In a CNN article on 5 ways to improve Wal-Mart, it begins by stating that investors are unhappy with the largest U.S. company's performance. It states that Wal-Mart's profits have increased 1%, meaning that they took their investors money, and earned it back plus an extra 1%. So why are investors unhappy about this?
Remember the difference between accounting and economic profit. Wal-Mart has earned a 1% increase in accounting profit. However, most other companies have earned better returns well above 1%. In fact, you could open a e-savings account with Citigroup and earn 4.5%. What the investors here are implicitly complaining about is that Wal-Mart has had a negative economic profit, even though it earned a positive accounting profit. Higher returns, like the savings account, offer a better return than Wal-Mart as of late. As a result, investors have punished them as indicated by a 5.1% fall in their stock price over the last year.
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2 comments:
Wal-Mart is Locked-in to an old Success Formula which is increasingly out of date. As a result its returns have declined as has its growth rate. However, the company is so locked in to Defending its operating practices that it will use financial machinations, such as a buyback that raises EPS without raising the E, in order to hide its worsening performance. In theory Wal-Mart should be improving its rate of return by reacting to market signals. In reality it is ignoring market signals and hoping its size will protect it from market competition. Read more at http://www.ThePhoenixPrinciple.com
Adam is right on the money with his above comment. I will be discussing this issue facing Wal-Mart in an upcoming lecture on the Principle-Agent problem.
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