It’s a question that’s been dogging Wal-Mart Stores (NYSE: WMT) since the giant retailer was just a fraction of its current size. And it’s a question that bears repeating: Is Wal-Mart, with more than 11,000 stores and a $265 billion market capitalization, reaching its upper limit? Has the company run out of ways to grow?
Warren Buffett doesn’t think so.
Berkshire Hathaway (NYSE: BRK-B) holds a 2.1% stake in Wal-Mart stock and last year increased its holdings by about 17%. And of course, even with annual revenues of more than $476 billion, the retailer has plenty of room to grow.
There are significant markets in the U.S. that Wal-Mart has yet to penetrate, and more overseas. There’s also a significant online business that’s always up for grabs as consumers value cost savings over loyalty. Amazon.com (NASDAQ: AMZN) alone generated revenues last year of almost $89 billion.
But if you are in the market for a growth stock, there are several reasons why Wal-Mart may not be your best bet.
Growth Is Slowing
Even if a business is not too big to grow anymore, its rate of growth will invariably slow. Last year, Wal-Mart’s revenues grew only modestly, to $476.3 billion from $468.7 billion, and its net income declined to $26.9 million from $27.7 million.
When a business is young, it may be possible to double in size in a single year. But businesses the size of Wal-Mart just don’t have that kind of momentum anymore.
A Physical Retailer in an Online World
Wal-Mart is primarily a physical retailer in a world where more customers are shopping online. Yes, you can – and millions of people do – shop at Walmart.com. But years after online shopping became popular, Wal-Mart is still identified primarily as an offline retailer.
The company understands that more and more shopping is trending online, and it’s making appropriate investments to compete. But as a business that made its name around massive supercenters – offering everything from cheap apparel and produce to manicures and auto repair under the same roof – it still has an extremely heavy brick-and-mortar footprint, and heavy expenses to maintain that.
Wal-Mart has recently scaled back its plans for new supercenters in favor of more compact “Neighborhood Markets.” But in the same way that a large cruise ship can’t suddenly change direction, Wal-Mart’s future will be somewhat limited by its past strategy.
Wal-Mart’s cost of labor is sizable – and growing. Wal-Mart recently committed to increase worker wages, but the cost will be significant. What’s good, and definitely deserved, for workers may be problematic for a retailer that’s been able to offer rock bottom prices by keeping expenses low.
Wal-Mart is not the only game in town. While it may indeed be the only retail presence in many small towns in the United States, it faces stiff competition nationwide from the likes of Target (NYSE: TGT), Costco (NASDAQ: COST) and scores of other retailers.
So if you’re looking for a good retail stock, shop around a bit.
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