Forget the critics, labor unions, activists and politicians who have tried to stir up trouble for Wal-Mart Stores Inc. The company's latest problems come from a far more serious quarter: consumers.
Despite price cuts designed to lure early-bird Christmas shoppers, November was Wal-Mart's worst month in a decade, with sales falling below last year's levels. And December won't be much better.
"The good old days are over," said Mark Husson, an analyst with HSBC Securities in New York. "And some people in the market don't seem to be able to accept that [Wal-Mart] is not going to go back to the rates of growth it used to enjoy."
Wall Street's Wal-Mart believers say this is the time to buy, noting that the stock has essentially stagnated since a peak in 1999, while earnings have more than doubled. The company is on track to post annual sales of more than $350 billion and profit of close to $12 billion this year.
But limping sales at the company's established stores for most of 2006 tell some analysts that investors have good reason to be wary: How can the biggest retailer on Earth turn around sales and continue to grow?
"Nobody has ever been this big, so it's impossible to say," said Bob Buchanan, an analyst at A.G. Edwards & Sons Inc. in St. Louis, who rates the stock "hold." "Retailing is all about momentum, and that's especially true for a company doing $350 billion in sales. There's not going to be a quick fix here."
For years, Wal-Mart was able to post month after month of highflying sales, delivering impressive earnings growth, often better than 15% annually. By undercutting competitors with its "Every Day Low Prices," the company also was able to quickly expand its store base, yielding greater total sales gains.
The company has more than 6,600 stores worldwide, nearly 4,000 in the United States.
In a bid to top last year's success with an early holiday campaign, Wal-Mart began cutting prices on hundreds of items this year even before Halloween.
Nonetheless, October sales were barely above flat, 0.5% in stores open at least a year, a yardstick that investors use to measure growth.
On Thursday, the company confirmed preliminary estimates that November sales fell 0.1% compared with the same period a year earlier and said it expected December sales to be between flat and up 1%.
Shares in Wal-Mart fell 79 cents on the news to $46.10. In the previous 52 weeks, shares have ranged between $42.31 and $52.15.
Wal-Mart's sales troubles come while other retailers' cash registers are ringing loudly -- the opposite of what has occurred for much of the last 10 years.
For the year, Wal-Mart has an average monthly same-store sales gain of 2.2%, compared with 4.9% for Target Corp. and 6.6% for Kohl's Corp., according to the International Council of Shopping Centers.
"I think what was incredibly important for Wal-Mart in the '90s was that they would always beat on price," said Adrian D'Ambrosi, an analyst for Lord, Abbett & Co.'s Large Cap Growth Fund. "A lot of retailers have learned they don't have to compete with Wal-Mart on price anymore; they just have to offer better value."
For most of the year, Wal-Mart Chief Executive H. Lee Scott Jr. has blamed macroeconomic forces for the company's woes, noting that its core lower-income consumers were particularly hard hit by soaring gas prices.
But in the fall, when gas prices stabilized and the rest of the retail industry rallied, Wal-Mart continued to suffer. Scott was forced to acknowledge other problems.
Moves to spruce up the company's fashion offerings went "too far, too fast," Scott told analysts this fall.
The bid to offer more fashionable apparel was a bid for Target's business. With designer names and fashion flair, Target has made customers comfortable buying dental floss and flirty dresses under one giant, uber-hip roof.
But such across-the-store buying is the Holy Grail of discount retailing, which brings in customers for its commodities but covets the fat profits of apparel and other soft goods.
Wal-Mart found out that though its edgier Metro7 line for women sold well in several hundred stores, the line's skinny jeans and other higher-style fashions bombed when the company expanded it to 3,000 stores.
Scott also said Wal-Mart's bid to overhaul 1,800 stores "created a higher level of customer inconvenience than we had anticipated." That project has been halted for the holidays and will resume in January.
At the same time, the company is facing tough sales comparisons because of unusual events a year before -- money pumped into stores as people rebuilt after hurricanes Katrina and Rita.
Earlier this fall, Wal-Mart moved to mollify investors.
The company shaved capital expenditures, which will grow 12% to 15% this year to about $18 billion, to only 2% to 4% next year.
It's also scaling back square-footage growth from 8% this year to 7.5% next year to focus on improving performance at existing stores.
And Wal-Mart is exiting Germany and South Korea after years of struggles in both countries.
For investors such as D'Ambrosi, whose Lord Abbett fund has Wal-Mart shares, that's still not enough. "They're taking baby steps," he said. "To the extent they keep this growth rate high, returns will suffer. The two are not reconcilable at this size."
Growth is already tougher to achieve.
Even as it announced plans this week to open stores in fast-growing India, Wal-Mart was railing against a proposed San Diego ordinance that would block the retailer from building its combination grocery-and-merchandise Supercenters within city limits.
Local opposition across California -- in Inglewood, Rosemead, Turlock and Los Angeles -- as well as in Chicago and New York has meant expensive legal and political fights.
Wal-Mart said in 2002 that it would open 40 Supercenters in California in the following four to six years. It has opened 21 of the big stores and is in the process of building eight more, a spokesman has said. A dozen others are in the planning stages.
None of Wal-Mart's problems, however, are enough to scare off many of the value investors who are patiently awaiting a turnaround.
"They're valid concerns, but they're things you can look at and understand," said Victor Hawley, portfolio manager at Los Angeles-based Reed, Conner & Birdwell, which holds about 800,000 shares in Wal-Mart worth about $37 million.
Allan Rudnick, investment chief at money manager Kayne Anderson Rudnick Investment Management in Century City, said Wal-Mart suffered the same perception problems in the early to mid-1990s, when the stock languished. It then climbed to a high of nearly $70 in 1999.
"It's classic," said Rudnick, whose firm owned about 500,000 shares at the end of September, the most recent reporting period. "A stock will go sideways while people are concerned about the negatives. But if the underlying fundamentals are moving ahead -- the sales, the earnings, the book value, the dividend -- then investors ultimately will respond."
Patience isn't eternal, however.
Next year, Wal-Mart's problems ought to be in the rearview mirror, Hawley said: Store remodeling will be complete, sales comparisons will be easier, the bad fashion will be cleared out. And the price rollbacks will be in full force.
"Once all those things get finished, then we better start seeing a change," Hawley said. "If that doesn't happen, I'm sure the catcalls will come fast and furious."
(BEGIN TEXT OF INFOBOX)
Headquarters: Bentonville, Ark.
Chief executive: H. Lee Scott Jr.
Stores: 6,691 (59% in the United States)
Employees: 1.8 million
Revenue*: $315.7 billion, up 9.6% from 2005
Net income*: $11.2 billion, up 9.4% from 2005
*For fiscal 2006, which ended Jan. 31
Source: The company
Los Angeles Times