The 10 Telltale Signs of Future Troubles for WalMart

The 10 Telltale Signs of Future Troubles for WalMart

Walmart announced quarterly financial results last week, and they were not good.  Sales were down $500million vs the previous year, and management lowered forecasts for 2016.  And profits were down almost 8% vs. the previous year.  The stock dropped, and pundits went negative on the company.

But if we take an historical look, despite how well WalMart’s value has done between 2011 and 2014, there are ample reasons to forecast a very difficult future.  Sailors use small bits of cloth tied to their sails in order to get early readings on the wind.  These small bits, called telltales, give early signs that good sailors use to plan their navigation forward.  If we look closely at events at WalMart we can see telltales of problems destined to emerge for the retailing giant:

closed WalMart1 – In March, 2008 WalMart sued a brain damaged employee.  The employee was brain damaged by a truck accident.  WalMart’s insurance paid out $470,000 in health care cost.  The employee’s family sued the trucking company, at their own expense, and won a $417,000 verdict for lost future wages, pain and suffering and future care needs.  Then, WalMart decided it would sue the employee to recover the health care costs it had previously paid.  As remarkable as this seems, it is a great telltale.  It demonstrates a company so focused on finding ways to cut costs, and so insensitive to its employees and the plight of its customers that it loses all common sense.  Not to mention the questionable ethics of this action, it at the very least demonstrates blatant disregard for the PR impact of its actions.   It shows a company where management feels it is unquestionable, and a believe its brand is untouchable.

2 – In March, 2010 AdAge ran a column about WalMart being “stuck in the middle” and effectively becoming the competitive “bulls-eye” of retailing. After years of focusing on its success formula, “dollar store” competition was starting to undermine it on cost and price at the low end, while better merchandise and store experience boxed WalMart from higher end competitors – that often weren’t any more expensive.  This was the telltale sign of a retailer that had focused on beating up its suppliers for years, cutting them out of almost all margin, without thinking about how it might need to change its business model to grow as competitors chopped up its traditional marketplace.

3 – In October, 2010 Fortune ran an article profiling then-CEO Mike Duke.  It described an executive absolutely obsessive about operational minutia. Banana pricing, underwear inventory, cereal displays – there was no detail too small for the CEO.  Another telltale of a company single-mindedly focused on execution, to the point of ignoring market shifts created by changing consumer tastes, improvements at competitors and the rapid growth of on-line retailing. There was no strategic thinking happening at WalMart, as executives believed there would never be a need to change the strategy.

4 – In April, 2012 WalMart found itself mired in a scandal regarding bribing Mexican government officials in its effort to grow sales.  WalMart had never been able to convert its success formula into a growing business in any international market, but Mexico was supposedly its breakout.  However, we learned the company had been paying bribes to obtain store sites and hold back local competitors.  A telltale of a company where pressure to keep defending and extending the old business was so great that very highly placed executives do the unethical, and quite likely the illegal, to make the company look like it is performing better.

5 – In July, 2014 a WalMart truck driver hits a car seriously injuring comedian Tracy Morgan and killing his friend.  While it could be taken as a single incident, the truth was that the driver had been driving excessive hours and excessive miles, not complying with government mandated rest periods, in order to meet WalMart distribution needs.  This telltale showed how the company was stressed all the way down into the heralded distribution environment to push, push, push a bit harder to do more with less in order to find extra margin opportunities.  What once was successful was showing stress at the seams, and in this case it led to a fatal accident by an employee.

6 – In January, 2015 we discovered traditional brick-and-mortar retail sales fell 1% from the previous year. The move to on-line shopping was clearly a force. People were buying more on-line, and less in stores.  This telltale bode very poorly for all traditional retailers, and it would be clear that as the biggest WalMart was sure to face serious problems.

7 – In July, 2015 Amazon’s market value exceeds WalMart’s. Despite being quite a bit smaller, Amazon’s position as the on-line retail leader has investors forecasting tremendous growth.  Even though WalMart’s value was not declining, its key competition was clearly being forecast to grow impressively.  The telltale implies that at least some, if not a lot, of that growth was going to eventually come directly from the world’s largest traditional retailer.

