Wal-Mart Shares Recover Losses Heading Into Shareholder Meeting

On simply a price-per-share basis, it may be difficult for lawyers and pension fund directors to argue that Wal-Mart’s alleged involvement in bribing Mexican officials has harmed the company.

Revelations of the bribery scandal first hit April 21 when the New York Times reported a “campaign of bribery” that was allegedly managed by former Wal-Mart de Mexico CEO Eduardo Castro Wright. The bribery schemes allowed Wal-Mart to obtain construction and other permits quicker than its competitors.

Some Wal-Mart watchers and legal experts have said the bribery activity could result in the removal or early retirement of Lee Scott, a Wal-Mart board member and the Wal-Mart CEO during the alleged bribery action.

At least three large institutional shareholders: the New York City Pension Fund, California State Teachers' Retirement System and the California Public Employees' Retirement System, said earlier this month they have lost faith in the board's independence amid the bribery allegations. These outspoken dissenters together control 18.1 million votes — a mere 5.23% of the total outstanding shares.

In addition, three influential proxy advisement firms — Egan Jones, Glass Lewis & Co. and ISS — also recently encouraged their large client bases to vote out Duke and Scott, among others, when they cast their ballots this week.

The potential fallout from these combined initiatives at best are likely to serve as protests, given that 1.7 billion votes would be needed to outvote the family’s holdings — near 50% of the total 3.4 billion shares.

SHAREHOLDER VALUE
The Friday before the scandal broke, Wal-Mart shares (NYSE: WMT) closed at $62.45. In the next few days, the share price fell to $57.36. Walton Enterprises, the corporation holding a majority of Walton Family stock, saw its value drop more than $8 billion to a cool $92.343 billion. Berkshire Hathaway, aka Warren Buffett, saw the value of its more than 46.7 million shares in Wal-Mart drop by about $237 million.

But the $57.36 share price would be the bottom with respect to fallout from the scandal. The share price began to climb back toward $60. On May 17, Wal-Mart Stores reported solid numbers for the first quarter of its fiscal year 2013, with net income up more than 9%, and U.S. same store sales up 2.6%. The per share earnings of $1.09 were ahead of the 98 cents in the same quarter

of last year, and above Wall Street estimates.

Any concerns the investor community may have had about the Mexico bribery issue were overcome by the earnings report.

The shares closed Wednesday (May 30) at $65.44, down 24 cents for the day, but up more than 14% over the bottom following the bribery allegation disclosure. Also, intraday trading on Wednesday reached $65.95, ahead of the 52-week high of $65.76.

The share price has also returned to values not seen since since mid-2000 — perfect timing for a retailer in the middle of a shareholders’ week that includes celebrations of its 50th year in business.

‘WILL ALWAYS BE PROTESTS’
Some analysts say the improved financials for the Bentonville-based retailer is a function of the economy being weak and pushing consumers back down the price chain to Wal-Mart. Others have suggested Wal-Mart’s focus on entering smaller markets with smaller stores may prove profitable.

“Wal-Mart has recovered successfully from all past litigation and will do so again,” noted Jake Mann, with the Motley Fool Blog Network, said in this note. “$6.5 billion in settlement fees (estimated) is less than 1.7% of all of Wal-Mart’s revenues, and this is not the first time bribery claims were filed in Mexico, to say the least.”

Mann also said Wal-Mart has a workaround to deal with rising energy prices.

“Still, Wal-Mart is working hard to increase supply chain efficiencies, most notably by controlling deliveries from manufacturers directly to avoid costs of hauling goods from distribution centers to stores nationwide,” he explained.

Even with the better financial, protestors and lawsuits against the retail giant aren’t likely to go away.

Scott Alaniz, with Boston Mountain Money Management, does not believe the strength of Wal-Mart’s share price and recent earnings report will help the company fend off negative publicity and protestors related to the bribery scandal.

“The relative strength in the share price is due to the recovery in U.S. comparable store sales growth, which helps shareholders. Because of Wal-Mart's size and success, there will always be protests and negative publicity,” Alaniz noted.

Michael Tilley with our content partner, The City Wire, is the author of this report. He can be reached by email at [email protected].