Legal issues, e-commerce expansion and investor fatigue on Wal-Mart radar

There is never a shortage of Wal-Mart Stores news any day of the year. The nation’s biggest employer is entangled in multiple lawsuits and invests heavily in e-commerce capabilities, while also trying to appease investors. As lawsuits go, Wal-Mart wins some and loses a few, but the retailer often tries to settle the cases to make sure the terms are kept confidential.

One such settlement with actor/comedian Tracy Morgan is now being scrutinized by Wal-Mart’s insurer, Ohio Casualty Insurance Co. and Liberty Insurance Underwriters, which last week asked the comedian to turn over six years of tax records (2009-2014) arguing that the Wal-Mart settlement was too generous. Wal-Mart accepted responsibility for the 2014 fatality truck crash on a New Jersey Turnpike which injured Morgan and killed James McNair. Terms of the settlement with Morgan were to be kept sealed, but insiders estimate the payout to be around $90 million for Morgan and another injured passenger, Ardie Fuqua.

Insurers claim Morgan’s loss of income was grossly overstated and they are seeking his tax records to prove it. The insurers also want Morgan to turn over any communications he had with Wal-Mart after the crash, and submit independent medical exams. A federal judge in New Jersey enforced subpoenas on Morgan and Fuqua Jan. 23 and gave them 20 days to turn over the records.

The insurers noted in their claim that Wal-Mart likely reacted to bad publicity and sought to settle quickly, calling the payout “exorbitant.” Meanwhile, Wal-Mart has defended its efforts to settle with the accident victims and Morgan has publicly said he forgave Wal-Mart, noting the company stepped up and handled the situation successfully. The $10 million settlement Wal-Mart made with the family of McNair is not being challenged in connection with the litigation.

Wal-Mart provided the following statement on the pending case: “This lawsuit is about the defendant insurance companies not living up to the requirements of their own policies. We funded the settlement agreements in full, but some of the insurance carriers have failed to pay their portion of the settlement amount. This is no different than any individual who holds an insurance policy, makes a claim for a covered loss, and then is told by the insurance company that despite the existence of coverage, they don’t intend to pay.”

DRIVER PAY
U.S. District Judge Susan Illston (California) also recently handed Wal-Mart a $60 million verdict over truck driver pay between 2005 and 2015. Illston restructured the jury’s verdict award to include $5.8 million owed in restitution and almost $55 million in back pay to roughly 840 Wal-Mart truck drivers making up the class. The case had been lingering in the courts since 2008.

The court found Wal-Mart did underpay its drivers during rest breaks, layovers and pre-trip and post-trip inspections. But Wal-Mart was not required to compensate for tasks such as fueling time and Department of Transportation inspections. Illston also declined the plaintiffs’ request for penalties.

“While we disagree with the jury’s verdict in this case, we are pleased the judge declined to award additional penalties,” Wal-Mart corporate spokesman Randy Hargrove told the media.

Hargrove added that 90% of drivers have been with Wal-Mart for more than 10 years and earn anywhere from $80,000 to more than $100,000 annually.

SAME-SEX BENEFITS
Also in the past week, Wal-Mart and Sam’s Club reached a $7.5 million settlement to resolve a class action case (Cote vs Wal-Mart) challenging health insurance benefits for same-sex employees between 2011 and Dec. 31, 2013. The settlement took place in late December and class members have until March 20 to file a claim.

This suit precedes Wal-Mart’s benefit changes which began Jan. 1, 2014, the time it started offering health insurance benefits to same-sex employees.

Wal-Mart denied any wrongdoing in connection with the settlement. Terms of the settlement include: $3.5 million going to the settlement fund to be used to make payments to class members for documented out-of-pocket healthcare or health insurance costs incurred by their same-sex spouses during the three-year class period.

After deducting attorney fees, the remainder of the settlement will be used to make payments to class members based on the number of months they would have been eligible for benefits. The short-claim payments can range from $5,000 for one year to $15,000 for three years.

