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King of the Hill?

While the story is about Wal-Mart, the interesting point is that failure comes very, very quickly in retail.

Wal-Mart recently reported that it will be laying off 2,300 workers at its Sam’s Club subsidiary, reportedly to cut the fat of middle management. Layoffs in and of themselves aren’t uncommon at any large company — competitor Target (NYSE: TGT ) also recently said it would lay off nearly 500 employees and keep hundreds more positions vacant — but such personnel reductions also aren’t something a growing company does very often.

What’s worth keeping an eye on is whether the Sam’s Club layoffs are a symptom of much larger problems at Wal-Mart. The company has been a giant of retail for decades, but there are signs that its reign is coming to an end.

Retail is a tough business to be in.

It doesn’t take long for a retailer to go from the top of the world to bankrupt. Kmart lost just $22 million in the second quarter of 2001, but was bankrupt by Jan. 22, 2002. In the four months leading up to bankruptcy, same-store sales fell 1.8%, 4.4%, 2.6%, and 1%, respectively, from a year earlier. You don’t need a big decline in sales to suck up all of your profits in retail.

Circuit City reported a 4.2% rise in same-store sales as late as December 2006, even raising its fiscal-year guidance to growth of 7%-8% in U.S. stores. But by December 2007, same-store sales were down 11% for the month and the company would be out of business by November 2008. From optimism to bust in less than two years.

The reason that retailers are sensitive to declines in sales is that there is a lot of overhead that goes into selling in brick-and-mortar stores. Wal-Mart spent $89.2 billion on overhead over the past year, and based on current margins and overhead spending, it would only take a 13.6% decline in sales to eat up all of Wal-Mart’s profits.

Amazon is Wal-Mart’s biggest competitor

What makes Amazon a bigger threat today is the company’s sheer size. It’s now bigger than Target, and every percentage point of growth takes growth away from Wal-Mart. In fact, Wal-Mart’s budget-conscious consumers are probably more likely to shop on Amazon than Target’s consumers.

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