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Tuesday, November 13, 2007

When Wal-Mart Reports Inventory Control Success- Short Their Suppliers

Wal-mart-Gets-Theres Wal-Mart is the 800lb gorilla of distribution and they know exactly how to throw their weight around in order to keep the dung off their fur.  Today their stock is up after they reported Inventory Control Success and savings in other cost cutting efforts.


Inventory control success

Consolidated inventory rose 2.7%, against year-to-date sales increase of nearly 9%, Wal-Mart Chief Financial Officer Tom Schoewe said in the pre-recorded call. That was better than Wal-Mart's goal of expanding inventory at half the growth rate in sales.

That's also allowed Wal-Mart to lower markdowns used to clear out inventory in its U.S. stores. 

Wal-Mart's shares gain on earnings surprise, holiday outlook - MarketWatch

That spells almost certain trouble for Wal-mart suppliers.  Those products do not get controlled and cut and moved through the system faster without a cost hitting somewhere.  Since Wal-Mart is unlikely to pay the bill for discounting and cost cutting, that means that Wal-Mart's supplies are even more likely to feel the pinch.

That's a double whammy for most Wal-Mart suppliers.  They are almost universally locked into contracts that prevent price increases.  So as the cost to manufacture and transport products increase, suppliers have to continue to sell to Wal-Mart at the same old price.  Then Wal-Mart comes in after the fact and discounts items away to clear the supply chain.

Suppliers selling to Wal-Mart better be out there aggressively finding cheaper source alternatives themselves or else their own reporting is not going to be half as positive as Wal-Mart's garden of life.

The Market Analysts Always Read Wal-Marts impact on the Market Backwards

So with all that said, its rather funny that Wall Street always reads Wal-mart reports like this as a positive sign for the economy.  Wal-Mart in fairness is keeping the supply chain honest, but they make things look a little more chipper than they really are.  What is OK for Wal-Mart is rarely OK for the rest of the industries working with Wal-Mart.

If you are looking for a positive economic sign in Wal-Mart's financial's, you will not find it in their Inventory Control Success.