With apologies to Clement Clarke Moore

Twas the eve'n after Turkey Day and all through the mall,
There were creatures a-stirring, but not buying all.
The discounts were posted in the stores with care,
In hopes that the shoppers soon would be there.

The security teams were nestled all snug at their posts,
While visions of safety were bigger than most.
Shoppers in PJs, some with hot plates,
Had just settled in for a cold morning's wait.

When out in the parking lot there arose such a clatter,
Security sprang to attention to see what was the matter.
Away to stores I flew like a flash,
Held on to my credit cards, I'd only pay cash.

The fluorescent lights gleamed on the newly arrived stuff,
Gave a glimmer of hope to the retailers who'd had it so tough.
When what to my wondering eyes should appear,
But a whole slew of shoppers, with Christmas lists for those dear.
They clutched at the flyers, all glossy and slick,
And I knew in an instant that it was bargains that would stick.

More rapid than hordes, the shoppers they came,
Crowding home and electronics, gotta get that new game.
Now toasters, now iPods, now board games and toys,
Grab discounts, grab bargains, can't afford to be coy.
To Kohls and to Target, To Walmart and the mall,
Shop away, shop away, shop away all.

As dry leaves that before the wild hurricane fly,
Grew the lines at the checkouts with items to buy.
So up to the next floor, the hordes they plain flew,
They wanted those bargains, apparently more than did you.
And then in a twinkling, I heard from the clerks,
'Next in line please,' they were glad to have work.

As I talked with consumers, the people in line,
It was really apparent they weren't feeling too fine.
They were clutching their wallets, a glaze in their eyes,
'No credit left for me this year,' was often their cry.
Their choices were careful, each item a find,
Yet the retailers had obviously kept margins in mind.

Their steps they were quick, but eyes were quite bleery,
Still yawns they were stifled, due to caffeine with dairy.
Their bags didn't bulge, despite purchases paid,
A few less per family than they'd previously made.
Still some shopped for sport and had good fun,
Twas quite the excitement to watch where they'd run.

A quick look through stores when I should be in bed,
Soon gave me to know retailers might have a tough time ahead.
The customers they shopped where stuff was on sale,
But no discount equaled no purchase despite their avail.
And leaving the mall to hit the next store,
The consumers weren't confined to stores they adore.

The shoppers want value, not just cheap price.
And retailers win who know naughty from nice.
We're still not done with the shopping this season,
But retailers will win who use their good reason.

A quick minute or two on the consumer

And here I am again... more about the consumer

So, I can't figure out how to imbed this video, but here's a link to my Bloomberg TV interview on Thursday.

A steeplechase for Shetland ponies

When I woke up before the crack of dawn this morning to review April's retail sales, I was expecting that things would be better than expected. I didn't get it posted to the blog, but if you're following me on Twitter (see the side bar to the right) you saw my notes from last weekend's mall walk. For the first time in months, malls were busy last weekend. People were parting with cash. Not large amounts of cash. But parking lots were fuller and more bags were being carried in greater quantity than I'd seen in my last 2 months of mall walks. Call it a smallish bounce off the bottom, but whatever you do, don't call it a return to a need for Spendaholics Anonymous.

My view is born out in this morning's comparable store sales numbers. Wal-Mart, bastion of the 'Save Money, Live Better' crowd beat expectations handily. Aeropostale, the poor man's value-conscious shopper's Abercrombie & Fitch, hit it out of the park with a 20% comp gain on the back of a 25% gain this time last year. Amazing. Oh, and the real Abercrombie? Down -22%. Price/value matters, folks. The shopper is spending, but they're being careful about how much and where.

Case in point on that value thingy? Sak's same store sales down over 31%. Nordstrom was 'only' down 10.8%, better than expected and more in line with Macy's (down 9.1%) because JWN has added more offerings at lower price points. Ross, TJX - both up nicely. Kohl's & JCP? Sales down, but not as much as expected... Q1 guidance raised. Thing is, you can only manage inventory and costs so much, eventually you have to have sales or make more drastic adjustments that will cause hate and discontent amongst the shoppers and perhaps shareholders.

