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As the world financial system is crashing down around investors’ ears, it may be wise to put spare cash into stocks of soup, rather than soup stocks. Even Wal-Mart, the biggest retailer in the world with sales last year topping $370bn, will not be immune to a global economic slowdown. Yet for those who have to keep money in the stock market, the resilience of the discount retailer from Bentonville, Arkansas, is a rare outpost of security.
That is not entirely surprising. Wal-Mart has a reassuringly strong balance sheet. A large user of commercial paper, markets have tightened, but not closed to the double-A rated issuer. With $7bn of cash on the balance sheet, debt due next year could be simply repaid, rather than refinanced if necessary. Fixed charge cover – a measure of a company’s operating profit relative to its financial obligations – is over seven times, more than double the retailing average.
The group also benefits from consumers rediscovering thrift – autumn advertising campaigns in the US are heavily emphasising value. Monthly sales data from retailers out on Wednesday confirmed the bleak picture for discretionary spending. Wal-Mart, and discount club Costco, reported solid growth, while clothes retailers and department stores are starting to discover that not even steep discounts can tempt shoppers through the doors.
Yet, handily for Wal-Mart, the shift in consumer attitudes comes at a time when a three year plan to improve performance is bearing fruit. Under Wal-Mart USA head Eduardo Castro-Wright, centralised control has been loosened. Marketing efforts now appear to match what is happening in-store. In a timely move, the group began to scale back openings last year to concentrate on raising returns. Expecting a return to the ten year median earnings multiple of 25 times would be nonsensical. Such exuberant valuations are long gone. But on 15 times forward earnings, Wal-Mart is music to panicked souls.
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