WMT 2Q 2015: Lowered Guidance and 3 questions for Greg Foran

Last week, WMT’s full year guidance was ratcheted even lower than analysts’ already bleak expectations. Over the past three months the stock had fallen by nearly 6% (vs. a 3% increase in the overall market during the same period). In prerecorded remarks incoming WMT US CEO Greg Foran said “Walmart U.S. is a great business, with a deep and rich heritage in serving our customers with a smile, in clean, tidy, well-merchandised stores, with terrific low prices and value. A cornerstone of our success has been our wonderful associates, from our stores to our DCs, our Home Office and e-commerce facilities. They still are.”

He added “We will deliver against these key customer requirements: being in stock, clean stores, the right price, the right items, improved service, better productivity. I will be out in stores hearing directly from our customers and our associates and tracking our performance.”
Foran was right to focus on associates in his first public role as US CEO, and he clearly perceives that the company’s US workers are at the center of a major strategic challenge that involves operations, culture and reputation. We believe many US associates would welcome the opportunity to describe the problems they are facing in the stores, and we hope this well-timed overture goes beyond the one-on-one “open door” policy which has come to represent an empty promise for associates across the US.
Mr. Foran, in an effort to begin this dialogue we respectfully offer you three questions:
1. It’s clear you and Doug McMillon want to accelerate the small format and ecommerce strategies, but are you also ready to make the investments in labor required to give those strategies a chance to succeed?
2. We welcome your fresh perspective, not just on strategy, but on company culture as well. There is widespread concern about fairness and respect at WMT. For example, when executives’ bonuses are insulated from the effects of SNAP reductions while hourly associates’ bonuses are not, the message is clear: we are not all in this together. Will you commit to fixing this culture?
3. WMT’s reputation has been damaged by its labor practices and this in turn has made it harder for the company to expand into profitable urban markets in the US. Are you ready to adopt a more collaborative approach?

Thinking Small

Over the past several months, WMT officials have clearly articulated a desire to ramp up investments in ecommerce and small format stores, but critics have pointed out that these initiatives represent a different business model than that of the supercenter, as well as significant new capital expenditures, and even defenders of the strategy acknowledge it is primarily a defensive one. In response, WMT officials have sought to emphasize the ways the new investments will leverage the company’s existing big box base—initiatives such as “site to store” (allowing customers to pick up website purchases at brick and mortar stores) and “tethering” (using supercenter backrooms as secondary distribution centers to supply new small format stores nearby).

But recent downgrades by Goldman Sachs and Jefferies raised doubts about these initiatives, citing the company’s focus “on growth and investment rather than returns” (Goldman) and arguing the “lower initial ROI from [small] formats during the early years of maturity are likely to be a headwind” (Jefferies).

Goldman suggested bluntly that “the jury is still out” on the company’s tethering concept. And rightly so: as many WMT associates can attest, supercenter backrooms are sometimes so chaotic they are hardly able to supply the supercenters they are connected to, much less an “ecosystem” of nearby smaller stores. (Apologies if we have this wrong, but we thought that Sam Walton built the largest retailer in the world by eliminating intermediate distribution points, not adding them.)

WMT ROI Continues to Decline

Meanwhile the market share impacts of Neighborhood Market are unclear at best. While WMT officials continue to tout strong same store sales gains at the smaller format, last month BMO Capital released a report suggesting that the Neighborhood Market format may not be as effective as WMT officials have suggested. BMO found that WMT lost market share in roughly one-third of markets where it operates the format, including four of the top ten markets. The four markets called out by BMO were Dallas-Ft. Worth, Phoenix, Las Vegas and Houston. Our own examination of Metro Market Studies data confirms these trends. The case of Dallas-Ft. Worth should be particularly troubling for WMT. Between 2010 and 2014 WMT’s market share fell from 27.3% to 27.1%. This 0.2% market share decline might appear relatively small, until one considers that the company increased the number of Neighborhood Markets from 22 to 32, and the number of supercenters from 71 to 73, during this time period.
Note well: this market share analysis pertains to grocery sales only, a segment in which the company claims it is actually gaining market share nationally. (In contrast, WMT’s overall market share, including general merchandise, has been falling since 2010.)
The obvious concern is that the new Neighborhood Markets may be cannibalizing existing WMT supercenters. Thus, the investment in new Neighborhood Markets may appear to be sound on a store level basis however when the cannibalization effect is considered the market-level ROI reduction may offset any gains.

