EXCITING WAL-MART AND McDONALD'S GAMBITS
by Mark Scheinbaum

Wal-Mart Stores, the world's largest retailer, and McDonald's, the
biggest restaurant chain, have stirred Wall Street in recent weeks. Both have
made bold headlines, and it might be surprising to some investors, that both
provide fascinating and potentially windfall opportunities.
The focus on Wal-Mart was on daily and weekly holiday sales figures, and
expansion plans. More on that later. Suffice it to say, that Wal-Mart could
become as ubiquitous as 7-Eleven or the corner Walgreen's.
The London Financial Times headline "Fallen Arches" proclaimed the first
McDonald's quarterly loss in 47 years. The stock price is way down, and CEO
Jack Greenberg has been sent out to pasture.
In talking with some investment pros, I am apparently a contrarian. I
think that McDonald's is admitting and reacting to terrible numbers now, to
straighten out its menu and marketing for the next decade.
Think about it: in a world where some people want to blow up the nearest
McDonald's as the ultimate symbol of U.S. politics, McDonald's is closing
hundreds of stores. The stores being closed include undereperforming
locations, nations where it is difficult or impossible to remove hard
currency to the U.S. bottom line, and/or countries where employees and
customers are daily placed in mortal fear. Good-bye and good riddance.
Fast food restaurants are still "defensive stocks." This means that in
tough economic times, mom or dad will still go to the drive-through for $10
worth of happy meals, instead of taking the time and expense to go shopping
for a home-cooked meal, sometimes costing more than the fast food fare.
However, many quality chains such as Checkers, Rally, Sonic, and regional
chains, have found that you can't win the 99-cent burger wars. Wendy's,
Burger King (just sold by Diageo), and Mickey D's can bump heads at 99-cent
loss leaders every week. They'll make up the slack with fries and Cokes.
The real challenge is better career employees with a vested interest in
the product, and new menu items and ambiance--and cleanliness--which counter
the economical leisure dining industry. Such restaurants as Golden Corral,
Sonny's Barbecue, Steak 'n' Shake, Applebees, and at a slightly higher level
Chilis, provide relatively fast and affordable service to many burger joint
exiles. Even staid and maligned Denny's created a positive buzz with its
expensive build-outs of Fifties-style diner-restaurants.
Tough expense controls and some innovative thinking can turn the fallen
arches into soaring arches again.
Back to Wal-Mart, the sky has been and is the limit!
With a rare A-plus credit rating, $18 billion in long-term debt, and
another $10 billion in debt being floated, Wal-Mart would like to open
another 400 stores in the United States next year.
Fascinated by retail stores, with no social life, or a combination of
both, I recently spent long hours listening and watching in and around
Wal-Mart stores and Super Stores in New Mexico, Florida, and North Carolina.
In talking with managers and employees (who thought I was simply an
interested customer), some amazing patterns appeared.

The big new Super Wal-Mart Stores--the battleships of the fleet--are
carefully researched as to demographics and location. Dissenters in the
workforce warned that older "small" Wal-Mart stores, would get clobbered.
They worried that the big stores with butcher shops, bakeries, and groceries,
would force the old stores a few miles away out of business.
In Florida the experience has been an initial small (8 per cent) decline
in old-store Wal-Mart sales, but increased bottom line as Super Stores take
business from grocery chains, K-Mart, and Target. By taking a sharp pencil to
specific inventory needs at the smaller stores, sales start to return to
previous levels. The best small store managers are tapped for Super Stores a
year or two ahead of construction. They get involved with every aspect of
community and charitable service, hiring, and cost control. They know their
product before one item is sold.
In South Florida, Central North Carolina, and Northern New
Mexico--especially in more rural and suburban areas, people are starting to
use Wal-Mart and its low prices as a surrogate for the corner Cumberland
Farms or 7-Eleven.
Shoppers would park, and emerge a few minutes later with a 12-pack of Sam's
soda pop, or a hot dog and drink from the snack bar. Other people will buy
bottled water, bags of tortilla chips, or film and batteries, in a quick
visit.
Quick visits to a Wal-Mart?
Yup! This year I noticed more registers opened, and more trained personnel
rushing to open lanes, keeping lines to a minimum even at holiday time. At
Target, with a cleaner, brighter environment, and very helpful workers on the
floor, lines were often long. K-Mart tried harder to survive reorganization
this year, but was often short on inventory and personnel. Wal-Mart was
noticeably faster and more efficient.
With Wal-Mart stores and Super Stores sometimes within 5 miles of each
other, can stellar sales continue?
Well, think of the Walgreens model. A new drug store-cum-general store-cum
cosmetics store for every 2,000 households in some parts of the country.
Little or no long-term debt. Smart site selection and smart purchasing allow
Walgreens to turn a pure profit in each new store in 30 months or less.
Wal-Mart's chooses to sell bonds to expand. If the $10 billion expansion
leads to a shopping experience which causes a motorist to pass-up a $1.09 can
of soda at a 7-Elevan for a 50-cent can of soda at Wal-Mart, the stock fun
has just begun.
It's true that labor unions will try to organize a greater portion of the
Wal-Mart work force. But it's also true that through all economic cycles,
during the last 31 years, the stock has gone from a split-adjusted low of one
penny per share to more than $70 per share at one point.
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Mark Scheinbaum does not own shares of either WMT or MCD, and serves as chief
investment strategist for Kaplan & Co., www.kaplansecurities.com based in
Boca Raton, Fla.