The big questions now surround guidance for the second quarter and beyond as well as healthy scrutiny of Wall Street analyst's earnings estimates. The latter worries me more than the former. I've never known a group of folks more likely to take two data points and draw a straight line than the lemmings of Wall Street. It should be intersting to see how many different ways folks can justify owning these stocks at these valuations in this economic environment.

But if the retailers and analysts set the bar low enough, it will be just like a steeplechase for Shetland ponies - such an easy hurdle that almost anyone can get over it. I suppose in that environment you should consider shorting those that still trip themselves up.

By the way, if you're interested in hearing this morning's Bloomberg interview, click here.

Apparently Lee Scott reads my blog

Women's Wear Daily is reporting the following:

The economy will turn around some day — but don’t expect conspicuous consumption to make a comeback.

So believes H. Lee Scott, chief executive officer of Wal-Mart Stores Inc., noting the dismal economy has caused a permanent and fundamental change in consumer behavior.

The fact that people still need to be told that this is the case is rather interesting to me. (If they'd only read my blog earlier...) This isn't something new, and it's going to get worse before it gets better.

One of the reasons why

A little over a year ago Credit Suisse put out an amazing graph that struck fear into my heart. It certainly had a lot to do with me looking more seriously at Wal-Mart as an investment (thank you, CS!) because of their focus on lower income consumers.

One look at this graph, combined with the knowledge that it is more and more difficult to get a mortgage (i.e. refinance some of these beasts), should make you rethink any rosy scenarios you might be harboring in your heart. Oh yes, and I hear that as many as 50% of the mortgages that reset in 2009 are already behind on their payments... at the teaser rates. Want to bet on a fabulous 2009? I'll take the other side of that bet!



It's not over until the fat lady sings, and she's not even starting to warm up yet.

What I'm thinking today... video edition

Sometimes re-typing what you've already said just doesn't make any sense. In that spirit, I present to you my recent appearance on Bloomberg TV:

Only Black in the bleak, dark and gloomy sense of the word

I'm afraid they may have to rename today. Traditionally known as Black Friday because it was they day that most retailers finally made a profit for the year ('went into the black'), this year I'm thinking there's a little more red flowing than normal. The question of the day: Is that red ink or blood flowing through the mall?

As I do every year, I arose this morning at a time that would have been considered uncivilized anywhere in the country, regardless of time zone. By a little after 3am I was chatting with folks lined up outside Kohl's. I followed that up with a trip to Wal-Mart for their 5am opening, then to Target for their 6am opening, and finally a walk through the mall for Macy's, JC Penney, Sears, Nordstrom and all the specialty stores.

Without further ado, this year's view from the battlefield:

