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Wal-Mart Stores Inc.'s investors are, in a way, just like its customers. The retailer's mission is to "save people money so they can live better." Owners of its shares appear to be focused on savings, too – or, more precisely, capital preservation.
The megaretailer reported its first-quarter results on Thursday and they were weak. Wal-Mart records 70 per cent of its sales in the U.S. and revenues at its super centres there grew a paltry 0.3 per cent compared with the year-ago quarter, and same-store sales shrank. This is a sharp deceleration; in 2013 sales grew almost 4 per cent. There was a slowdown internationally, too. Wal-Mart's longstanding attention to costs has left little fat to cut to boost profits when sales are slow. Were it not for lower interest costs, a lower tax rate and a lower share count – over the past year Wal-Mart has spent more than two-thirds of its free cash flow buying its own shares – earnings per share growth would have been just a few per cent.
In response, the stock sank 2 per cent. That is not much, given that the stock, at $80 (U.S.), was at an all-time high – well above the peaks of both 1999 and 2008 – the day before the report hit. Investors, in other words, are willing to own Wal-Mart at these levels even when the company is not growing. The best explanation is the halo of safety that surrounds the shares, which was polished by their massive outperformance during the 2007-2008 crash. The company will still have customers, and perhaps more customers, if the economy cracks; its balance sheet is clean; its $1.88 a share dividend is safe.
Wal-Mart, at this point, is less an investment than a sort of inflation-protected bank; a place to park capital when rates are low and the economy drags. One might even wonder if the biggest risk to the shares is a U.S. upturn, which could inspire Wal-Mart's depositors to withdraw their funds.