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Monday, July 31, 2006

Wal-Mart's Bad News

Wal-Mart (WMT) made a number of announcements over the last several days. None of them were good. The market's view was that same store sales being up 2.4% was a net positive, and Wal-Mart's shares rose about 1% to $44.86.

The news about Wal-Mart's same store sales is only positive in light of its meager 1% increase in same store sales in June. The July figure is better, but no much above the rate of inflation.

Wal-Mart's retreat from Germany, at a loss of a reported $1 billion, demonstrates that the model that has been so successful in the US and places like the UK, does not necessarily work in all markets. Given the size of the German market, the lesson is a particularly difficult one. Wal-Mart's sales in Japan have also been disappointing. And, the company's earlier exit from South Korea may be further evidence that the Wal-Mart model does not play everywhere.

The last bit of news is the most difficult to read. Wal-Mart employess in China have begun o unionize workers in the company's stores. The unions are controlled by the state-run All-China Federation of Trade Unions. Some initial press reports about the organization of workers at the big retailer chain (WMT has 30,000 workers in China) indicated that the union was viewed as pro-management. However, the move puts the Chinese government at the wheel of the labor issue in Wal-Mart's stores, a measure that the firm is unlike to have wanted.

With sales in the US running about flat with inflation and failures in South Korea and Germany, Wal-Mart must look to markets like China and possibly India for its growth. Indian legislation is keeping the company out of that country for the time being. And, Wal-Mart is now a partner, probably unwillingly, of the Chinese government's labor union organization.

Wal-Mart still trades near its 52-week low of $42.31, and will have to do more radical "reinvention" to move out of its hole.

Douglas A. McIntyre can be reached at He does not own securities in companies he writes about.

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