• People are hurting financially and it's going to show in sales. 75% of shoppers interviewed are cutting back their spending for this holiday season significantly (anywhere from 30-90% cuts). Of the remaining 25%, most were just holding spending equal to last year, and the few who were spending more were generally in their 20s (no mortgage, little debt) and hadn't spent much last year.
• Consumers are shopping for what's on sale: just having items FOR sale isn't enough anymore. The days of paying whatever you have to just to make sure that a is under the tree for the kids are just plain over. Most consumers were going to multiple stores to buy specific items in each location... and they were shopping fewer stores overall. This, by the way, defeats the purpose of doorbuster sales for the retailers, which are supposed to lure you in and get you to buy some non-discounted items also. The only exceptions to this rule were Wal-Mart shoppers. Wal-Mart management should be pleased to know that only one consumer interviewed in their line had any intention of going to another store after they were done at Wal-Mart. The 'save money, live better' message is resonating well with their consumers!
• Lines are longer than in previous years, but there is less in the baskets and everything in those baskets is pretty deeply discounted. I was asked by a reporter today if that meant bad margins for the stores, and the answer is only a 'maybe.' I know that JC Penney and other retailers have been trying to increase margins anyway they can, including buying items with discounting in mind. An example would be a retailer knowing that their consumer needs to buy jewelry at a certain price point, say $100. Just like last year, the retailer will have items at that price point, but the quality of the item will be lower this year, allowing them to maintain margins.
• There's no place like home. Once again, a lot more shoppers than I expected headed directly to the home departments at Kohl's, Macy's and JC Penney. Even though this stuff hasn't been selling well at full price, if you discount it they will buy.
• Most surprising trend? This year it had to be the lack of a must have item. Sure, parents were buying video games and DVDs for their kids. But only a few parents mentioned the Guitar Hero as something they had to have. GPS units, MP3 players, cheap flat screen TVs were all mentioned as desirable by shoppers... but virtually no one said they'd pay full price to get them.
• Most bags in the mall? This year it was a tie between Macy's and JC Penney, with Bath & Body Works getting special mention as the most prominent specialty retailer.
• The winner of the 'You Think This Stuff is Going to Sell Itself?' Award is Abercrombie & Fitch. Apparently the corporate motto is 'Discounts? We don't need no stinkin' discounts.' Unfortunately, based on the lack of traffic and sales in the store, I beg to differ.
• Biggest fall from favor award goes to Apple. I'm not saying they weren't selling anything, because I'm sure they were, but over the past few years the stores have been packed to overflow on Black Friday. Today? Not so much.

So, what do we do with all this information? I'm going to spend some time this weekend plowing through balance sheets, looking at corporate cash levels, and watching consumers. I firmly believe that today confirms that the holiday retail season is going to be as dismal as advertised, if not worse. I think there might be something to be said for shorting the retail index and pairing that with a long trade for a couple of high quality retail companies. Names to follow.

The New King is a Duke

Congratulations to Mike Duke, the newly named successor to Lee Scott at Wal-Mart. Mike's most recent deployment has been over the international portion of the business. His experience in the firm and in retailing in general will be put to good use heading up the worlds largest retailer.

Although I have to say that the skills that Lee Scott has most utilized over the past three years have been more in the public relations and media arena. It's been all about the old soft shoe... but it's been backed up with action. And for that, I need to add a hearty congratulations to Lee Scott. I know I'm not on his Christmas card list, and in fact seemed to be on Wal-Mart's hit list for a number of years, but Lee, you done good. You fixed the problems. You brought in the right people, let them do what needed to be done, and the results have been worth waiting for. I'm sorry for that time a few years ago when you took a month off and I called for your resignation. It wasn't nice, but I was frustrated. In retrospect, it wouldn't have been the best thing for the company.

Now Lee, go enjoy your retirement. The folks you've put in place will carry on just great. You're leaving at a high point, and you've earned it.

It covers a multitude of sins

It's interesting to me how the earnings reports of some of the best companies are surprising my breathern on Wall Street. Look at Macy's. Look at Dell. Look at The Gap. Look at this recession's poster child, Wal-Mart. Their sales weren't nearly where they needed to be, but the bottom line number was fabulous, just fabulous. The Wall Street Wonks are scratching their heads, trying to figure out how their channel checks could have lead the some wrong.

As I've been saying over and over again lately, in this market it is all about the best operators. Can they control their expenses? Have they looked at every possible option for reducing their Cost of Goods Sold? Are they maximizing their sales per square foot? Have they gotten creative with their marketing, luring people into the stores with low margin stuff, then selling them some attractive higher margin items too?

The best companies know which levers they can pull in bad economic times, and those levers aren't something new to them. The best companies are led by management teams that understand that if the only way you can grow your earnings is through building more stores or selling more stuff, you're holding a pretty weak hand in the poker game that is global capitalism.

In this kind of market, I want to own companies holding 4 aces. These companies exist, but you need to look closely at how they've managed their businesses historically as well as currently. As Warren Buffett has been quoted, it's only when the tide goes out that you see who has been swimming naked. Avoid naked capitalism! Buy companies that have covered their backsides... and yours... well.

