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Friday, July 28, 2006

Wal-Mart Leaves Germany; Where Do They Leave Next?


After reviewing Wal-Mart's (WMT) essential failure and exit sale in Germany, this has to make you wonder where else the company may decide to exit next.

For starters Count CHINA Out as far as a market they will exit. It has about 60 stores and plans to open 15 or 16 more in the next year. China is considered the Holy Grail for Wall Street, so even if Wal-Mart had to vacate China they would do it gradually and it would be years off most likely. Wall Street would also view leaving China as a serious blow.

Here are the international markets the company operates in: Argentina, Brazil, Canada, China, Costa Rica, El Salvador, Germany, Guatemala, Honduras, Japan, Mexico, Nicaragua, Puerto Rico, United Kingdom

Before we get too far here, let's identify this. They are selling 85 stores in Germany. Terms are undisclosed, but they will be taking roughly a $1 Billion charge. They were NEVER liked in Germany and if you go back through your historic releases you will see that their expansion plans into Europe have been fought tooth and nail. Europe already has its own hyper-markets and they do not want anymore. The EU governments can't afford any more either. These hyper-markets have already wiped out untold amounts of mom and pop shops, and with the amount of unemployment the EU nations don't want to support any more unemployed.

There are a couple of lay-up economies that they seemingly wouldn't leave. Mexico and Canada would seem to be a permanent core focus, as there are still many opportunities in those countries and they are on our borders and easier to manage. It will also keep its focus on the UK more likely than not.

It also in recent years made a large investment for Japan via its stake in Seiyu, so it may be unlikely that they exit there.

Could the company be looking into trimming other Latin American markets? They could easily look at the El Salvador, Costa Rica, Guatemala, Honduras, and Nicaragua as potential cuts. This is leaves out Argentina and Brazil, but who knows.

Here is what the company said about itself on the website:

The division has posted impressive financial results as well. Wal-Mart International announced that 2006 fiscal year end sales reached $62.7 billion, an 11.4 percent increase over the previous year, and that operating profit rose to $3.3 billion, an increase of 11.4 percent over the prior year. In 2006, Wal-Mart International plans to open 220 to 230 units in existing markets. Relocations or expansion of existing stores will account for approximately 35 of these units, while the remainder will represent new operating units for the company.

We are talking about the same Wal-Mart that has been in trouble in the US. Forget about the social impacts and the moral debate of Wal-Mart for a second. After all, we are discussing the stock. The chart doesn't lie. The company has an image issue, has much more negative press than the believable good press they get. Small communities (and large cities) now fight to keep them out. What does that tell you? They have a $184 billion market cap and they now average over $80 Billion in revenues Per Quarter. It has a market equivalent P/E with the S&P at about 16. It is also at the lower-end of its 52-week trading range of $42.31 to $50.87, and is at the lower-end of a 3-year $42.31 to $60.00 trading range (see 3-year chart above).

They really need to decide which markets to exit next it would seem. The street is actually rewarding them for throwing in the towel today with shares up almost 2% at $44.33. They are looking at new concept stores in the US. It is very possible that they just finally reached their maximum capacity to grow, but that may be unfair. It just seems that they need to focus where they are wanted rather than where they want to go impose their will and might.

They very well may look at other markets, but they need to use Germany as the lesson. If you are being fought relentlessly from entry, maybe you should rethink your plans. If the street is going to reward them even with a $1 Billion charge and for walking out with your tail between your legs, then they should use this as an opportunity to sell other markets that are not as profitable.

Jon C. Ogg
July 28, 2006
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