Instead of expanding in markets where WMT already has significant market share, a much more compelling case can be made for growth in a number of urban markets where the company has little to no presence. As one analyst recently noted, in four large population states (New York, New Jersey, Massachusetts and California) the number of WMT stores per person is about half the national average for the company. “Walmart has to go where the people are,” wrote the analyst, “and those states, especially their large metropolitan areas, have not been warm and friendly to Walmart.”

Putting the ‘Heat’ on US Manufacturing

Today WMT officials are hosting a “US Manufacturing Summit,” cast as an effort to jump start domestic sourcing, but this is not the first such effort. WMT’s first “Buy American” campaign was launched in the late 1980s, and also promised to boost US manufacturing jobs. While the overall effect on jobs was unclear (WMT shifted production some items such as shirts to US manufacturers while simultaneously increasing imports from China and other low wage export platforms) the program was widely considered a PR success. But WMT’s “Buy American” campaign had another goal as well. As one then Wal-Mart board member told Wall Street Journal reporter Bob Ortega, one of the main objectives of the campaign “was to put the heat on American manufacturers to lower their prices.”
One consequence of this “heat,” according to one WMT vendor who spoke with Discount Store News, was that companies like his were “no longer manufacturers,” and had merely become sources who “produce only the products that Wal-Mart has decided it wants to sell, which in turn makes R&D and introduction of new products redundant and unprofitable.”
When even those prices weren’t low enough, some suppliers, now completely dependent on WMT for their markets, were told to move offshore. As Professor Gary Gereffi at Duke University observed in 2004: “Wal-Mart is able to transfer whole U.S. industries to overseas economies.”
How many jobs were affected? According to a report by the Economic Policy Institute, Wal-Mart’s imports from China had reached $27 billion by 2006, and Wal-Mart’s imports alone accounted for 11% of the growth of the US trade deficit with China between 2001 and 2006. EPI estimates WMT was responsible for the loss of an estimated 200,000 US manufacturing jobs.
What about Wal-Mart’s 2014 “Made in the USA” campaign? If WMT’s earlier foray into US manufacturing resulted in tragedy for thousands of US workers, the current edition resembles something closer to farce.
To illustrate its “commitment to American renewal” Wal-Mart has identified a handful of suppliers it says are part of an effort to grow US manufacturing jobs. One of the examples most often profiled in recent press accounts is that of Element Electronics Corp., a producer of flat screen TVs in Michigan and South Carolina. One report called Element “the campaign’s biggest surprise to date,” touting the supplier’s “six assembly lines making 32- and 40-inch TVs that are now available in all of Walmart’s more than 4,000 U.S. stores.”
But, as a subsequent Wall Street Journal report noted, the real surprise may be the one that awaits unsuspecting US consumers:
“WINNSBORO, S.C.—Every flat-screen television set that rolls off conveyor belts here goes in to a box marked “Assembled in the USA” before it ships to Wal-Mart customers. What might surprise buyers is how little those TVs change after arriving from China in the same boxes.”
The Journal describes how Element’s US workers merely unbox the TVs, insert Chinese-made memory boards, then test them before replacing them in their patriotic cardboard cubes. Element would like to do more assembly in the US, but, as Professor Gereffi noted ten years ago, the necessary supply chains were moved offshore years ago, often at the behest of a large Arkansas based buyer.
It’s not surprising then that WMT’s actual “commitment” amounts to zero: the company’s press releases announce an additional $250 billion in domestic purchases over the next ten years, but that is actually slightly less than what WMT was already on track to purchase, assuming WMT US and Sam’s Club’s sales and cost of goods sold simply continue to grow at the rate they have over the past three years (2.9%).
Meanwhile, as it has in the past, WMT continues to lobby in favor of “free trade” legislation including the secretive Trans-Pacific Partnership and “fast track” authority for trade bills. We eagerly await any indication the company is considering reversing these positions as part of its commitment to US jobs.