Cheap is as cheap does

I'm sitting here scratching my head, trying to figure out what it was that caused today's incredible rally toward the end of the day. Maybe there was a hedge fund convention that started at 1pm eastern, mandatory attendance gentlemen, and that let up the selling pressure for a few hours? Or maybe some Mars moved into the orbit of Venus causing an updraft in the positive energy flow amongst the planets and intra-day traders. I've read a couple of articles that attempt to explain it as the reaction to ultra cheap stock valuations, but that explanation makes as much sense to me as the first two ideas I floated.

For stocks to be cheap, there has to be some benchmark to measure them against, whether it is peers, expected earnings, or history. The problem is that I don't think that we really have a clue what earnings are going to be for a majority of companies, the historical basis we're considering is too short (putting them versus the last 5 or 10 years is, dare I say it, just plain stupid - we're in an economic situation that goes back at least 30 years, if not 80 years), and when you put companies up against their peers the only relatively expensive companies are the companies that are actually doing okay in this economic malaise (you know, the only companies that I wouldn't mind owning at this point.)

Case in point: in the retail landscape, it's hard to find a company doing better than Wal-Mart, and they're relatively expensive too. They reported earnings this morning that were a penny better than expected (a huge accomplishment for a company of their size!) Now the headline you might have seen splashed about was that they took guidance down for next quarter, but that was because of a swing in foreign exchange, not because of operational issues. If you take the $0.06 hit that they are expecting from foreign exchange out of the equation, they are actually taking guidance UP for Q4. That is the kind of company I want to own.

Let's contrast that with the reports this afternoon from Kohl's and Nordstrom. They're both good operators: good management, good systems. Crappy sales. To quote my favorite former CIO, you might call the numbers they put up 'dismal and deleterious.'

On the surface they theoretically both beat expectations, but I'd hope at this point that you're looking below the surface. Kohl's actually beat expectations by a penny, but took Q4 earnings guidance down by 1/3. Customers just aren't buying. So is it cheap at 10x earnings? Maybe, if you truly believe that they'll grow earnings at 14% over the next 5 years... but do you REALLY believe that? I didn't think so.

Nordstrom beat recently lowered expectations by $0.02, but that result included a help of $0.03 from non-recurring items that they hadn't included in previous guidance. Or, put another way, they reported real numbers that were a little worse than they guided to a week ago. Oh, and then they put some icing on the cake... they lowered earnings by HALF for Q4. HALF. Hello, Seattle? We have a problem. This is the third time they've taken guidance down this year. And to have earnings looking like something closer to $0.35 for Q4 than $0.70, that's just abysmal. So it's trading at 5.4x times next year's earnings, doesn't that make it a buy? Sure. Go ahead. But use your money, not mine.

Socks and underwear

For many consumers, this is probably going to be The Holiday of Socks and Underwear. For most retailers, that’s going to translate to sackcloth and ashes for earnings.

The consumer is facing rising unemployment, higher food prices, tightening credit, and the evaporation of their balance sheets. Consumers are buying food and basics, all other categories have fallen off the proverbial cliff. They’re trading down wherever and whenever possible, and buying on sale when they don’t trade down. The one unknown is how the recent fall in gas prices will adjust consumer spending (down 45% off the July highs, roughly -15% from this time last year), but my best guess is that other concerns will trump it.

In order to entice shoppers into their stores, the bargains have already started. This is partly because many retailers still have fall merchandise to clear so they can get holiday into the stores, and partly because shoppers have proven to not make a move toward their wallets until the signs say 40% off or more. (JC Penney Tuesday through Thursday: 75% clearance merchandise, 15% off everything else in the store. Why would anyone think retailers are desperate?) Bankruptcy clearance sales are putting even more pressure on the ‘healthy’ (or would it be more appropriate to say ‘not yet in horrible trouble’) retailers, as they have to compete with the clearance pricing.

