Rumors of Wal-Mart's demise are greatly exaggerated

"Wal-Mart Posts 1st Profit Fall in Decade" proclaimed the Associated Press headline, in pure schadenfreude. "Wal-Mart Profit Falls 26%, Its First Drop in 10 Years" beamed Michael Barbaro, resident basher of big business at the New York Times.

Gee, you'd think it was the end of the world for Wal-Mart. Remember, though, that liberals love to make hay out of a short, cherry-picked period of time. They typically dismiss a quarter of economic growth, whether it's the U.S. during a Republican presidency or a major business built on capitalism, as either an aberration or no big deal -- even if the growth is consistently quarter after quarter. (And in the United States' case, after major tax policy changes were enacted and spur continuous growth.) On the other hand, they love to point to a single, isolated slowdown in one quarter as proof of structural failure.

So naturally, the liberal mainstream media ate it up when Wal-Mart's profits were down for just this last quarter. But note that Wal-Mart's profits still increased, though not as much as before. That was in large part related to the cost of pulling out of Germany (whose flat economic growth means the people have little money to spend anywhere) so it can focus on countries that are profitable. Were it not for the special charge of $863 million, the reported $2.08 billion profit would have been 4.7% greater than the $2.81 billion reported for the quarter one year ago. Furthermore, earnings were still in line with what its analysts said, excluding that one-time charge, so the situation is not as bad as mainstream media would have you believe.

Barbaro wrote that "Domestic sales rose by a modest 6.9 percent." In what kind of world is that considered "modest"? Having helped manage a business, albeit a small one, I can tell you that 6.9% growth in 12 months is still pretty damn good. That's around U.S. GDP growth after adjusting for inflation, so in other words, Wal-Mart's alleged downturn is still equal to robust American economic growth. What does that say about when Wal-Mart really sizzles? If, in an out-of-context quote, Wal-Mart's CEO admits that management is "disappointed" with sales, how high must their normal expectations be?

And then we find the real story: "Overall sales, from stores in the United States and abroad, rose 11.3 percent, to $84.5 billion from $75.9 billion." So where Wal-Mart can make a profit, it makes one hell of a killing. Also,

Bernard Sosnick, an analyst at Oppenheimer Securities, said he was impressed that Wal-Mart had met its earnings forecast from operations at a time when its customers, many earning less than $30,000 a year, were absorbing gasoline price increases and the company was investing heavily in store renovation. "This has been a worst-case scenario for Wal-Mart," Mr. Sosnick said.

In a worst-case scenario, Wal-Mart still makes a terrific profit.

Other liberals have disparaged Wal-Mart by saying its growth rate has been flat for the last few years: this one pegs Wal-Mart's growth at 4%. So does that make Barbaro's figure of 6.9% a boom for Wal-Mart? The former claims to go by Wal-Mart's annual sales reports, but then what figures is Barbaro using, but the same ones that Wal-Mart will put into its annual reports? Well, we really shouldn't be surprised that liberals, eager to bash capitalism in any way they can, will contradict each other. It doesn't matter to them, as long as they can deceive people in their anti-capitalist rants.

The truth is that in fiscal year 2006, Wal-Mart's net sales increased 9.5% to $312.4 billion, and its net income rose 9.4% to $11.2 billion. Those were straight from Wal-Mart's 2006 annual report. (Compare this to Target's recently reported net income of $609 million.) For any size of business, that's an incredibly tiny profit margin. Most could never survive on such a pittance, yet with that kind of growth coupled with unparalleled sales volume, Wal-Mart can succeed. It even uses the same "low profit margin, high sales volume" idea with its online music sales. Investors would balk at most companies with that kind of profit margin, but they're not scared of Wal-Mart's strategy. They're still looking at a predicted earnings per share of around $2.90 for calendar year 2006. The stock is down from its 52-week high, and it fell in Tuesday's trading after the "weak" profit news, but it was up slightly on Wednesday. So some investors panicked, while those who keep faith will be rewarded.