Giving Low Wage Consumers a Raise

There is a widespread attribution of WMT’s woes to the state of the low-income consumer—continued high unemployment, nonexistent wage growth, cuts to food stamp benefits. But here we see a tension inherent in WMT’s business model. As the largest employer in the country, with a labor policy based on notoriously low wages and benefits, and the increased use of temporary employees, WMT has driven standards down in the service sector labor market. These effects are felt most acutely in the local labor markets where WMT also has the largest market shares among low income consumers. As economic geographer David Harvey wryly observed, “Impoverished workers do not constitute a vibrant market.”

But as the national momentum continues to build for a raise in the minimum wage—due in no small part to the energy and courage of low wage workers, including WMT associates, who have been standing up for themselves—the debate about WMT’s ability to pay higher wages continues to rage. One foolish analyst recently argued higher wages were impossible, writing that “Wal-Mart’s model is not designed to pay higher wages. Thus, shareholders will suffer if wages rise.”
This analyst dismissed the example of Costco’s better paid, higher productivity workforce as an exception that is irrelevant to WMT. As many before have done, this analyst points to WMT’s larger assortment compared to Costco, stating “this will always require more labor than running discount warehouse stores.”

Consistent with the rhetorical traditions of the anti-living-wage genre, the foolish analyst studiously avoided comparing Costco’s performance to that of Sam’s Club, a discount warehouse chain that looks remarkably similar to Costco (and is owned and operated by WMT). Like Costco, Sam’s has a limited assortment of SKUs and caters to a members only, significantly higher income customer base than WMT supercenters. But while Sam’s Club workers receive pay that is comparable to other WMT associates, Costco employees make significantly more. Yet Costco’s investment in its workforce pays for itself, as the superior sales and operating statistics make clear.

Net Sales per Sq. Ft.

(Source: UFCW analysis of company filings. Sam’s Club data for each period represents annual data for the fiscal year ending in the January following the year identified. For example, 2013 data represents the period ending 1/31/14; Costco data for each period represents annual data for the fiscal year ending in August or September of the year identified.)

Why is the Costco comparison important? Because there are essentially two competing explanations for why WMT’s wages are so low: first, as WMT’s critics argue, the company has a deeply ingrained cost-cutting philosophy that blinds executives to the longer term opportunities missed by failing to invest in workers and increase their productivity. The alternative explanation is that high wages are simply incompatible with WMT’s business model—the company would pay workers more, its defenders imply, if it was financially viable to do so. The importance, therefore, of the Costco vs. Sam’s comparison is that it provides a natural experiment: what would WMT executives do if given the chance to operate a business model (discount warehouse clubs) which both critics and defenders of the company acknowledge to be consistent with a high-wage/high-productivity labor model? The answer, unfortunately for Sam’s associates and for WMT shareholders, is hypothesis number one: the company pays the same low wages at both WMT US and Sam’s Club stores.

In fact this conclusion is consistent with empirical research on the retail sector, which shows that a variety of formats, not just low SKU warehouse clubs, can implement high road labor strategies—but it isn’t just academic speculation. Any honest assessment of the operational problems at WMT stores will identify significant losses associated with a chronic underinvestment in labor—out of stock shelves, long lines at checkout, and chaotic backrooms are clearly hurting sales.

Frontline associates—members of OUR Walmart—have been raising these concerns publicly for over 3 years (see our reports here and here), and we are heartened to see mainstream analysts echoing these concerns in recent months. Earlier this year outgoing US CEO Bill Simon gave lip service to the need to add more labor to the store, and this morning his replacement Mr. Foran said the company had in fact added hours, but WMT associates have yet to report any noticeable change in staffing levels. But don’t just take the workers’ word for it. In June analysts at the highly respected Cleveland Research observed that any labor investments were “highly selective to almost non-existent,” and stated that this was the “biggest problem by far” the company faces in keeping its shelves stocked.

Reputation Matters

A recent survey by Lake Research Partners provides some insight into this opposition: a large segment of the public has a negative perception of WMT, and many view the company as treating its workers badly. Among the 27% of consumers who rarely or never shop at WMT, over one-third (36%) cited “poor treatment of workers” as a reason. Even among WMT’s most loyal shoppers, those who shop there weekly, 9% say they have been shopping there less, and among those 25% cite “poor treatment of workers” as a reason.