8 – In January, 2016 we learn that traditional retail store sales declined in the 2015 holiday season from 2014.  This was the second consecutive year, and confirmed the previous year’s numbers were the start of a trend.  Even more damning was the revelation that Black Friday sales had declined in 2013, 2014 and 2015 strongly confirming the trend away from Black Friday store shopping toward Cyber Monday e-commerce.  A wicked telltale for the world’s largest store system.

9 – In January, 2016 we learned that WalMart is reacting to lower sales by closing 269 stores.  No matter what lipstick one would hope to place on this pig, this telltale is an admission that the retail marketplace is shifting on-line and taking a toll on same-store sales.

10 – We now know WalMart is in a Growth Stall.  A Growth Stall occurs any time a company has two consecutive quarters of lower sales versus the previous year (or two consecutive declining back-to-back quarters.) In the 3rd quarter of 2015 Walmart sales were $117.41B vs. same quarter in 2014 $119.00B – a decline of $1.6B. Last quarter WalMart sales were $129.67B vs. year ago same quarter sales of $131.56B – a decline of $1.9B. While these differences may seem small, and there are plenty of explanations using currency valuations, store changes, etc., the fact remains that this is a telltale of a company that is already in a declining sales trend.  And according to The Conference Board companies that hit a Growth Stall only maintain a mere 2% growth rate 7% of the time – the likelihood of having a lower growth rate is 93%.  And 95% of stalled companies lose 25% of their market value, while 69% of companies lose over half their value.

WalMart is huge.  And its valuation has actually gone up since the Great Recession began.  It’s valuation also rose from 2011- 2014 as Amazon exploded in size.  But the telltale signs are of a company very likely on the way downhill.

The 5 Stocks You Should Buy This Week

The 5 Stocks You Should Buy This Week

Stocks are starting 2016 horribly.  To put it mildly.  From a Dow (DJIA or Dow Jones Industrial Average) at 18,000 in early November values of leading companies have fallen to under 16,000 – a decline of over 11%.  Worse, in many regards, has been the free-fall of 2016, with the Dow falling from end-of-year close 17,425 to Friday’s 15,988 – almost 8.5% – in just 10 trading days!

With the bottom apparently disappearing, it is easy to be fearful and not buy stocks.  After all, we’re clearly seeing that one can easily lose value in a short time owning equities.

But if you are a long-term investor, then none of this should really make any difference.  Because if you are a long-term investor you do not need to turn those equities into cash today – and thus their value today really isn’t important.  Instead, what care about is the value in the future when you do plan to sell those equities.

Investors, as opposed to traders, buy only equities of companies they think will go up in value, and thus don’t need to worry about short-term volatility created by headline news, short-term politics or rumors.  For investors the most important issue is the major trends which drive the revenues of those companies in which they invest.  If those trends have not changed, then there is no reason to sell, and every reason to keep buying.

(1) Buy Amazon

Take for example Amazon.  Amazon has fallen from its high of about $700/share to Friday’s close of $570/share in just a few weeks – an astonishing drop of over 18.5%.  Yet, there is really no change in the fundamental market situation facing Amazon.  Either (a) something dramatic has changed in the world of retail, or (b) investors are over-reacting to some largely irrelevant news and dumping Amazon shares.

Everyone knows that the #1 retail trend is sales moving from brick-and-mortar stores to on-line.  And that trend is still clearly in place.  Black Friday sales in traditional retail stores declined in 2013, 2014 and 2015 – down 10.4% over the Thanksgiving Holiday weekend.  For all December, 2015 retail sales actually declined from 2014.  Due to this trend, mega-retailer Wal-Mart announced last week it is closing 269 stores.  Beleaguered KMart also announced more store closings as it, and parent Sears, continues the march to non-existence.  Nothing in traditional retail is on a growth trend.

However, on-line sales are on a serious growth trend. In what might well be the retail inflection point, the National Retail Federation reported that more people shopped on line Black Friday weekend than those who went to physical stores (and that counts shoppers in categories like autos and groceries which are almost entirely physical store based.)  In direct opposition to physical stores, on-line sales jumped 10.4% Black Friday.

