Why Wal-Mart is surging

It's not just the low prices. They've made the shopping experience better, says retail expert Edward Weller

By Lawrence Delevingne


NEW YORK (Fortune) -- Wal-Mart, the world's largest retailer, reported unexpectedly strong sales Thursday, a bright spot in an otherwise gloomy retail market. U.S. same-store sales increased 5.1% compared to February 2008, not counting fuel sales. Fortune spoke with ThinkEquity analyst Edward Weller about Wal-Mart's results and the broader retail market. Excerpts:

Why is Wal-Mart (WMT, Fortune 500) doing so well?

It didn't happen overnight. Three or four years ago, they woke up and they realized that a lot of the criticism they were getting was justified...they've been working their tail off to improve their business for the last several years.

They're well known as a price leader and they're working real hard to reinforce the reality of it and tell people about it. But that's something they've always done - they're doing a better job of it. The stores are cleaner, the store personnel are cheerier, the checkouts are faster, the stores are easier to shop because there's less stuff in them. It's a big complex of things that creates momentum like this. It's not luck or just the environment.

What other changes has Wal-Mart made?

They've made an immense number of changes. They're more flexible about scheduling their people; they're treating their people better; they're giving them better benefits; they're doing a lot to improve morale in the store. They're cheerier, it's easier for them to maintain better-looking stores because they have less complex assortments to deal with and there's less stuff on the floor.

And of course there's the constant improvement of the technology of getting it from wherever it's made to wherever it's bought. They're getting a lot more efficient at that too. And that's not just to save costs - it's to be more responsive to what customers are buying.

What about other discount chains?

BJ's [Wholesale Club] is doing pretty well because their region [the East Coast] is good, because they've done a lot of improvement on some of their merchandise content. But they had an 8% [gain in comparable sales] excluding gasoline, and lower gasoline prices took that 8% to zero basically in the last month.

So even on paper, the discount retailers that seem to be doing well can't keep up with Wal-Mart?

Some of them are doing okay, but if you're selling furniture these days, and nobody's buying furniture - your sales are down 15%, let's say - it looks like you're not doing as well as Wal-Mart. But Wal-Mart might be down 15% in furniture too.

There's an interesting difference between Wal-Mart and Target (TGT, Fortune 500) now. It's not like Target fell asleep - Target has been improving through this entire period - but they're not improving as fast as Wal-Mart. It's kind of like everything has a second derivative. It feels hazy and weird because part of the reason is, it is hazy and weird.

What about the higher-end retailers?

When you go through a period like this, it's not exactly fashionable to carry an $1,800 handbag. It loses its social cachet under certain sets of circumstances, and we have those circumstances in place now. We're at a point now that unless those torn jeans came by those tears honestly, you're not supposed to wear them.

The high-end stores, particularly the Fifth Avenue high-end stores like Saks (SKS) - 18 months ago, the place was filled with people spending what appeared to them to be cheap dollars. Well, the dollar ain't so cheap now. So the fancy Manhattan stores get a very severe double-barrel hit: there's the lack of tourists on the one hand, and the fact that fancy, high-priced elegant designer stuff doesn't exactly have the same social cachet it did two years ago.

Where are those high-end shoppers going now?

You know that woman who bought three cashmere sweaters at Neiman Marcus last December a year ago? She can go shopping in her closet. She doesn't have to trade down to Target. She doesn't have to do anything - you have to replace the washing machine when it breaks and leaks all over the floor.

This is a particularly strange time with the high-end collapsing the way it's collapsing. Usually what happens is that everybody spends less. Or to put it another way, the people that bought at Neiman's slowed down a little bit and some of them continued to shop at Macy's (M, Fortune 500) and some of the people that shop at Macy's don't anymore or they trade down to Target and some of them trade down to Wal-Mart.

And some of them just trade out - they stop. So everyone tends to soften. Usually, they all soften simultaneously. But this time it looks like it's horrible at the upper end. So if you're in New York, it looks like the world is coming to an end. If you're in Kansas City, you go in and you pick up a couple pairs of Wranglers or Rustlers, because nobody buys Levi's in the middle of the country, and you did your shopping for the month.

Are we near a bottom?

Before economic activity starts to go up, it usually stops going down. I think we are now approaching that period for consumption. To top of page

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