More broadly, a majority of consumers see WMT’s labor policies as emblematic of what’s wrong with the economy. According to Lake, “By a 56% to 17% margin, consumers agree with the statement ‘Walmart is a real example of what’s wrong with our economy—the CEO is making millions and the workers are making minimum wage with poor benefits.’”

WMT's Bad Reputation

Source: Lake Research Partners

Walmart Workers to Attend Yahoo Shareholder Meeting…Again.

Last year, just as Walmart was illegally firing  workers for participating in legally protected strikes, Walmart Associates who are members of OUR Walmart were attending the Yahoo! shareholder meeting.  They did so in order to address their concerns about Walmart’s illegal retaliation to Yahoo! CEO Marissa Mayer, who is also a member of the Walmart Board of Directors.  The workers and the questions they directed to Mayer were widely covered in the press.

Following the encounter at last year’s Yahoo shareholder meeting, Ms. Mayer has persisted in her steadfast refusal to meet with members of OUR Walmart, despite repeated invitations.

Now, Mayer is doubling-down on Yahoo’s ties to Walmart by nominating former Walmart CEO and Director H. Lee Scott to join the Board of Yahoo!

In this post, we summarize some of the issues that may be raised at this year’s Yahoo shareholder meeting on June 25th.

Yahoo! values to Walmart or Walmart Values to Yahoo!?  

Expect to hear questions about whether Ms. Mayer is bringing Silicon Valley values to Walmart or allowing Walmart values to creep in at Yahoo.

The meeting comes on the heels of a new report about the lack of diversity at Yahoo and the Yahoo Board will be welcoming three new members whobring the total number of people of color on the Board to….zero.

OUR Walmart members are also sure to raise questions as to whether Ms. Mayer’s role at Walmart subjects Yahoo to unnecessary reputational risk, or simply represents an unnecessary distraction (is Mayer’s being two hours late for an important advertising meeting because she was asleep, a sign of being overcommitted?)

New Yahoo Director Heavily Implicated in Alleged Bribery and Cover-Up at Walmart

The nomination of former Walmart CEO Lee Scott to the Yahoo! Board (at Ms. Mayer’s behest) raises serious questions for Yahoo! investors about their company’s commitment to accepted standards of corporate governance and legal compliance. Scott is among those implicated in in the alleged bribery and cover-up scandal at Walmart.

As the Pulitzer-Prize winning articles in The New York Times detail, Mr. Scott, who was then CEO of Walmart, rebuked internal investigators into the alleged bribery for being overly aggressive.  The Times reports that,

“days later, records show, Walmart’s top lawyer arranged to ship the internal investigators’ files on the case to Mexico City.   Primary responsibility for the investigation was then given to the general counsel of Wal-Mart de Mexico – a remarkable choice since the same general counsel was alleged to have authorized bribes.”  

 As CEO of Walmart, Scott approved this transfer of responsibility, thereby limiting the internal investigation.  The alleged bribery and apparent cover-up and the failure of the company to fully investigate and disclose these matters at the time may yet result in  criminal and/or civil actions being taken against Walmart and senior executives including Mr. Scott. It has already had serious consequences for Walmart investors, as the company expects to spend more than $600 million by the end of the current fiscal year on lawyers, internal investigations, and compliance reforms. The matter is currently under investigation by the Department of Justice and the Securities and Exchange Commission.  The company has said that it expects to spend more than $600 million through January 31, 2014 on internal investigations, legal fees and compliance reforms.

If The New York Times is accurate, it appears that Mr. Scott not only participated in the alleged cover up of FCPA violations, but may have also subsequently violated the certification requirements of the Sarbanes Oxley Act numerous times, by failing to disclose to the SEC and to shareholders credible evidence of FCPA violations, inadequate internal controls, and fraud by senior management personnel.

Mr. Scott’s E-Commerce Record at Walmart is Poor

Mr. Scott was CEO of Walmart from 2000 to early 2009 – a period during which analysts appear to agree that Walmart’s progress in the area of e-commerce was characterized by repeated stumbles and slow growth.