And Amazon thoroughly dominated on-line retail sales this holiday season.  On Black Friday Amazon sales tripled versus 2014.  Amazon scored an amazing 35% market share in e-commerce, wildly outperforming number 2 Best Buy (8%) and ten-fold numbers 3 and 4 Macy’s and WalMart that accomplished just over 3% market share each.

Clearly the market trend toward on-line sales is intact.  Perhaps accelerating.  And Amazon is the huge leader.  Despite the recent route in value, had you bought Amazon one year ago you would still be up 97% (almost double your money.)  Reflecting market trends, Wal-Mart has declined 28.5% over the last year, while the Dow dropped 8.7%.

Amazon may not have bottomed in this recent swoon.  But, if you are a long-term investor, this drop is not important.  And, as a long-term investor you should be gratified that these prices offer an opportunity to buy Amazon at a valuation not available since October – before all that holiday good news happened.  If you have money to invest, the case is still quite clear to keep buying Amazon.

FANGs(2) Buy Facebook

The trend toward using social media has not abated, and Facebook continues to be the gorilla in the room.  Nobody comes close to matching the user base size, or marketing/advertising opportunities Facebook offers.  Facebook is down 13.5% from November highs, but is up 24.5% from where it was one year ago.  With the trend toward internet usage, and social media usage, growing at a phenomenal clip, the case to hold what you have – and add to your position – remains strong.  There is ample opportunity for Facebook to go up dramatically over the next few years for patient investors.

(3) Buy Netflix

When was the last time you bought a DVD?  Rented a DVD?  Streamed a movie?  How many movies or TV programs did you stream in 2015? In 2013?  Do you see any signs that the trend to streaming will revert?  Or even decelerate as more people in more countries have access to devices and high bandwidth?

Last week Netflix announced it is adding 130 new countries to its network in 2016, taking the total to 190 overall.  By 2017, about the only place in the world you won’t be able to access Netflix is China.  Go anywhere else, and you’ve got it.  Additionally, in 2016 Netflix will double the number of its original programs, to 31 from 16. Simultaneously keeping current customers in its network, while luring ever more demographics to the Netflix platform.

Netflix stock is known for its wild volatility, and that remains in force with the value down a whopping 21.8% from its November high.  Yet, had you bought 1 year ago even Friday’s close provided you a 109% gain, more than doubling your investment.  With all the trends continuing to go its way, and as Netflix holds onto its dominant position, investors should sleep well, and add to their position if funds are available.

(4) Buy Google

Ever since Google/Alphabet overwhelmed Yahoo, taking the lead in search and on-line advertising the company has never looked back.  Despite all attempts by competitors to catch up, Google continues to keep 2/3 of the search market.  Until the market for search starts declining, trends continue to support owning Google – which has amassed an enormous cash hoard it can use for dividends, share buybacks or growing new markets such as smart home electronics, expanded fiber-optic internet availability, sensing devices and analytics for public health, or autonomous cars (to name just a few.)

The Dow decline of 8.7% would be meaningless to a shareholder who bought one year ago, as GOOG is up 37% year-over year.  Given its knowledge of trends and its investment in new products, that Google is down 12% from its recent highs only presents the opportunity to buy more cheaply than one could 2 months ago.  There is no trend information that would warrant selling Google now.

(5) Buy Apple

Despite spending most of the last year outperforming the Dow, a one-year investor would today be down 10.7% in Apple vs. 8.7% for the Dow.  Apple is off 27.6% from its 52 week high.  With a P/E (price divided by earnings) ratio of 10.6 on historical earnings, and 9.3 based on forecasted earnings, Apple is selling at a lower valuation than WalMart (P/E – 13).  That is simply astounding given the discussion above about Wal-mart’s operations related to trends, and a difference in business model that has Apple producing revenues of over $2.1M/employee/year while Walmart only achieve $220K/employee/year.  Apple has a dividend yield of 2.3%, higher than Dow companies Home Depot, Goldman Sachs, American Express and Disney!

