The economy is tanking. So why is Wal-Mart thriving?

Commentary about business and finance.
Feb. 26 2008 6:31 PM

The Wal-Mart Puzzle

The economy's tanking. So why is it thriving?

Wal-Mart. Click image to expand.
Wal-Mart

Given the economic headwinds, one would think that a retailer catering to lower-end consumers would be doubly slammed. As the subprime-mortage mess shows, people at the bottom of the income ladder are struggling. And as for the retail sector generally, don't ask. Retail sales have been sluggish in recent months, and national chains are shutting down stores by the dozen. From Nordstrom down to Target, fourth-quarter profits have been disappointing.

Which brings us to the mystery of Wal-Mart. The nation's largest retailer, which caters to working-class customers, seems to have something of a sweet spot. The stock closed Tuesday at $51.40—its highest close since March 2005. Amid the market turbulence of the last six months, Wal-Mart's stock has risen nicely and has pasted the Standard & Poor's retail index. Wal-Mart's stock makes an excellent proxy for the health of the working-class consumer. So how can it be that Wal-Mart's stock is outperforming its tonier, trendier rivals?

Advertisement

I'd point to four reasons:

First, while Wal-Mart's overall sales aren't rising dramatically, they are rising—on a total and same-store basis—even as the economy grinds to a halt. In the fourth quarter (PDF), the combined U.S. sales of Wal-Mart and Sam's Club (the company's warehouse division) rose 5.2 percent, while same-store sales rose 1.6 percent for Wal-Mart and 2.5 percent for Sam's Club. And this is happening at a time when many large retailers have suffered declines in same-store sales. The reason is that Wal-Mart sells necessities, not discretionary items. The overwhelming majority of its sales are not impulse buys. Even in a recession, most people don't drastically reduce their spending on staple groceries, light bulbs, or diapers.

Second, Wal-Mart's cheapo reputation is serving it well. For much of this decade, Trading Up has been the governing retail paradigm. In an age of easy credit and expanding consumer choices, masses of consumers took to shopping for staples at cheap outlets while indulging their passions at boutiques. Underwear from Wal-Mart, but chocolates from Godiva. Mac and cheese in bulk at Costco, but Starbucks for caffeine jolts. But that mentality is so 2005. As the latte era grinds down and credit tightens, Americans have stopped trading up and started trading down. That plays right into the hands of Wal-Mart, whose brand identity is all about saving people money. Underwear and Hershey's kisses from Wal-Mart. In a pinched economy, consumers are embracing their inner skinflint. And Wal-Mart is a penny pincher's paradise.

Third, the stock market is famously a futures market. While today's closing prices reflect data on last quarter's sales and profits, they also reflect investors' beliefs about what sales and profits may be in the coming quarters. And there's good reason to believe Wal-Mart's will hold up well. Unlike many retailers, Wal-Mart expects its profits will rise modestly in 2008. And the economic-stimulus package President Bush signed earlier this month seems to have been designed to help Wal-Mart. It funnels cash to individuals making less than $75,000 or to families making less than $150,000, many of whom might shop at Wal-Mart. Three hundred dollars really isn't enough to put a dent in a payment for a new car or to pay off a mortgage, but it might be enough to spur a shopper to throw a few extra goodies into the Wal-Mart shopping cart.

Fourth, as the U.S. economy idles, the rest of the world is still growing quite rapidly. And Wal-Mart finally has meaningful international sales to report. In 2003, international sales were just 16.7 percent of overall revenues. But thanks to aggressive expansion in Mexico, China, and elsewhere, Wal-Mart has become an increasingly multinational corporation. In the 12 months that ended in January 2008, international sales rose 17.5 percent and constituted 24.2 percent of overall sales. In the most recent quarter, international sales rose 18.8 percent from the year before and for the first time accounted for more than 25 percent of total revenues. The growth in rapidly expanding international operations is adding more dollars to Wal-Mart's top line than the slower growth of the massive U.S. base. Having essentially saturated the United States, there isn't much Wal-Mart can do to increase sales dramatically here—especially at a time of economic strain. But the behemoth of Bentonville has found a way to tap into the continuing global boom.

The past several years have been something of a lost decade for Wal-Mart investors. But if the current trends of slow domestic growth and a global boom continue for the next two years, Wal-Mart may yet salvage the '00s.

Daniel Gross is a longtime Slate contributor. His most recent book is Better, Stronger, Faster. Follow him on Twitter.

TODAY IN SLATE

Culturebox

The Ebola Story

How our minds build narratives out of disaster.

The Budget Disaster That Completely Sabotaged the WHO’s Response to Ebola

PowerPoint Is the Worst, and Now It’s the Latest Way to Hack Into Your Computer

The Shooting Tragedies That Forged Canada’s Gun Politics

A Highly Unscientific Ranking of Crazy-Old German Beers

Education

Welcome to 13th Grade!

Some high schools are offering a fifth year. That’s a great idea.

Culturebox

The Actual World

“Mount Thoreau” and the naming of things in the wilderness.

Want Kids to Delay Sex? Let Planned Parenthood Teach Them Sex Ed.

Would You Trust Walmart to Provide Your Health Care? (You Should.)

  News & Politics
Politics
Oct. 22 2014 9:42 PM Landslide Landrieu Can the Louisiana Democrat use the powers of incumbency to save herself one more time?
  Business
Continuously Operating
Oct. 22 2014 2:38 PM Crack Open an Old One A highly unscientific evaluation of Germany’s oldest breweries.
  Life
Dear Prudence
Oct. 23 2014 6:00 AM Monster Kids from poorer neighborhoods keep coming to trick-or-treat in mine. Do I have to give them candy?
  Double X
The XX Factor
Oct. 22 2014 4:27 PM Three Ways Your Text Messages Change After You Get Married
  Slate Plus
Tv Club
Oct. 22 2014 5:27 PM The Slate Walking Dead Podcast A spoiler-filled discussion of Episodes 1 and 2.
  Arts
Culturebox
Oct. 22 2014 11:54 PM The Actual World “Mount Thoreau” and the naming of things in the wilderness.
  Technology
Future Tense
Oct. 22 2014 5:33 PM One More Reason Not to Use PowerPoint: It’s The Gateway for a Serious Windows Vulnerability
  Health & Science
Bad Astronomy
Oct. 23 2014 7:30 AM Our Solar System and Galaxy … Seen by an Astronaut
  Sports
Sports Nut
Oct. 20 2014 5:09 PM Keepaway, on Three. Ready—Break! On his record-breaking touchdown pass, Peyton Manning couldn’t even leave the celebration to chance.