Wal-Mart investors be forewarned: citizen opposition to Wal-Mart may have an adverse impact on the value of your stock. According to a 15 page report called “Not in My Backyard: An Analysis of Community Oppposition to U.S. Big Box Retail,” produced several weeks ago by Bernstein Research Call, based in New York, Wal-Mart faces a growing stock concern caused by the high-level of opposition to the company’s new stores. According to the Bernstein report, which was based in part on an interview with Sprawl-Busters, “Local opposition has successfully squashed numerous plans among the big box players in different parts of the country. Many communities are adopting size limits on store size that fall below the average size of these retailer’s stores. Most of the opposition has been concentrated in California, Texas, Florida and the Northeast, exactly where the highest growth opportunities lies for these companies.” The investor advisor goes on to warn shareholders that “events are showing that big box retailers may face increased difficulty expanding into their most sought after markets.” Bernstein notes that “heightened resistance could negatively impact these retailers by slowing their square footage growth rates.” Both Wal-Mart and Target project that they will increase their square footage by 8% or more this coming year. As the Bernstein Research Call report points out, “square footage growth is a critical driver of most premum-priced retail stocks, given it provides a cushion to earnings.” But Bernstein warns, “this growth is under seige in several regions of the country from growing opposition by local communities.” The Bernstein report quotes from Sprawl-Busters’ “10 Sins of Retail Sprawl”, and advises, investors should be aware that a single percentage point reduction in square footage growth has a 1-2% negative impact on annual earnings per share growth for the big -box retailers” like Wal-Mart, Target and Costco. Based on their review of existing economic impact reports, Bernstein concludes, “we do not foresee resolution and expect this issue to continue to be a favorite in the media. Concerns and complaints by local communities have not been ignored. There are many examples of places where big box openings have been halted as a result of the resistance. There have also been situations where legislation has been adopted that prohibits the construction of retail stores of a certain large size.” Based on their research of the Sprawl-Busters website, Bernstein lists 27 examples of communities with restrictive zoning laws. The report also includes a United States map showing the percentage of victories in big box battles. “Looking only at the biggest of the big boxes,” the report says, “the opposition victories represented 5% of the 2004 new store openings…The successful attempts at blocking new stores have grown at a 21% annual rate the past two years. If this trend continues over the next five years, 2009 will see approximately 90 big box retail stores blocked.” The study says that opposition groups have stopped 132 stores between 2000 and 2004, and will stop 321 stores between 2005 and 2009. Bernstein estimates that local site fights cost big box retailers between $250,000 and $500,000 per location, but the retailers claim these expenses as part of their store building capital costs, and can depreciate these costs as part of the asset value. But the cost of these drawn-out, expensive site fights hurt the big box stores and should be important to investors, because of “the time lost due to the more arduous process of opening stores in hostile areas…while the incremental costs of fighting community opposition is not significant in our view, the impact of lower square footage growth could be material.” Bernstein estimates that if Wal-Mart’s average square footage growth over the next 5 years falls by 1%, “that would result in 229 fewer stores over the next five years,” which would also hurt earnings per share. “In order to maintain current square footage growth rates,” the study concludes, “the discounters mathematically need to open an increasing number of stores each year. As the number of opposition victories increases, these companies will need to build their real estate pipleines even faster, in order to prevent a major decleration in square footage growth in the coming years.”
This study is the most direct illustration of how increasing community opposition has become a “challenge” to the big box stores. Sprawl-Busters estimates that Wal-Mart alone will face at least 80 local site battles this year, or 33% of the new store locations that Wal-Mart selects. This means the company will have to pick second and third tier locations as backups for many stores, or wade through months of fruitless delays, and some ultimate defeats. Because of their bullying tactics and high-handed development style, Wal-Mart, Target and Home Depot will face a record number of site fights this coming year, putting investors on edge, and jeopardizing stock growth. This is a self-inflicted wound, because these companies could be more community-friendly, but they continue to ignore what their opponents are saying about them. For a copy of the Bernstein investor’s report, contact Robert Higginbotham at [email protected], or [email protected]