Apple has over $200B cash. That is $34.50/share.  Meaning the whole of Apple as an operating company is valued at only $62.50/share – for a remarkable 6 times earnings.  These are the kind of multiples historically reserved for “value companies” not expected to grow – like autos!  Even though Apple grew revenues by 26% in fyscal 2015, and at the compounded rate of 22%/year from 2011- 2015.

Apple has a very strong base market, as the world leader today in smartphones, tablets and wearables.  Additionally, while the PC market declined by over 10% in 2015, Apple’s Mac sales rose 3% – making Apple the only company to grow PC sales.  And Apple continues to move forward with new enterprise products for retail such as iBeacon and ApplePay.  Meanwhile, in 2016 there will be ongoing demand growth via new development partnerships with large companies such as IBM.

Unfortunately, Apple is now valued as if all bad news imaginable could occur, causing the company to dramatically lose revenues, sustain an enormous downfall in earnings and have its cash dissipated.  Yet, Apple rose to become America’s most valuable publicly traded company by not only understanding trends, but creating them, along with entirely new markets.  Apple’s ability to understand trends and generate profitable revenues from that ability seems to be completely discounted, making it a good long-term investment.

In August, 2015 I recommended FANG investing.  This remains the best opportunity for investors in 2016 – with the addition of Apple.  These companies are well positioned on long-term trends to grow revenues and create value for several additional years, thereby creating above-market returns for investors that overlook short-term market turbulence and invest for long-term gains.

How Telltales Told You Not to Own Wal-Mart, and Continue To Do So

How Telltales Told You Not to Own Wal-Mart, and Continue To Do So

Wal-Mart market value took a huge drop on Wednesday.  In fact, the worst valuation decline in its history.  That decline continued on Thursday.  Since the beginning of 2015 Wal-Mart has lost 1/3 of its value.  That is an enormous ouch.

WMT stockBut, if you were surprised, you should not have been.  The telltale signs that this was going to happen have been there for years.  Like most stock market moves, this one just happened really fast.  The “herd behavior” of investors means that most people don’t move until some event happens, and then everyone moves at once carrying out the implications of a sea change in thinking about a company’s future.

All the way back in October, 2010 I wrote about “The Wal-Mart Disease.”  This is the disease of constantly focusing on improving your “core” business, while market shifts around you increasingly make that “core” less relevant, and less valuable.  In the case of Wal-Mart I pointed out that an absolute maniacal focus on retail stores and low-cost operations, in an effort to be the low price retailer, was being made obsolete by on-line retailers who had costs that are a fraction of Wal-Mart’s expensive real estate and armies of employees.

At that time WMT was about $54/share.  I recommended nobody own the stock.

In May, 2011 I reiterated this problem at Wal-Mart in a column that paralleled the retailer with software giant Microsoft, and pointed out that because of financial machinations not all earnings are equal.  I continued to say that this disease would cripple Wal-Mart.  Six months had passed, and the stock was about $55.

By February, 2012 I pointed out that the big reorganization at Wal-Mart was akin to re-arranging deck chairs on a sinking ship and said nobody should own the stock.  It was up, however, trading at $61.

At the end of April, 2012 the Wal-Mart Mexican bribery scandal made the press, and I warned investors that this was a telltale sign of a company scrambling to make its numbers – and pushing the ethical (if not legal) envelope in trying to defend and extend its worn out success formula.  The stock was $59.

Then in July, 2014 a lawsuit was filed after an overworked Wal-Mart truck driver ran into a car killing James McNair and seriously injuring comedian Tracy Morgan.  Again, I pointed out that this was a telltale sign of an organization stretching to try and make money out of a business model that was losing its ability to sustain profits.  Market shifts were making it ever harder to keep up with emerging on-line competitors, and accidents like this were visible cracks in the business model.  But the stock was now $77. Most investors focused on short-term numbers rather than the telltale signs of distress.