That "Is Walmart over" entry is full of bad economics, as if it were written by an EPI or CBPP lackey. The first clue is that the author can't get the company's name right. He claims that if a product manufacturer complains that Wal-Mart isn't paying enough, "Walmart will find another supplier and [the product manufacturer] will lose the business." This is ignorant baloney, as are most liberals' assertions about how businesses operate, and anyone with a lick of common sense can see why: it reverses cause and effect, which a while back I listed as an economic misconception to beware of. Competition is the fundamental principle behind economic growth, so you'll never see a real business "complaining" that it has to cut costs. A successful business, i.e. one that doesn't depend on protectionism (by definition always government-induced), will cut costs to get and retain someone's business, not because it's afraid of losing it. A manufacturer will move operations overseas not because Wal-Mart sets the price, but to outbid other competing manufacturers.

Remember that a price is set by both sides: if people are left free to compete, then no one has the power to dictate the terms of a transaction, including price. (Liberals have a very skewed concept of "competition," however. It boils down to giving certain people a "head start" instead of letting them compete on their own merits, but that's for another day.) If Jim can sell a proverbial widget to Wal-Mart for 90 cents, but he notices or even thinks that Bob can compete at 85 cents, then Jim will look for ways he can sell at 80 cents. Liberals' hearts bleed for the Bob types, especially the "mom & pop" stores that Wal-Mart tends to run out of business, but I rejoice at the disappearance of less efficient businesses. Why is striving for higher efficiency so wrong, especially when the consumer always wins in the end?

It's Wal-Mart's incredibly aggressive competition that is the key to its success. If Wal-Mart were really so rough in its negotiations, why are so many manufacturers knocking each other down to gain Wal-Mart's business? For the same reason that liberals, particularly unions that are powerless to intimidate Wal-Mart, accuse Wal-Mart of not paying enough, even though plenty of people still voluntarily accept low-end employment at Wal-Mart: it must not be that bad. If they disliked Wal-Mart so much, or if they couldn't sell the goods at the prices Wal-Mart is willing to pay, then the manufacturers would be turning to Target, or to "mom & pop" shops.

That brings us to another measure of success: maybe you're not running as fast as before, but what if everyone else has fallen even further behind? Start worrying about Wal-Mart when it moves into an area and doesn't drive others out of business. What if your competitors are so afraid of you that they get the referee to block you from entering the race? Earlier this year, White Plains (Westchester's county seat and main city) finally gave Wal-Mart the green light to open a store in the downtown shopping area. White Plains had to give Wal-Mart a "certificate of occupancy," and the state had to grant a license to sell groceries. The mayor had previously said he's afraid of "too much competition," which is pure horseshit. How much was he getting from Target, Stop & Shop and specialty stores, I wonder? How about Circuit City, Best Buy and CompUSA a few miles away? If Wal-Mart is in such trouble, why are they so afraid of it opening up next door?

The AP article quotes a couple of portfolio managers, including one for Thrivent Investment Management. According to the International Herald Tribune, Thrivent had 1.1 million shares as of March 31st, so about $51 million worth. But that's not even 1% of Thrivent's present $67.5 billion in assets, so far from a significant investment. The other portfolio manager is working with a mere 51,000 shares ($2.27 million) out of $8.2 billion in assets -- not even three hundredths of one percent. Also, if you do a little checking around, one almost wonders if this David Heupel fellow's job is providing soundbites (even to China's People's Daily propaganda) about why not to invest in Wal-Mart, rather than managing a portfolio.

I should note that liberals might think I'm a Wal-Mart cheerleader, but I personally don't invest in Wal-Mart, or any funds or other ventures that do. Nonetheless, I'd rather listen to fund managers who control more significant holdings of Wal-Mart stock, instead of people with axes to grind. Certain liberal morons would like big players like TIAA-CREF (the largest U.S. retirement fund) to drop their Wal-Mart investors, but thankfully there are managers who look out for their investors' best interests, instead of following some idiotic bleeding-heart philosophy. Norwegians might wish that, someday, when they find there's a high cost to putting the environment and "ethical business practices" first.