Wal-Mart's bad PR comes at a bad time

By David Goldman, staff writer

NEW YORK (CNNMoney.com) -- Wal-Mart has again found itself facing some bad publicity on the labor relations front after a federal appeals court certified the largest gender discrimination class action lawsuit in U.S. history on Monday.

A federal court of appeals ruled Monday that more than 1 million female Wal-Mart employees could proceed with the lawsuit, which was originally filed in 2001. The employees, who are seeking billions of dollars in damages, accuse Wal-Mart of paying women less than men and promoting fewer women into management positions.

In March, Wal-Mart said in a regulatory filing that an adverse ruling "may result in liability material to the company's financial condition." But it's still a long road before the case gets to trial, if it even gets there.

If the case remains in the media, analysts say it could hurt Wal-Mart's image, something the giant retailer has been working hard to repair. At the same time, Wal-Mart is reluctant to just settle the case, because it would likely cost them billions of dollars.

"This could be a huge verdict if this goes all the way through," said Terry Clower, director of the University of North Texas Center for Economic Research and Development. "Why do you think Wal-Mart's been fighting it so hard? How does Wal-Mart make up for something that? The folks shopping at Wal-Mart will end up paying for it."

As a result, Wal-Mart (WMT, Fortune 500) said it will appeal to the U.S. Supreme Court.

The problem is that now isn't a great time for Wal-Mart to take a PR hit. Like other retailers, the company has suffered sales declines with its same store sales falling for three consecutive quarters for the first time in its history. The company's net sales fell in the fourth-quarter for the first time since the company went public 41 years ago. And supermarkets have started to steal away some loyal Wal-Mart customers.

In an attempt to boost sales, Wal-Mart has begun a push into urban areas, which have previously been a tough fit for the retailer. But several analysts said they think that any bad press surrounding the company may tip the scales of opinion among local political leaders who have to vote to approve zoning changes for new Wal-Mart stores.

"I think there will be a backlash," said Burt Flickinger, analyst at Strategic Resource Group, a retail consulting firm. "Its strategy is backfiring, and this is going to be a big black eye for Wal-Mart for a number of years."

Flickinger said an inability to move into cities will hurt Wal-Mart's growth potential and ultimately its stock.

Customers are resilient

At the same time, Wal-Mart has survived hits to its image before. Over the past decade, the company has endured numerous reports of unfair labor practices as well as countless court cases and settlements. Wal-Mart even emerged unscathed from a damning 2005 documentary called "The High Cost of Low Price."

Through all of that, customers keep on coming back to Wal-Mart. Total sales have only once fallen at Wal-Mart's U.S. stores on a year-over-year basis in the company's history. Company profits have also recently outpaced Wall Street's expectations, despite the slip in U.S. sales.

"The acid test for all of this is how the company is doing," said Robert Passikoff, president of Brand Keys Consulting. "The truth is if all of this were having the kind of negative effect that it has on the PR side of the equation, you'd see a greater effect on profits -- but you're not seeing that."

Passikoff said that studies show consumers decide where to shop based on location, value and merchandise selection ahead of factors like store reputation.

The retail giant knocked Exxon Mobil (XOM, Fortune 500) out of the top spot on the Fortune 500 list, logging a profit of $14.3 billion on revenue of $408 billion in 2009.

Ted Boutrous, the lead attorney representing Wal-Mart in the case, said he believes customers understand that the court's ruling is not an indictment of the company.

"Customers are fair-minded, and they know the focus right now is on class-action law," said Boutrous. "The court went out of its way to say it is not saying anything abut the lawsuit's merits. The best way for Wal-Mart to protect its relationship with its customers is to take this to the Supreme Court." To top of page

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