In January, 2015 I pointed out that retail sales were actually down 1% for December, 2014.  But Amazon.com had grown considerably.  The telltale indication of a rotting traditional retail brick-and-mortar approach was showing itself clearly.  Wal-Mart was hitting all time highs of around $87, but I reiterated my recommendation that investors escape the stock.

By July, 2015 we learned that the market cap of Amazon now exceeded that of Wal-Mart.  Traditional retail struggles were apparent on several fronts, while on-line growth remained strong.  Bigger was not better in the case of Wal-Mart vs. Amazon, because bigger blinded Wal-Mart to the absolute necessity for changing its business model.  The stock had fallen back to $72.

Now Wal-Mart is back to $60/share.  Where it was in January, 2012 and only 10% higher than when I first said to avoid the stock in 2010.  Five years up, then down the roller coaster.

From October of 2010 through January, 2015 I looked dead wrong on Wal-Mart.  And the folks who commented on my columns here at this journal and on my web site, or emailed me, were profuse in pointing out that my warnings seemed misguided.  Wal-Mart was huge, it was strong and it would dominate was the feedback.

But I kept reiterating the point that long-term investors must look beyond short-term reported sales and earnings.  Those numbers are subject to considerable manipulation by management. Further, short-term operating actions, like shorter hours, lower pay, reduced benefits, layoffs and gouging suppliers can all prop up short-term financials at the expense of recognizing the devaluation of the company’s long-term strategy.

Investors buy and hold.  They hold until they see telltale signs of a company not adjusting to market shifts.  Short-term traders will say you could have bought in 2010, or 2012, and held into 2014, and then jumped out and made a profit.  But, who really can do that with forethought?  Market timing is a fools game.  The herd will always stay too long, then run out too late.  Timers get trampled in the stampede more often than book gains.

In this week’s announcement Wal-Mart executives provided more telltale signs of their problems, and the fact that they don’t know how to fix them, and therefore won’t.

  • Wal-Mart is going to spend $20B to buy back stock in order to prop up the price.  This is the most obvious sign of a company that doesn’t know how to keep up its valuation by growing profits.
  • Wal-Mart will spend $11B on sprucing up and opening stores.  Really.  The demand for retail space has been declining at 4-6%/year for a decade, and retail business growth is all on-line, yet Wal-Mart is still massively investing in its old “core” business.
  • Wal-Mart will spend $1.1B on e-commerce.  That is the proverbial “drop in the competitors bucket.” Amazon.com alone spent $8.9B in 2014 growing its on-line business.
  • Wal-Mart admits profits will decline in the next year.  It is planning for a growth stall.  Yet, we know that statistically only 7% of companies that have a growth stall ever go on to maintain a consistent growth rate of a mere 2%.  In other words, Wal-Mart is projecting the classic “hockey stick” forecast.  And investors are to believe it?

The telltale signs of an obsolete business model have been present at Wal-Mart for years, and continue.

In 2003 Sears Holdings was  $25/share.  In 2004 Sears bought K-Mart, and the stock was $40. I said don’t go near it, as all the signs were bad and the merger was ill-conceived.  Despite revenue declines, consistent losses, a revolving door at the executive offices and no sign of any plan to transform the battered, outdated retail giant against growing on-line competition investors believed in CEO Ed Lampert and bid the stock up to $77 in early 2011. (I consistently pointed out the telltale signs of trouble and recommended selling the stock.)

By the end of 2012 it was clear Sears was irrelevant to holiday shoppers, and the stock was trading again at $40.  Now, SHLD is $25 – where it was 12 years ago when Mr. Lampert started his machinations.  Again, only a market timer could have made money in this company.  For long-term investors, the signs were all there that this was not a place to put your money if you want to have capital growth for retirement.

There will be plenty who will call Wal-Mart a “value” stock and recommend investors “buy on weakness.”  But Wal-Mart is no value.  It is becoming obsolete, irrelevant – increasingly looking like Sears.  The likelihood of Wal-Mart falling to $20 (where it was at the beginning of 1998 before it made an 18 month run to $50 more than doubling its value) is far higher than ever trading anywhere near its 2015 highs.

