Wal-Mart shoppers, investors see up side during the downturn

Investors have found plenty of reasons to be optimistic about Wal-Mart of late, as the company found the right mix of merchandise and marketing to complement its refocus on low prices at a time when Americans are seeking less expensive options.

Wal-Mart's shares have soared more than 30 percent since early September, while the stocks of many major retailers, including discount rival Target Corp., have fallen during the same period and the Dow Jones industrial average has slipped 6 percent.

“The economy got bad at exactly the perfect time” for Wal-Mart, said Patricia Edwards of investment manager Wentworth Hauser and Violich, which resumed buying Wal-Mart shares in November. “As Wal-Mart got their act together, the consumer needed to be able to trade down. Wal-Mart is providing a better shopping experience and is allowing people to save money.”

Still, the world's largest retailer faces some challenges as shareholders gather for its annual meeting Friday in Arkansas.

Those include soaring transportation costs that are squeezing profit margins and increasingly frugal customers. Last month, Wal-Mart gave a cautious outlook for the current quarter as it reported better-than-expected first-quarter profits.

“We have a sea change in the mind of the consumer,” said Howard Davidowitz, chairman of retail consulting and investment banking firm Davidowitz & Associates, noting that the rough economy is pushing Americans to the point where they are buying the bare essentials. “Wal-Mart is the master of consumables, so it is benefiting.”

The biggest risk to Wal-Mart, he said, is signs of strain in the financial well-being of its most loyal customers.

Davidowitz estimated that 20 percent of Wal-Mart shoppers do not have bank accounts.

The company is still in an enviable spot – which it would not be had it not refocused on discounting, controlled inventory, cleaned up its stores and overhauled its clothing lines.

Wal-Mart's first-quarter performance, along with other low-price retailers, was among the few brighter spots for retailers. Its profits rose almost 7 percent, while department store chains J.C. Penney Co. and Kohl's Corp. recorded sharp declines. Target's earnings fell 9 percent.