Email from a lurker

I went to the RG4N meeting as a very skeptical person, as I'm not a big fan of big public meetings. There was one moment that, almost literally, sent a chill up my spine, though. The planner was talking about the history of malls, and showed a mall that was completed in (iirc) 1990 and abandoned in something like 1998.

"WHAT?" I thought. I know that malls can have a short lifespan, but UNDER TEN YEARS?

Think about that for a minute--imagine that this plan goes through, and we have a two story Wal-Mart with a multiple story parking garage, and...

...it's empty.

Granted, the traffic wouldn't be bad ;), but the crime would be hell. And, although I'm not a realtor, methinks there'd be a bit of a property value issue.

But, I figured that it isn't an issue because Wal-Mart is a Fortune 500 and wildly successful company, and successful companies don't put up buildings that they abandon quickly. So, I was surprised to run across this statistic on the Sprawlbusters website:

Wal-Mart has 390 empty stores on the market today.

Sprawlbusters doesn't give sources for info (which irritates me), so I'm not sure where this stat is from, and therefore how reliable it is. Email from a lurker says that 40 of those sites are in Texas.

I haven't succeeded at verifying or falsifying either of those numbers, but in the course of trying to, I came across something that surprised me. Wal-Mart is not doing as well as I had thought.

See, for instance, "Wal-Mart: where's the remodeling boost? Goldman analyst Adrianne Shapira downgraded the stock Monday, saying the retailer's turnaround is taking longer than expected" in Business Week Online, Jan 9, 2007.

It's a short article, and here's the punchline:

Shapira pointed out that Wal-Mart has remodeled 1,300 stores, overhauled merchandise, and aggressively promoted. Yet sales have only become increasingly pressured. "We continue to believe that investments in Wal-Mart's existing store base were long overdue, and should lead to long-term sales and returns improvement," Shapira wrote in a research note. "That said, returns on these investments do not seem to be materializing as quickly as we would have hoped."

Shapira lowered the firm's one-year price target to $51 from $53 per share, after lowering forecasts for Wal-Mart's earnings per share in 2007 and 2008. She noted that "weak sales continue to suggest payback from earlier investments will take more time."

Edwards' January 24, 2007 report says, "Hold/Conservative" and that the "currelative relative ROE of 1.25 compares unfavorably with the five-year historical average of 1.46." Credit-Suisse's January 24, 2007 report says that recent changes in management (which I'll explain in a bit, as I think they're relevant to the Northcross plan) "signal that upper management is cognizant of the problems plaguing the business and shareholder frustration with deteriorating results and a flat stock price." According to Bear Stearns' January 24, 2007 Report: Wal-Mart shares are trading "below the three-year and five-year historical average premium of 16-32%." They have a "target price" of $54-55. The Report has a footnote saying that they "do business with companies covered in its research reports" and that the "conflict of interest could affect the objectivity of this report."

None of these reports claims that Wal-Mart is in a terrible situation, but instead that it has been in a kind of flat place. They all (to me) seem hopeful that the recent changes in management will improve.

Most of the reports emphasize the replacements and moving around of people in upper management, especially the move of John Fleming from heading up marketing to being "in charge of all merchandising" (Edwards). Fleming had, at some point, been at Target/Marshall Fields.

Here's the potential relevance for the Northcross plan. What I gather from various things is that there is a big income split between the kind of people who shop at Target and the kind who shop at Wal-Mart, and Wal-Mart would like to get the Target crowd. So, they are looking to move slightly upscale. This didn't go very well in the last year, however, so they are looking to do things differently (but with the same goal). According to the CreditSuisse report (which put Wal-Mart as a top pick):

We believe Wal-Mart's "store of the community" initiative will be a major driver of sales as the company attempts to better tailor its merchandise on a market-by-market and even store-by-store basis. With better store standards, remodeling of key departments, and better tailoring of merchandise, Wal-Mart should be positioned to drive higher same-store sales growth.

So, one scenario is that the Northcross site store is placed where it is because they're trying to compete with Target, and hoping to lure Allandale types (and cross Mo-Pac types) to shop in a slightly more upscale Wal-Mart.

This scenario is supported by other shifts in marketing, such as offering "organic" foods and native plants. If this is the case, then it seems to me that something like the "hands around Wal-Mart" is a potentially effective strategy. It also means that the boycott is more powerful than I had initially thought. (When people announced the boycott, I thought, um, how many people here shop at Wal-Mart anyway? What impact does a boycott by people not in the target market have? But, if we are the target market, then a boycott could be very effective.)

That isn't the only possibility. Another one, also suggested by the CreditSuisse report, is that this plan is part of what they had been trying to do. The report also mentions:

Over the past several years, Wal-Mart has targeted 8% domestic square footage growth despite calls from many investors to moderate that growth. At its October 2006 analyst meeting, management indicated that it would move away from its 8% growth goal, opting instead for a more bottom-up approach. As a result, domestic square footage growth for 2007 is targeted at 7%.

The report concludes:

After 2007, the more stringent ROIC requirements for new stores could result in a more significant reduction in square footage growth, which we believe would be a major positive for the stock, helping to contribute to meaningful improvement in ROIC.

[ROIC is "return on invested capital"]
So, here's another possible scenario. Wal-Mart had been in major expansion mode when this lease was acquired, but that's now shifted. If that's the case, then Wal-Mart might be more amenable to negotiating on the size of the plan.

There are other scenarios, too. One, also suggested by a lurker in email, is something like this. Let's say that Chester, Inc. stock is flat, and I want to heat it up by showing lots of growth. One way to do this is to keep building new (and larger) stores. As long as I can make sure that I have a "go dark" clause in my leases (meaning that it's easy for me to turn off the lights and walk away from stores), this could look good on the books. If I wanted to do that, I would build bigger stores near existing stores (so I don't lose customers, but just make them move) that I then close. If that's what we're facing here, then there's no negotiating on size. In the worst case version of this scenario, it doesn't matter if the new location is boycotted; it doesn't even matter if the new location goes bust in a few years; all that matters is that Chester, Inc. gets an even bigger location built before what was once "the new location" goes dark.

I'm not sure how we can know just what scenario we're looking at here, but I sure would like to know more about the other locations in Texas that are vacant.