Bigger Is Not Always Better – Why Amazon Is Worth More than Walmart

Bigger Is Not Always Better – Why Amazon Is Worth More than Walmart

This week an important event happened on Wall Street.  The value of Amazon (~$248B) exceeded the value of Walmart (~$233B.)  Given that Walmart is world’s largest retailer, it is pretty amazing that a company launched as an on-line book seller by a former banker only 21 years ago could now exceed what has long been retailing’s juggernaut.

WalMart redefined retail.  Prior to Sam Walton’s dynasty retailing was an industry of department stores and independent retailers.  Retailing was a lot of small operators, primarily highly regional.  Most retailers specialized, and shoppers would visit several stores to obtain things they needed.

But WalMart changed that.  Sam Walton had a vision of consolidating products into larger stores, and opening these larger stores in every town across America.  He set out to create scale advantages in purchasing everything from goods for resale to materials for store construction.  And with those advantages he offered customers lower prices, to lure them away from the small retailers they formerly visited.

And customers were lured.  Today there are very few independent retailers.  WalMart has ~$488B in annual revenues.  That is more than 4 times the size of #2 in USA CostCo, or #1 in France (#3 in world) Carrefour, or #1 in Germany (#4 in world) Schwarz, or #1 in U.K. (#5 in world) Tesco.  Walmart directly employes ~.5% of the entire USA population (about 1 in every 200 people work for Walmart.)  And it is a given that nobody living in America is unaware of Walmart, and very, very few have never shopped there.

But, Walmart has stopped growing.  Since 2011, its revenues have grown unevenly, and on average less than 4%/year.  Worse, it’s profits have grown only 1%/year.  Walmart generates ~$220,000 revenue/employee, while Costco achieves ~$595,000.  Thus its need to keep wages and benefits low, and chronically hammer on suppliers for lower prices as it strives to improve margins.

140805_HO_OutAmazonAnd worse, the market is shifting away from WalMart’s huge, plentiful stores toward on-line shopping.  And this could have devastating consequences for WalMart, due to what economists call “marginal economics.”

As a retailer, Walmart spends 75 cents out of every $1 revenue on the stuff it sells (cost of goods sold.)  That leaves it a gross margin of 25 cents – or 25%.  But, all those stores, distribution centers and trucks create a huge fixed cost, representing 20% of revenue.  Thus, the net profit margin before taxes is a mere 5% (Walmart today makes about 5 cents on every $1 revenue.)

But, as sales go from brick-and-mortar to on-line, this threatens that revenue base.  At Sears, for example, revenues per store have been declining for over 4 years.  Suppose that starts to happen at Walmart; a slow decline in revenues.  If revenues drop by 10% then every $100 of revenue shrinks to $90.  And the gross margin (25%) declines to $22.50.  But those pesky store costs remain stubbornly fixed at $20.  Now profits to $2.50 – a 50% decline from what they were before.

A relatively small decline in revenue (10%) has a 5x impact on the bottom line (50% decline.) The “marginal revenue”, is that last 10%.  What the company achieves “on the margin.”  It has enormous impact on profits.  And now you know why retailers are open 7 days a week, and 18 to 24 hours per day.  They all desperately want those last few “marginal revenues” because they are what makes – or breaks – their profitability.

All those scale advantages Sam Walton created go into reverse if revenues decline.  Now the big centralized purchasing, the huge distribution centers, and all those big stores suddenly become a cost Walmart cannot avoid.  Without growing revenues, Walmart, like has happened at Sears, could go into a terrible profit tailspin.

And that is what Amazon is trying to do.  Amazon is changing the way Americans shop.  From stores to on-line.  And the key to understanding why this is deadly to Walmart and other big traditional retailers is understanding that all Amazon (and its brethren on line) need to do is chip away at a few percentage points of the market.  They don’t have to obtain half of retail.  By stealing just 5-10% they put many retailers, they ones who are weak, right out of business.  Like Radio Shack and Circuit City.  And they suck the profits out of others like Sears and Best Buy.  And they pose a serious threat to WalMart.

