Bloomberg ran an article March 26 suggesting Walmart is losing market share due to disorganized stores. Specifically, it doesn't have enough employees to stock the shelves. As a result, inventory isn't making it on to the floor. Target and Costco are two recipients of Walmart's folly. Should you continue to hold Walmart or move along to one of its competitors?
According to Bloomberg, while Walmart has added 455 stores in the U.S. in the past five years, it's reduced its workforce by 20,000 in that same period. So, it has increased the number of stores by 13% while reducing the number of employees by 1.4%. MIT professor Zeynet Ton, who specializes in operations management, indicates that the addition of five full-time employees to every Walmart in the U.S. would increase its selling, general and administrative expense by approximately 0.5% or $448 million. I'll assume the corollary is true and Walmart saves a similar amount by eliminating five jobs per U.S. store. That's 13 cents before tax, eight cents after tax, and an EPS increase of 1.6%. Either way (adding or subtracting) it seems like a meaningless amount.
Why is Walmart putting its retail reputation at stake for a measly $448 million?
Probably because it feels it can. However, the American Customer Satisfaction Index shows otherwise. In 2012, Walmart received a rating of 71, four points lower than Sears Holdings (Nasdaq:SHLD); the lowest amongst 12 department and discount stores. Even embattled J.C. Penney (NYSE:JCP) got a better rating. In fact, it was tied for second with both Kohl's (NYSE:KSS) and Target (NYSE:TGT). Only Nordstrom (NYSE:JWN) ranked higher. Most telling is the fact that every one of Walmart's peers has improved their customer satisfaction in recent years while Walmart has steadily gone downhill from an 80 rating in 1995 to 71 today. It's no coincidence that Walmart's ratings were higher in the mid-1990s. The company was still very much under the influence of Sam Walton who died in 1992.
Controlling overhead in general and payroll specifically, Walmart has always been careful about cost containment. In Sam Walton's 1992 autobiography, Made in America, the legend of retail said this about payroll: "No matter how you slice it in the retail business, payroll is one of the most important parts of overhead, and overhead is one of the most crucial things you have to fight to maintain your profit margin." While the customer service ethos Walton infused into Walmart's operations is long since gone, his desire to contain costs is still very much alive. One need look no further than its reduction in staff and subsequent inventory restocking problems that have occurred as a result. Walton might have been cheap, but he certainly wouldn't have let the shelves go bare. Executives in Bentonville have taken his mantra just a little too far.
In an effort to battle Amazon (Nasdaq:AMZN), Walmart is introducing lockers in 12 stores in a single market somewhere in the U.S. this summer. The company believes its 4,000 stores is the difference maker in its battle with the e-commerce giant because it allows its customers to order the products online and then pick them up in a nearby store location at their convenience. Approximately 25% of its customers don't have credit cards or bank accounts; the lockers allow them to order stuff online and then pay for it at the store. Currently Walmart generates $9 billion in e-commerce revenue on worldwide sales of $466 billion. Given the statistic about the unbanked, $68.6 billion of its U.S. revenue in 2012 was paid for in cash by people with no debit or credit options available to them. If 10% of that $68.6 billion were to buy online as opposed to in the store, its e-commerce revenues would almost double and its margins would most definitely rise. If this works for Walmart, its future earnings picture becomes a lot brighter without even having to grow its business.
Walmart gets a bad rap. It isn't easy running a business this large. The logistics alone boggle the mind. In the past it's used technology to its advantage; the introduction of the lockers along with mobile apps that make shopping easier show that it's not asleep at the wheel. The big concern is what it does in the future about its obvious manpower issues. If it continues to go cheap on payroll, eventually customers are going to leave for the competition and never return. Then it won't matter how brilliant their e-commerce business is.
I've recommended Walmart's stock in the past and although Target and Costco (Nasdaq:COST) are better stores in my opinion, I still believe Walmart's stock is worth owning. However, if its shelves remain bare six months to a year from now, I'd definitely reverse my decision. That's just bad retail.
At the time of writing, Will Ashworth did not own any shares in any of the companies mentioned above.