Wal-Mart shares fall, analysts predict management changes

Allegations of bribery, international corruption and a sloppy corporate cover-up at Wal-Mart Stores Inc. hammered the retail giant’s share price on Monday (April 23). Wal-Mart shares lost nearly 5% of their value to close at $59.54, the worst day in more than three years.

At the scandal epicenter, shares of Wal-Mart’s Mexican business segment — Walmex — choked back losses of more than 12.5% with shares closing at $37.82 down $5.43.

Analysts are mixed about the potential fallout which could unfold in the coming days as more is known about the bribery scandal under the watch of Eduardo Castro Wright, who is credited for an amazing run in expanding the company’s Mexican business segment.

Now his methodology is under federal scrutiny, which is problematic for a company that prides itself on its reputation for integrity and transparency. In addition to internal probes, the Department of Justice and a full congressional inquiry will be sifting through multiple layers of the  scandal and cover-up dating back to to 2005.

Castro Wright is scheduled to retire in July, but his name will be in the public spotlight for sometime thereafter as the allegations are fully investigated.

Given the scope and far-reaching strings of the alleged cover-up, Wall Street firms that follow the company say the most significant fallout would be the credibility and disruption in Wal-Mart’s senior management team.

Goldman Sachs issued an investor note Monday (April 23) that said violations of the Foreign Corrupt Practices Act typically cast a three-year cloud over a company under investigation. The long-term downside on the stock averages around 1 to 2% while the investigation looms.

The potential cost to Wal-Mart’s bottom line is much greater, according to Goldman Sachs. The investment banking firm estimates companies undergoing FCPA litigation shell out up to 9% of their total earnings before interest, taxes, depreciation and amortization over a three year period.

In Walmart’s case that’s a hefty $6.5 billion, based on the company’s 2012 annual financials.

Budd Bugatch, analyst with Raymond James & Associates, said history dictates that violations of the FCPA are taken seriously and if proven, could carry criminal penalties and/or career disruptions. He doesn’t see a long-term material impact on the shares but said the most significant damage from the bribery claims is to the credibility and disruption of Walmart's management team, even at the senior levels.

“There is the potential for significant changes in senior leadership if Walmart's internal investigation finds cause. Given the seriousness of these claims we expect the company's response to be thorough and highly visible despite the fact that the acts in question date back more than six years ago,” Bugatch noted.

Analysts for most the part were surprised by the news which broke Saturday by the New York Times. MKM Partners senior analyst Patrick McKeever, who has covered Walmart for 10 years called the allegation "the most damaging story that I have seen."

"Wal-Mart has a squeaky clean image when it comes to this sort of thing and they make quite a big deal about corporate integrity and ethics. … It would be disappointing if management tried to sweep this under the rug,” he noted.

Alan Ellstrand, University of Arkansas associate professor specializing in corporate governance issues, said if the allegations ring true it will be the cover-up which is the most costly to the management team.

The Times article alleges CEO Mike Duke and Board Chairman Lee Scott knew of the bribery issues within its Mexican business as far back as 2006 and did not self report or investigate until the media was in the midst of researching the story for publication.

“I wouldn’t be surprised to see new senior leaders brought forward a little sooner than previously planned, if indeed the cover-up did happen. It’s potentially the biggest scandal the company has seen in its 50-year history,” Ellstand said.

He said the Tom Coughlin indictment pales in comparison, because it was seen as an isolated incident. This scandal could call into question Walmart’s total international business, especially in markets where they are dominating their competition.

International expansion has been a key focus at Walmart in recent years and the catalyst for the company’s growth this century. The Mexican unit, with 2,100 stores and more than 200,000 employees, has become the company’s poster child for how to grow international presence.

Ellstrand said Walmart shouldn’t have to cheat given its size and ability to finance rapid growth internationally.

International trade experts noted Monday that Mexico has long been known for deep government corruption but that doesn’t excuse a U.S.-based company from following the law.

Trade expert Dr. Robert J. Shapiro of the Sonecon, a private economic policy consulting firm, likened the ordeal to the Bernie Madoff scam.

“When they were able to pull off unrealistic feats opening hundreds of stores in record time and running competitors out of the country that should have been a signal to someone in Bentonville that it might be too good to be true,” Shapiro said.

He said now those competitors in Mexico will have the right to sue Walmart which will likely add to the retail giant’s defense costs and fines.

One big problem Walmart will have to address is why it promoted Castro Wright after a time when there is alleged evidence the company knew of the bribery in Mexico, Shapiro added.

He said the best Walmart can do now is to offer complete transparency and cooperate fully with the investigations, since they did not do so when they first discovered the improprieties nearly six years ago.

“Toyota is a good example of a company involved in a big cover-up with respect to auto safety findings just a couple of years ago. Their public image took a big hit but they did face the charges with full transparency and have since recovered,” Shapiro said.