And Amazon is succeeding.  It has grown at almost 30%/year since 2010.  That growth has not been due to market growth, it has been created by stealing sales from traditional retailers.  And Amazon achieves $621,000 revenue per employee, while having a far less fixed cost footprint.

What the marketplace looks for is that point at which the shift to on-line is dramatic enough, when on-line retailers have enough share, that suddenly the fixed cost heavy traditional retail business model is no longer supportable.  When brick-and-mortar retailers lose just enough share that their profits start the big slide backward toward losses.  Simultaneously, the profits of on-line retailers will start to gain significant upward momentum.

And this week, the marketplace started saying that time could be quite near.  Amazon had a small profit, surprising many analysts.  It’s revenues are now almost as big as Costco, Tesco – and bigger than Target and Home Depot.  If it’s pace of growth continues, then the value which was once captured in Walmart stock will shift, along with the marketplace, to Amazon.

In May, 2010 Apple’s value eclipsed Microsoft.  Five years later, Apple is now worth double Microsoft – even though its earnings multiple (stock Price/Earnings) is only half (AAPL P/E = 14.4, MSFT = 31.)  And Apple’s revenues are double Microsoft’s.  And Apple’s revenues/employee are $2.4million, 3 times Microsoft’s $731k.

While Microsoft has about doubled in value since the valuation pinnacle transferred to Apple, investors would have done better holding Apple stock as it has more than tripled.  And, again, if the multiple equalizes between the companies (Apple’s goes up, or Microsoft’s goes down,) Apple investors will be 6 times better off than Microsoft’s.

Market shifts are a bit like earthquakes.  Lots of pressure builds up over a long time.  There are small tremors, but for the most part nobody notices much change.  The land may actually have risen or fallen a few feet, but it is not noticeable due to small changes over a long time.  But then, things pop.  And the world quickly changes.

This week investors started telling us that the time for big change could be happening very soon in retail.  And if it does, Walmart’s size will be more of a disadvantage than benefit.

December Retail Sales down 1% – Sell WalMart, Buy Amazon

December Retail Sales down 1% – Sell WalMart, Buy Amazon

Retail sales fell .9% in December.  Even excluding autos and gasoline, retail sales fell .3%. Further, November retail sales estimates were revised downward from an initial .7% gain to a meager .4%, and October sales advances were revised downward from a .5% gain to a mere .3%.  Sales were down at electronic stores, clothing stores and department stores – all places we anticipated gains due to an improving economy, more jobs and more cash in consumer pockets.

Whoa, what’s happening?  Wasn’t lower gasoline pricing going to free up cash for people to go crazy buying holiday gifts?  Weren’t we all supposed to feel optimistic about our jobs, higher future wages and more money to spend after that horrible Great Recession thus leading us to splurge this holiday?

There were early signals that conventional wisdom was going to be wrong.  Back on Black Friday (so named because it is supposedly the day when retailers turn a profit for the year) we learned sales came in a disappointing 11% lower than 2013.  Barron’s analyzed press releases from Wal-Mart, and discerned that 2014 was a weaker Black Friday than 2013 and probably 2012.  Simply put, fewer people went shopping on Black Friday than before, despite longer store hours, and they bought less.

So was this really a horrible holiday?

Retail store sales are only part of the picture.  Increasingly, people are shopping on-line – and we all know it.  According to ComScore, on-line sales made to users of PCs (this excludes mobile devices) were up 17% on Cyber Monday, in stark contrast to traditional brick-and-mortar.  Exceeding $2B, it was the largest on-line retail day in history.  The Day after Cyber Monday sales were up 27%, and the Green Monday (one week after Cyber Monday) sales were up 15% (all compared to year ago.)  Overall, the week after Thanksgiving on-line sales rose 14%, and on Thanksgiving Day itself sales were up a whopping 32%.  The week before Christmas (16th-21st) on-line sales surged 18%.  According to IBM Digital Analytics the on-line November-December sales were up 13.9% vs. 2013.

The trend has never been more pronounced.  Regardless of how much people are going to spend, they are spending less of it in traditional brick-and-mortar retail, and more of it on-line.

