Spying Commentary
Posted on April 10, 2007 by webteam
Wal-Mart’s missteps can hurt the company more than “revealing trade secrets,” but this hasn’t stopped the company from blundering its way through another quagmire of public relations as it tries to keep its secrets hidden. From the Arkansas Democrat-Gazette:
Wal-Mart Stores Inc. has obtained a gag order against an employee it fired last month, saying he has trade secrets that could damage the company if revealed to competitors.
Nu Wexler, spokesman for Wal-Mart Watch, said…’Wal-Mart is making the Keystone Kops look like Navy Seals. It’s a bad idea to publicly scapegoat a guy who knows where all the bodies are buried,’ he said.
Wal-Mart’s Project Red emerges from the Bat Cave [Blogging Stocks]
Wal-Mart Stores, Inc. is beginning to look like a bad episode of the TV version of Batman. Last week, I posted on Wal-Mart’s paranoid spying unit—nicknamed the Bat Cave. Today, The Wall Street Journal reported on yet another once secret project—dubbed Project Red—to spin off Wal-Mart’s Sam’s Club operation. Unfortunately, Wal-Mart shareholders would not be likely to benefit from such a spin off.
Wal-Mart’s recent woes are considerable. Its stock price is down 20% over the last five years while rival Target Corp.’s—whose TV advertisements are fantastic—is up 75%. Meanwhile at Wal-Mart, a former vice chairman pleaded guilty last year to fraud and tax evasion related to using Wal-Mart funds for custom-made alligator boots and a dog kennel. He had said he was reimbursing himself for payments he made to help keep unions out of Wal-Mart. In December, Wal-Mart fired a senior marketing executive, saying she had had a personal relationship with a subordinate and accepted gifts such as pricey vodka from a vendor. When she sued, Wal-Mart filed in court what it said were suggestive emails.
Now, after firing Bat Cave member, Bruce Gabbard, for spying on a New York Times reporter, it emerges that he was part of the security team for Project Red. Wal-Mart hired two teams of McKinsey & Co. consultants, so neither could fully grasp the project. Cameras inside a room recorded their activities. The security team encrypted data and reports and created passwords to secure their work.
Setting aside the weirdness of Wal-Mart’s spying, would spinning off Sam’s Club boost Wal-Mart’s sagging stock price? Probably not.
Sam’s Club drags down Wal-Mart’s overall profitability and spinning it off could generate a company with a $16.2 billion market value. How so? According to Wal-Mart’s latest annual report, Sam’s Club generated $41.5 billion in sales and $1.5 billion in operating income, a 3.6% margin which is substantially less than Wal-Mart Stores’ 7.5% operating margin. Moreover, Sam’s Club represents only 12.1% of Wal-Mart sales compared to 65.6% for Wal-Mart Stores.
Nonetheless, it’s not too hard to estimate how much a Sam’s Club spin off would be worth. Applying Costco Wholesale Corp.’s (NASDAQ: COST) price/sales ratio of 0.39, Sam’s Club could be worth $16.2 billion as an independent company.
Unfortunately for Wal-Mart shareholders, Sam’s Club’s value may already be reflected in Wal-Mart’s $199 billion market capitalization. It’s not clear whether Sam’s Club could be easily separated operationally from Wal-Mart Stores, and if so, how much such a separation would cost. Furthermore, I doubt that freeing Wal-Mart of this relatively minor operation would boost its margins enough to raise Wal-Mart’s sagging stock price.
Maybe the two McKinsey teams on which Gabbard was spying can answer these questions. To the Bat Cave, Robin!
Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Costco, Target, or Wal-Mart.
