Everybody Loves Wal-Mart

Local politicians seem to falling all over themselves to give Wal-Mart tax breaks to locate in their area. In a small town very near my home, a Super Wal-Mart is being built soon, despite the fact that there are already two Wal-Marts, and more being built, within a thirty-mile radius.

What is the customer base, you ask? My dear and loyal reader(s) should know that the towns falling within this radius boast a population between 10,000 and 30,000 people.

Maybe they need a break, you say. Well, Wal-Mart's EBIT has hovered around a whopping $20,000,000,000 in the last three years. It is tough to buy the idea that they need tax breaks. Their most recent growth is starting to smell like Starbucks - they are putting more stores than is prudent in the same area. I remember seeing a Wal-Mart in Hinesville, GA, then driving a few blocks down, turning left, going up a block and seeing another Wal-Mart! What were they thinking? The tiny possible increase in sales due to customer convenience can hardly justify the considerable increase in overhead. As I noted, the same thing is happening to communities within a thirty-mile radius of my hometown: the number of Wal-Marts locally are doubling. It is clear that Wal-Mart will take any breaks it can get to mitigate the effects of capital expenditures on cash flows (and who wouldn't?) Whether or not it is a good idea, local governments are eager to supply tax incentives for Wal-Mart to build.

Is Wal-Mart showing signs of a Starbucks redux? While the last three years don't appear to have changed greatly with respect to cash flows from investing activities, the overall change in cash flows would be troubling to me as an investor, particularly in light of the picture from the ground.

For now, I'm forced to concede that the market appears to disagree with me. Wal-Mart's stock has seen a 50% gain in the last twelve months. I'll be greatly interested in seeing what the cash flow statement has to say about things come January, and what the income statement has to say in the next couple of years that follow.

Watch out for falling prices.