As of 2007, Walmart’s failures in e-commerce were being noted in the industry press.

 Meanwhile, Wal-Mart has struggled online. Its website lags behind competitors like Amazon.com and Target, and recent marketing experiments using social networking technologies have achieved mixed success. The company has even suffered in its sweet spot, with serious setbacks to its deployment of radio-frequency identification (RFID) tags throughout its supply chain. 


Wal-Mart is struggling to build an online presence. It ranks 13th in Web sales volume among retail businesses, according to industry watcher Internet Retailer, even though, according to Web data analysis company Alexa, Walmart.com is the third most-popular retailing website based on number of users (behind Amazon.com and Target.com).


Walmart’s failure to build an ecommerce foundation during Mr. Scott’s tenure continues to be felt today.   The company reported online sales of $10 billion in 2013 - less than 3 percent of overall sales – compared with Amazon’s online sales of $67.85 billion.

Can Yahoo! shareholders really expect Mr. Scott to be independent?    

 According to Yahoo, the role of the Nominating and Corporate Governance Committee of the Board of Directors “shall be to recommend to the Board individuals qualified to serve as directors of the Company and on committees of the Board.”

However, Yahoo’s proxy document states that Mr. Scott was identified as a candidate for service by Ms. Mayer.  The two served together on Walmart’s Board, until Mr. Scott stepped down earlier this month.

Given Mr. Scott and Ms. Mayer’s existing relationship and her role in identifying him for service at Yahoo, can Yahoo investors really expect Mr. Scott to be independent?

Particularly given Mr. Scott’s implication in the alleged bribery and cover-up at Walmart and his failures in the area of ecommerce, shouldn’t Yahoo investors have the right to expect that candidates for Board service will go through established channels of nomination and vetting?


How will Ms. Mayer respond to these kinds of questions?   Will Yahoo investors raise other concerns about Mayer’s focus on Yahoo or about Mr. Scott’s potential legal issues?    The shareholder meeting is on Wednesday at 8am pacific.   Check out the live stream here.



Friday headline roundup

Walmart’s dirty secret (New York Post, 6/11/2014)

A final tally of votes from Walmart’s annual shareholder meeting held last week also showed unprecedented opposition against key directors, including Chairman Rob Walton, who saw 29 percent of independent voters opposed to his re-election. A full 40 percent of shares not controlled by the founding Walton family voted that Walton be replaced by an independent chairman. Last week, Walmart appeared to thumb its nose at that proposal by appointing Walton’s son-in-law as his heir apparent to helm the board. “It’s déjà vu all over again in terms of high votes against directors and, unfortunately for Walmart’s shareowners, the board’s cynical response,” said New York City Comptroller Scott Stringer, whose city pension funds voted against 6 of Walmart’s 14 directors.

My Life on the Walmart Treadmill (Huffington Post, 6/10/2014)

I’m caught in the neverending cycle of the working poor: I work because I need to support myself but the work I do at Walmart doesn’t provide enough means in order for me to support myself, nor does it offer any relief from my plight nor any progression from it. I’m not an underachieving worker either. I am a cashier and I’m really good at it too. In my first six months, my scans per hour were the highest in my entire district and I even won a cashier rodeo, beating out the best cashiers in the district, winning $100 for a store-wide pizza party — but we never had the party. There was a point in time when I was training to become the customer service manager as well. However, after close to six months of “training” — often doing this job all by myself — I wasn’t offered the position yet I was still scheduled to work as the customer service supervisor, and I wasn’t compensated for the work I did.

Former Managers Allege Pervasive Inventory Fraud at Walmart. How Deep Does the Rot Go? (The Nation, 6/11/2014)

Among the big questions raised by these allegations is whether irregular inventory accounting practices are widespread and systemic throughout the company, or the result of a few local rogue operations. And, if the practices are widespread—and not corrected for on the company’s financial statements—are they significant enough to inflate the company’s profitability and, in the process, its stock price?