Amazon vs. Walmart long term Value scores

So, what about Wal-Mart?  The chain remains mired in its traditional way of doing business.  Even though same-store sales have been flat-to-down most of the last 2 years, and the number of full-line stores has declined in the USA, the chain remains committed quarter after quarter to defending its outdated success formula.  Even in China, where Alibaba has demonstrated it can grow on-line ecommerce revenues more than 50%/year, Wal-Mart continues to try growing with a physical presence – even though it has been a tough, unsuccessful slog.

Yet, despite its bribery scandal in Mexico undertaken to prop up revenues, lawsuits due to over-worked, stressed truck drivers having accidents on double shifts killing and injuring people, and an inability to grow, Wal-Mart’s stock trades at near all-time highs.  The stock has nearly doubled since 2011, even though the company is at odds with the primary retail, and demographic, trends.

On the other end of the spectrum is Amazon.com.  Amazon is still growing revenues at over 20%/year.  And introducing successful new publishing and internet service businesses, expanding same day delivery (and even one hour delivery) in urban markets like New York City, as well as expansion of its Prime service to include more original programming with famed director Woody Allen after winning the Golden Globe award for its original series Transparent.

However, several analysts were trash talking Amazon in 2014.  20% growth has them worried, given that the company once grew at 40%.  Even though Amazon’s growth is a serious reason companies like Wal-Mart cannot grow.  And there is the perennial lack of profitability – including a larger than expected loss in the second quarter ; a loss which included a $170M write-off on FirePhones which never really found a customer base.  The latter item led to a Fast Company brutal lambasting of CEO Jeff Bezos as a micro-manager out-of-touch with customers.

This lack of analyst support has seriously hurt Amazon.com share performance.  From 2010 to early 2014 the stock quadrupled in value from $100 to $400.  But over the past year the stock has fallen back 25%.  After dropping to $300/share in April, the stock has rallied but then retrenched no less than 3 times, and is now trading very close to its 52 week low.  And, it shows no momentum, trading below its moving average.

Which is why investors in Wal-Mart should sell, and reinvest in Amazon.com.

All the trends point to Wal-Mart being overvalued.  Its revenues show no signs of achieving any substantial growth.  And, despite its sheer size, all retail trends are working against the behemoth.  It has been trying to find a growth engine for 10 years, but nothing has come to fruition – including big investments in offshore markets.  The company keeps trying to defend & extend its old success formula, thus creating a bigger and bigger gap between itself and future market success.

Simultaneously, Amazon.com continues to invest in major developing trends.  From publishing to television programming to cloud/web services and even general retail, everything into which Amazon invests is growing.  And even though this is a company with $100B in revenues, it is still growing at a remarkable 20%.  While some analysts may wish the investment rate would slow, and that Amazon would never make mistakes (like Firephone,) the truth is that Amazon is putting money into projects which have pretty good odds of making sizable money as it helps change the game in  multiple markets.

Think of investing like paddling a canoe.  When you are investing against trends, it’s like paddling up the river.  You can make progress, but it is hard.  And, one little mistake and you easily slip backward.  Lose any momentum at all and you could completely turn around and disappear (like happened to Circuit City, and now both Sears and JCPenney.)  When you invest with the trends it is like paddling down the river.  The trend, like a current, keeps you moving in the right direction.  You can still make mistakes, but the odds are quite a lot higher you will make your destination easily, and with resources to spare.  That’s why the sales results for December are important. The show traditional retailers are paddling up river, while on-line retailers are paddling down-river.

I don’t know if Wal-Mart’s stock value has peaked, but it is hard to understand why anybody would expect it to go higher.  It could continue to rise, but there are ample reasons to expect investors will figure out how tough future profits will be for Wal-Mart and dispose of their positions.  On the other hand, even though Amazon.com could continue to slide down further there are even more reasons to expect it will have great future quarters with revenue gains and – eventually – those long-sought-after profits that some analysts seek.  Meanwhile, Amazon is investing in projects with internal rates of return far higher than most other companies because they are following major trends.  Odds are pretty good that in a few years the trends will make investors happy they own Amazon, and dropped out of Wal-Mart.