The one safe haven has been discount stores, but even within that group there are the haves and the have nots. Wal-Mart is the poster child for this recession: the one retailer who after three long years of promises and pain had finally gotten its house in order, and at exactly the right time. Wal-Mart’s mix of food and general merchandise (roughly 60/40 consumables/gm) has served it well. Costco and BJ’s Wholesale also sell a mix of products leveraged to consumables, and their performance reflects that. That contrasts with Target that doesn’t sell nearly as much food (41% of what they sell is apparel/home). Dollar stores are also doing well, as is as Aeropostale a teen retailer that specializes in lower priced merchandise that is still similar to the higher priced Abercrombie and American Eagle.

Macy’s and Best Buy reported this morning. Macy’s is managing through this time by not marking down, controlling inventories, and putting out a feel good message (LOVE LOVE LOVE the ‘Believe’ campaign they’re running) as opposed to some of their competitors (JCP noted above) that are really marketing on price. Best Buy told us this is the worst they’ve seen it. Of course, they’re not selling anything that is absolutely vital to the consumers’ survival (despite what kids might say about having to have the newest computer games.)

Surveys are showing that a majority of shoppers are planning on spending less this holiday season than last year. Those purchases that are made are going to focus on value for the money. That doesn’t bode well for gift cards this year, since a savvy shopper can shop the sales, buy a $100 sweater for $60 (or less) and get the mental credit with the gift receiver for having bought a $100 sweater. On the other hand, if you give a gift card $50, chances are you have to pay $50 for it. Although, there are a number of signs of desperation from the retailers that include ‘buy $100 in toys and get a $10 gift card (Fred Meyer… a Kroger affiliate much like a small WMT) and Mattel’s current offer of ‘buy $100 in Barbie paraphernalia (any retailer) and get a $50 Barbie Visa gift card for mom.’

Specifically on stocks reporting Thursday:
* I’m expecting that WMT could beat consensus of $0.76, although since we’re talking about WMT, it should only be by a penny or two.
* Kohl’s has already guided down to the lower end of $0.51-0.56. They’re going head to head with the rest of the department store space, and it’s a very value conscious consumer. They’re a fabulous competitor and have been able to manage costs extremely well historically which is going to be necessary for success going forward.
* Nordstrom. ::sigh:: Nordstrom is going to be painful. All we know is that numbers will be below previous guidance for $0.32-0.37 (consensus was $0.36, now $0.31, and I fear still too high.) Love management, think they’ve got great systems and cost advantages (commissioned based sales staff), but I am concerned that they’re not only missing the aspirational customers but that now their core customers have pulled way back.

Be careful out there.

Limbo!

All I can think about after this morning's retail same store sales release is doing the limbo... you know, the dance where the refrain is 'how low can you go?'

The numbers are miserable. Of all the companies I track, only two had positive comp store sales (comps): Wal-Mart (+2.4%) and Aeropostale (+1%)... and Aeorpostale's comp was below the expectation for +4%. The department stores had it rough, and the higher end stores were hit especially hard. Nordstrom managed to 'beat' expectations for a -12.5% comp by reporting -15.5%. Saks not only had a -16.6% comp, but said that even their (previously?) well-heeled shoppers weren't buying much if it wasn't on sale. That's saying something for a store that targets customers with an income in the top 5% demographic!

Reports today were filled with companies guiding down expectations prior to the release of Q3 earnings, which start next week. Two thoughts on this: first, if you didn't already realize that things have just been getting worse for the consumer you haven't been paying attention; and second, where the HECK have the Wall Street analysts been? I have to say, many times when I've met with those guys and company managements, I've been amazed at how much more I know about the companies and how they're executing in the stores than the headline analyst did. Scary. Get out and get into the malls, boys. It's eye opening! ::rant over::

Anyway, on the 'opps, we did it again... our earnings aren't going to make previously lowered expectations' list are:

• Nordstrom
• Macy's
• Kohl's
• JC Penney (within range if you include a real estate sale is NOT okay)
• American Eagle
• Pacific Sunwear
• Zumiez

Interestingly, the list of companies affirming guidance or raising guidance is as long, just from different sectors:

• BJ's Wholesale (gas helped a lot)
• Ross Stores
• TJX Companies
• Aeropostale (the only specialty retailer really performing)
• Hot Topic
• The Gap (low sales are okay if you can still make margins)

So what will be come of America's retailers? It's going to be ugly folks. To paraphrase, these are the times that try retailer's souls. My prediction is that within a few years we will have a major contraction in specialty retail. Folks like Abercrombie & Fitch will give up on some of their brand extentions like RUEHL that just aren't working. American Eagle will shutter Martin + Osa. Gap will have to shutter a lot of its retail space. Limited, it's been nice, but can you really make it? Chico's? Coldwater Creek? You're no longer growth businesses, and I'm not sure there's room enough for both of you in this new landscape.

The American consumer has rediscovered frugality, and this time it isn't a phase, it HAS to be religion. I'm just not sure there's a reason to own much beyond the discount stores until more of the pain has passed.

Who woulda guessed?

Here's a news flash, kids - trends continue to play out as expected. It’s all about consumables and discounting. Mall traffic and sales are weak, which shows clearly in comps for mall-based concepts. The consumer appears to be consolidating shopping trips to places like Wal-Mart and Costco that allow them to buy basics as well as discretionary items. Television sales are down in even the warehouse clubs, but up at Wal-Mart as the commoditization of flat screens continues. No retailers that I surveyed guided down.

Wal-Mart’s numbers were more than double expectations, coming in at 3.9% for the total company (1.4% expected). Of particular note: US Stores were up 4% (guidance was 0-2% and consensus was 1.4%). They mentioned specifically that they are seeing a bump from the stimulus checks. In a different press meeting this morning the number $350 million thus far was bandied about. Given that the average SuperCenter does $1 million per day (old fact, but probably still pretty correct), that might be a bit significant. Both traffic and ticket were up.

Target was within guidance but is lagging Wal-Mart and others who sell more food. TGT’s consumables exposure is about 20% of sales, and over 40% of sales (last year anyway) were in the weak apparel and home categories.

Nordstrom’s 10.9% comp was within the expected range of 8-12%. June expected to be VERY weak as the Half Yearly sale for Women & Children was moved from June to May. The two months combined should be fine.

Saks, a favorite on the upper end of the scale until now, fell out of bed. Seems like there might have been a few too many friends and family discounts given lately.

As for the rest of the mall? Nothing to write home about except Aeropostale (wow!), Zumiez and Hot Topic. Almost everyone else did worse than expected, in some cases (Gap) by unexplainably high percentage points. It's bad out there folks, but could you at least TRY, please?

not so Great Expectations

Tomorrow morning at a time that is so early it doesn't belong on any civilized person's clock the monthly onslaught of information known in retail land as comps (comparable store sales) will be released for our viewing pleasure.

These numbers can be both a huge help and a pain in the tush when analyzing retailers. The numbers themselves don't matter to the stock prices as much as how they differ from analyst expectations. Numbers may be not just negative but very negative, but as long as they're better than expectations, everything's hunky dory. And conversely, positive is good, but if they don't beat expectations, all bets are off.

One of tricks is sorting the wheat from the chaff in the releases. Is a company blaming weather for poor performance? (They almost never give the weather credit for good sales.) Is anyone else blaming the weather too? Where are their stores concentrated? How's the economy (or the weather) in that area of the country? Are they up against easy comparisons from last year, or will last year be hard to beat? In March and April, you also have to take into consideration when Easter was last year... a change from month to month can also affect sales significantly.

Oh, and don't forget to look for clues about earnings. Sometimes the company will come right out and adjust earnings expectations up or down. Sometimes they'll just hint that margins are weak or strong, which may affect the quarter's earnings, even if they don't say so outright.

Getting back to tomorrow's numbers: expectations aren't very high. It should be happy days for the usual suspects selling food (see my post two days ago) such as Costco and Wal-Mart. The department stores aren't expected to do much at all... negative numbers should abound, although Nordstrom moved a big sale from June into May, so their comps should be good. In specialty and apparel stores, don't expect much there either. It's tough days at the mall.