Wal-Mart Is Family Friendly—at Least to Members of the Walton Family (Businessweek, 6/5/2014)

Yet in some ways, Walmart is still a family business. The Waltons own slightly more than 50 percent of the company, a share that’s gone up in recent years. Rob Walton, Sam’s eldest son, is chairman of the board of directors, a position he’s held since 1992. His brother, Jim, and son-in-law, Gregory Penner, are also on the board. That’s too many Waltons for some shareholders, who want a more independent board and plan to say so at the company’s annual meeting on June 6.

Poll: Walmart’s treatment of associates affects consumer choices

Check out Lake Research Partners’ new polling data on Walmart:

The conversation about Walmart’s treatment of employees is influencing consumer decisions. An important share of consumers do not believe Walmart treats their employees well. This affects how they feel about Walmart and their willingness to shop there. Consumers also believe that Walmart is a successful company, capable of treating employees better, and support efforts to do so. The data is clear that Walmart’s record of treating workers poorly is harming the company’s reputation. Furthermore, the concerns about Walmart’s pay and treatment of workers is putting its market share at risk, leading even some of its most loyal customers to consider avoiding the store.

“The opposite direction” from better corporate governance

How did Walmart’s leaders respond to the myriad employees, investors, and proxy advisors urging the company to strengthen corporate governance standards by establishing an independent board chairman? Why, by entrenching Walton control of the company, of course, appointing director Greg Penner as the board’s vice chair and setting him up to succeed his father-in-law Rob Walton as chairman of the company.

Charmaine Givens-Thomas of Illinois, a longtime Walmart associate and shareholder, traveled to Arkansas to attend the company’s annual meeting and read the shareholder resolution calling for an independent chairman. She was not impressed by Walmart’s selection of Penner, telling Bloomberg: “It’s absolutely in the opposite direction that we wanted. We want Walmart to put an independent person in there to be more fair to the associates and shareholders.”

Company leaders’ message to Walmart associates and shareholders seems to be: You don’t matter unless you’re a Walton. However, the Walton family, Walmart executives, and members of the board of directors shouldn’t expect to be able to ignore other shareholders forever. Indeed, shareholder sentiment for better governance standards appears to be rising: Between 2013 and 2014, the percentage of shareholders supporting an independent chairman for the company’s Board of Directors increased. Will it grow even more in 2015?

Friday headline roundup

Wal-Mart Board Criticized by ISS; More Independence Needed on Pay and Handling of Bribe Probe, ISS Says (Wall Street Journal, 5/26/2014)

Institutional Shareholder Services Inc., which advises big shareholders like mutual funds how to vote on corporate ballots, is concerned the company hasn’t disclosed which, if any, of its executives might be found culpable in an investigation into alleged bribery overseas. ISS also said it is troubled by a string of adjustments to pay targets and plans that together have the effect of insulating executives’ pay somewhat from the consequences of Wal-Mart’s declining performance. The recommendations are unlikely to have much practical effect given the Walton family’s control over the company. But they do highlight the recent challenges Wal-Mart is facing. The retailer recently reported its fifth straight quarterly decline in U.S. sales and said there is more weakness to come. It is struggling in international markets as well.


Wal-Mart Shareholders Want to Hear More About This Bribery Problem (BloombergView, 5/27/2014)

Should you vote to re-elect Wal-Mart chairman S. Robson Walton and director Michael T. Duke? Hahaha who cares, your vote doesn’t count, over 50 percent of Wal-Mart’s shares are controlled by Walton family members so they can do whatever they want. If you’re actually filling out a ballot, just write in my name or whatever, it doesn’t matter.

Wal-Mart Workers Plan Strikes Ahead Of Company’s Shareholders Meeting (Business Insider, 5/29/2014)

The striking workers will primarily be mothers who are fighting for higher pay, better benefits, and more opportunities for full-time work, organizers said Thursday. They are also protesting what they call retaliation against workers who speak out against the company. 


Why Walmart needs to support a higher minimum wage (Yahoo! Finance, 5/27/2014)

Breakingviews estimates that Walmart could net an additional $13 billion if the minimum wage jumps to $10 an hour. At least one quarter of Walmart shoppers work in minimum-wage jobs and they’re more likely to spend that extra cash than save it, Cox notes. For now, Walmart has stayed mum on the issue. But that’s to the company’s — and employees’ — disadvantage, Cox says. “It’s the right thing for the working man, who also happens to be their customer,” he adds.