U.S Judge William Young (Boston, Mass.) will hold a final approval hearing in this case on May 11. At that time, Young will decide whether to grant the plaintiff attorney’s request for up to 25% of the $7.5 million settlement fund and costs.

Wal-Mart said the resolution making both sides happy is a good thing. The retail giant said it will continue to not distinguish between same- and opposite-sex spouses when it come benefits under the company’s health insurance plan.

E COMMERCE EXPANSION
Wal-Mart continues to double down on its investments in ecommerce infrastructure, with a sixth high-speed e-commerce fulfillment campus slated to open in central Florida later this year. Now it looks as if the company has chosen Denver for what will be its seventh e-commerce fulfillment campus. Wal-Mart’s real estate division purchased 169 acres of mixed-use space near Denver International Airport last year, and the Denver Business Journal reports sources tell them the land will become an e-commerce center.

Wal-Mart did not respond to a request for comment on the matter.

Amazon already has a fulfillment facility in Aurora, Colo., and recently announced a second site there. Walmart, too, has invested heavily in the Denver area, but that has been in stores, once of which is slated to close March 3. It will be the third Neighborhood Market closure by Wal-Mart in the Denver area in the past 15 months.

“After a careful and thoughtful review process, we have made the difficult decision to close” the Walmart Neighborhood Market, Wal-Mart spokeswoman Anne Hatfield said. “Over the next year, we’ll continue to innovate our business, invest in e-commerce, and improve our existing stores, including remodeling several Colorado locations.”

Denver was one of the markets where Walmart aggressively expanded under former Walmart U.S. CEO Bill Simon. He once told Talk Business & Politics, the reason grocery home delivery was possible in Denver was because the retailer has so many stores evenly dispersed around the city — 11 at the time. With the pending closure of the Neighborhood Market on Sheridan Boulevard, the Mile High City will have four supercenters and three Neighborhood Market formats.

INVESTOR UNREST
Wal-Mart is a widely held stock and is often seen as a defensive play because of its 3% cash dividend and its low-price mission which is sought after by consumers under financial constraints. Morningstar analysts recently cut its rating of Wal-Mart to an AA- (down from AA) and held on the negative outlook rating citing eroding profit margins and increasing competitive pressures for the downgrade.

The AA- rating is still well above investment grade and Morningstar analysts credit Walmart with a strong balance sheet, plenty of free cash and low debt level. That said, Morningstar mentions a troublesome trend impacting the retailer.

“While the rating contemplates stabilization in profitability, it does not forecast a return to historical margins or returns in the near future and profitability has weakened over the past several years.” the rating report states.

Specifically, EBIT (gross) margins declined to 5% in fiscal 2016, falling 1% from just five years ago. Capital expenditures are projected to be approximately $11.0 billion, or about $2 billion below more recent levels, as the company moderates new store openings, accelerates the pace of remodels, and invests in labor and e-commerce initiatives, according to the Morningstar note

One particular Wal-Mart investor, Warren Buffet’s Berkshire Hathaway, continues to unload its position in Wal-Mart over the past year. Filings with the Securities and Exchange Commission from the third quarter cited stock liquidations of about $2 billion in Wal-Mart, which was about 70% of his stake at that time. Buffett has publicly said brick-and-mortar retailers will have trouble keeping pace with Amazon.

Wal-Mart has been rated a hold by 19 of 31 brokerage firms covering the company. The main reason cited is the three-year lower profit forecast as it ramps up investments in e-commerce and wages. The hold ratings have increased from 17 in October when the retailer held its annual meeting with analysts.

Wal-Mart shares (NYSE: WMT) were trading at $66.41 in Wednesday’s (Feb. 1) session. The share price is flat with a year ago, rising 0.21%. While the full-year range is flat there have been peaks and valleys throughout the period. The share price has ranged from a low $62.35 to a high $75.19 over the past 52-week period.