Tuesday, October 13, 2009

Wal-Mart and Same Store Sales: The Fallacy of Less is More

There was an opinion piece recently in the daily email reporting of IR Alert by Carol Schumacher, the Vice President, Investor Relations of Wal-Mart. In the piece, Ms. Schumacher details how Wal-Mart’s practices for reporting sales store sales have evolved over time. I read the article with some interest as I have owned Wal-Mart stock for many years and have longed believed that they were one of the premier retailers in the world. I wish I could say the same about the way they report same store sales today.

In the early days of the company, when sales were regularly outpacing everyone on the planet, Wal-Mart reported weekly comparable store sales every Saturday. This to me is ideal. It shows you have great reporting systems, a desire to keep investors informed, and by the time the company reported the quarter, one item of uncertainty, the sales number in your more mature stores, has been eliminated and the market has incorporated it into their estimates.

Alas, it could not last, particularly as Wal-Mart’s sales began to slow, and a few years back the company moved to a more common monthly reporting system. At the same time, they instituted a program to provide guidance on their view of the upcoming month’s sales. My guess (and that’s all it is) is that the issuance of guidance was a bit of a sop to the Street to ease the fact that analysts were going to get less frequent hard information and more company estimates.

This year, Wal-Mart has stopped reporting same store sales on a monthly basis and will report them only in conjunction with their quarterly earnings. Again, to sweeten the pill, they shifted to providing guidance on comparable sales figures for their U.S. and Sam’s Club stores for the upcoming quarter.

The reasons given in the article for all these changes seem to fall into three basic categories: 1. This is the way everybody else does it, 2. By giving out only quarterly numbers, they decrease volatility in the stock, and 3. Wal-Mart is focusing on more long-term metrics, which will help focus investors more on the long term.

Because I don’t agree with the direction Wal-Mart is headed in, let me try and address these issues in the order listed. First, Wal-Mart didn’t get to be the biggest retailer in the world by doing things the same way that everyone else does. The company has famously broken the mold on many retail practices and prospered. Further, this isn’t the way everybody else does it. It is only the way other companies whose sales have slowed down do it. If Wal-Mart were posting numbers that regularly showed them to be well ahead of the competition, as they were in the 1970’s and early 80’s, my guess is that they would be continuing to give out weekly comp store sales numbers. By changing the way they report, what Wal-Mart is really doing is sending a message that they think future sales will look less robust than they have been in the past.

Second, to understand the volatility issue, look at what Wal-Mart did: they consistently scaled back on providing hard data in a timely fashion, going from weekly to monthly to quarterly comp store sales numbers, while substituting guidance or estimates. Of course you are going to get guidance wrong from time to time. These are after all, estimates about future events. And when guidance varies from actual numbers, trading volatility will follow. The answer is not to decrease the flow and timing of hard information; the answer is to decrease the amount of estimates.

Third, and finally, let us turn to the issue of getting investors to focus on long-term metrics. Companies need to remember that the stock market has a split personality: over the short run it is a popularity contest, trading on the number du jour; over the long haul it is a discounting machine, using past information to discount estimates of future cash flows. It takes both short-term and long-term investors to make a market, and when you are a bellwether stock such as Wal-Mart, you will get both in droves. Investor relations officers all want the long-term buy and hold investor, but short-term investors help increase a stock’s liquidity and when a stock trades more liquidly, volatility goes down, not up.

I know that Mies van der Rohe famously said, “Less is more”, but he was speaking about architecture, not same store sales. When thinking about same store sales, I tend to follow the maxim of classically trained economists, which is: “More is always better”.

No comments: