Deep Dive: Wal-Mart
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(Ryan) What they do: Their mission statement is to help people around the world save money and live better. Walmart owns and operates more than 11,400 retail stores around the world and breaks the company down into 3 reportable segments: Walmart US, Walmart International, and Sam’s Club.
And there are 3 different types of retail stores. Supercenters, discount stores, and neighborhood markets. Most of them averaging more than 1,000 square feet.
(Ryan) History: Walmart began in 1950 and was started by Sam Walton at the age of 32. Walton purchased a store from a gentleman Luther Harrison in Bentonville, Arkansas and used that location to open the very first Walton’s Five and Dime. Sam didn’t open his first actual “Wal-Mart” until 1962, but when he did he embarked on a path of attempting to offer the lowest prices and great services. Classic “your margin is my opportunity”.
And he started to replicate this low-cost model with new stores. By 1967, the company had grown to 24 stores and in 1970 Walmart went public using the proceeds to help finance expansion. All in all, this is one of the more inspiring tales of entrepreneurialism and is a great case study about the value of culture. Also shows what it takes to scale and grow a grocery business.
Recent developments: In 2016 they introduced Walmart Pay, and in 2017 launched free 2 day shipping. Also acquired FlipKart in India. So much of the money being spent is e-commerce oriented.
Pretty easy one here since Wal-Mart sells almost everything at their store
Competitors are all the large retailers including Amazon, Target, Costco, Home Depot, Walgreens, CVS, Best Buy, Kroger
Main competitor is now Amazon
In 2019: Wal-Mart was 2.7% of consumer spending in U.S. Amazon was 2.3%
In 2020: Wal-Mart was 3.1% of spending, Amazon was 3.3%
(Ian) Management and Ownership:
Doug McMillian is President and CEO
Was named in 2014
Previously was was CEO of Walmart International, and Sam’s Club
Worked at Walmart for 30 years
Stock up about 85% in
Walton family owns just under 50%
Market cap of $395 billion, ticker WMT
EV of $442 billion so quite a bit higher than market cap
Ev/sales of 0.78
EV/ adj. EBIT (sale of asset) of 16.7
EV/FCF of 20.9
Dividend yield of 1.58%
Over last 20 years, shares outstanding have gone from 4.5 billion to 2.8 billion, so strong overall shareholder yield
Total revenue for Q1 was $138.3B, up 2.7% (due to a divestiture of a Walmart International business)
Comp sales at Walmart US (which makes up ~70% of overall sales) grew by 6.1% YoY
E-commerce sales for Walmart US increased 37% YoY
Operating income was $6.9B for the quarter, up 32% YoY
Operating margins are about 5%
Bought back $2.8B in shares for the quarter
(Ian) Balance sheet and liquidity:
$23 billion in cash
About $46 billion in inventory
$63 billion in debt, real estate based
Owns about 80% of its stores
(Ryan) Store quality has gotten a bit better over the years. Used to have a stigma of being sort of the lower-tier grocery chain and it feels like that has gone away a bit.
(Brett) You know what you’re going to get at Wal-Mart. Very consistent
Future growth opportunities:
(Ryan) Ribbit Capital partnership. In January Walmart announced that it was creating a new fintech startup. From the press release, “The venture will bring together Walmart’s retail knowledge and scale with Ribbit’s fintech expertise to deliver tech-driven financial experiences tailored to Walmart’s customers and associates.” The details on this are limited, but some sort of finance superapp to pair with shopping seems logical. Might be worth acquiring a BNPL provider.
(Brett) Flipkart. They do not break it out in the financials but this is the big stake they have in the Indian e-commerce company. Competing fiercely with Amazon over there. One interesting asset Flipkart owns is PhonePe, a payments app. Payment volume was up over 150% YoY in Q1, and last report I saw it had 250 million registered users. You spin this off in the U.S. and it would trade at a $100 bil market cap right now (doesn’t mean it is worth that though)
(Ian) Walmart Plus, amazon Prime competitor, about 8 million members, amazon has about 150 mm members
Highlights and lowlights:
(Ryan) Highlights: Well run. Good corporate culture. And obvious scale advantages. Having the geographic footprint that they do makes them far more agile with new e-commerce initiatives. (Pick-up, delivery, ship from store, digital pharmacy stuff) Lowlights: Idk, there aren’t a lot. Yearly comps could be a short-term issue. Not really for the business, but just for the stock. And I guess Target has had a pretty remarkable turnaround and their growth has outpaced Walmart’s. But it’s a big market and it hasn’t affected Walmart.
(Brett) Highlights: Incredible moat, love the Flipkart asset, love the moves into pharmacy/healthcare with their customers (insulin release the latest example), and they finally struck back strongly in e-commerce. Lowlights: Business size/maturity is the only downside here, and competitive positioning vs. Amazon is not fantastic either. Hard to find lowlights anywhere though
(Ian) Highlights: Footprint, omnichannel retail, propensity to be aggressive. Online up from 7.5% of sales to 12.5%, somewhat COVID related, but Lowlights: Core business does not have a lot of growth potential
(Ryan) E-commerce, fintech, and healthcare related initiatives increase customer loyalty and they maintain double-digit returns on invested capital. The good thing about a business as consistent as this, with reliable cash flow, and a large cash balance is that if they deviate way too far from their estimate of fair value they can capitalize on it by repurchasing shares. Doesn’t feel like tremendous upside.
(Brett) adequate or strong returns will need to come from multiple sources. How I envision it: mid single digit or maybe lower compound sales growth, eek out some margin expansion each year, get some returns from the dividend, and reduce share count steadily. That could all add up to solid returns
(Ian) Omnichannel, perfect mix of real estate ane ecommerce, supplier relationships
(Ryan) The business is reliable enough that there isn’t any massive short-term risk or catastrophic risk. However, a plausible bearish scenario is that this somehow becomes mismanaged. Poor acquisitions, adding bad/unnecessary debt, somehow tarnishing the brand, and all the difficulties/bureaucracy that comes with being a huge business start to present themselves.
(Brett) The banner year in 2020 isn’t replicable. Can’t gain market share in e-commerce after making such large investments. India has trouble becoming a profitable market were some things I think have a chance of occurring and hurting the business.
(Ian) Brand not strong enough to capture e-commerce market. Some of the growth opportunities don’t pan out. Real estate continues to deteriorate. Stock acts like the 2000s stock price, flat
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Disclosure: The authors and podcast guests are not financial advisors. Brett Schafer and Ryan Henderson are portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this podcast.