Enough already!

Is there no end to the pain and insanity in retail land? It's just WRONG when the economy is so bad that even a can't-lose retail concept like Lululemon has to take down earnings guidance. Seriously, what could possibly be more mission critical to Jane Consumer than spendy yoga togs? It's a trend that is a bit concerning. It was just last week that another high-end Wall Street darling, J Crew, also had to bring down guidance.

I have sick sense of humor sometimes, but I find it tremendously amusing that if the company is growing its store base and appeals to an upper income demographic, Wall Street loves it. As if $4 a gallon gas will never affect people who make over $100k a year. Let's be real folks - the only way this economy isn't putting the squeeze on you is if you don't eat or use energy. And those folks above the US median income level (which is roughly $47k/year), in many cases those are the folks that stretched themselves even further beyond their means and are hurting more now.

So how on earth does someone invest in retail stocks right now, given all that? First, one takes a heavy dose of one's favorite antacid. Then, the next step is to determine your personal outlook on the economy. (You might want to take another swig from that Maalox bottle right about now.)

If your economic glass is half empty, think about where people either shop to save money or have to shop to survive. I'm a personal believer (and holder) of companies that sell food and other consumables such as Wal-Mart and Costco. I'm hard pressed to find a stock that I like more than Wal-Mart. Really. Wal-Mart. They've finally shifted the majority of their marketing away from that hideous bouncing smiley face and it's unhealthy obsession with dropping prices. Don't get me wrong, consumers absolutely need low prices right now. But they're not so desperate for low prices that they would endure the seven levels of hell that a shopping trip to Wal-Mart used to involve. Thank goodness management finally brought some fresh blood into their little closed world of NW Arkansas, and exciting new ideas such as 'even people on a budget like to shop in a nice environment,' and 'if people aren't in a rush to leave the store, maybe they will spend more money on discretionary items' started invading the corporate consciousness. Revolutionary, no?

Retail today is more than the old adage 'stack it high and watch it fly.' Retail is both art and science. For years, Wal-Mart excelled at the science of retailing - selling stuff cheap and controlling costs. Watch the CNBC documentary "The Age of Wal-Mart" sometime. The fact that they even know that strawberry PopTarts sell best before a hurricane scares me. Even scarier: that it took them so long to understand that a clean bathroom and short checkout lines make for happy consumers. And who would have ever guessed that putting up little signs that show us what an outfit should look like would sell more clothing? Oh yeah, the competition.

Which brings me back to how Wal-Mart has changed. As one Wall Street wonk put it recently, "this isn't your father's Wal-Mart." They have made strides on employee health care and the environment, both of which were causing issues with and for investors. They finally recognized that growth for growth's sake wasn't working. US retail domination via copious store count growth is no longer a stated goal (although World Retail Domination still seems to be on the table.) Thinking about Return on Investment is back in vogue at headquarters. And the arrogance that management once displayed toward their critics seems to have been at least muted if not dissipated entirely. Thank you Leslie Dach and Eduardo Castro-Wright: whatever they're paying you isn't nearly enough.

So there are all the touchy-feely reasons for owning the stock. The bottom line for a capitalist is buying the stock low and selling higher. Wal-Mart is currently trading at 16.7 times January 2009 consensus earnings of $3.45. Personally, my model puts earnings at $3.51, or a P/E of 16.3x '09 estimates. I am looking for P/E multiple expansion (investors willing to pay higher prices for a similar level of earnings) as it becomes more and more obvious that Jane Consumer isn't going back to her lavish lifestyle any time soon. Last year's aspirational consumer is now aspiring to put food on their table and gas in their tanks! I'm guessing that at least a 18.5x next year's earnings is reasonable, or about $65. If they continue to deliver strong sales and earnings, that number may experience inflation too.

Next time: where to look for investments if your economic glass is half full.