WMT - Walmart Inc

[karthikpm]

i view WMT's announcement (basically continued middling revenue growth, but a significant increase in costs to counteract the loss of business to Amazon) as a huge negative for the retail space generally. WMT is a very large, strong business which faces an existential threat from Amazon - and it is going to spend real money to try aggressively turn things around. i imagine this will come in the form of offering, pricing, logistics, etc. and since "me too" offerings don't seem to do well online, WMT will have to not just meet but beat AMZN's offerings.

 

if Sears' prospects looked unfavorable with WMT in a torpor, how are they when WMT is willing to thrash aggressively to compete?

 

i bet they wish they had prevailed in the Quidsy sale.

 

others comments?

 

Will Walmart survive or thrive with these low margins and lower prices?  Are there any examples of a non-niche brick and mortar company successfully competing against Amazon?

[Palantir]

WMT actually has a nice online store. Wonder if it will amount to anything here.

[rkbabang]

WMT actually has a nice online store. Wonder if it will amount to anything here.

 

I don't know what the people are like in Walmarts nation wide, but I told my wife not to ever buy anything online at Walmart again and have it shipped to our local store.  It took me over an hour to pickup 3 items that my wife purchased.  And no, there was no one in line in front of me.  The person couldn't find the order on his computer (even though I had a print out of the receipt and the email telling me that the order was ready) then he couldn't find the boxes in back.  Then he couldn't figure out how to use the register to do whatever it was he had to do before letting me take them.  Then he didn't want to let me take them, because I wasn't my wife, even though she put me as an authorized person to pick it up. I had a seat and just waited, and waited, and waited....he even kept appologising to me and telling me that he was "a little slow sometimes".  Even thanked me for not getting mad and yelling at him the way some people do.  I much prefer Amazon Prime to the freakshow you see by entering that place (both the workers and the customers).  Walmart has a long way to go if it wants to compete with Amazon, It needs to offer free shipping to your home for one, I don't see it happening.

[Jurgis]

they will generate $80bn of cash over the next 3 years

 

How exactly they are going to generate $80bn of cash over the next 3 years?

Is this FCF after capex? OCF?

 

Edit: it looks like they might do $20B OCF this year, so I guess $80bn in next 3 years is also OCF.

[hyten1]

i guess my experience is unique? i use to pretty much only buy from amazon.

 

but its been a few years where i have been splitting my purchase btw amazon and walmart. amazon doesn't always have the best price. and when i do buy from walmart i always get free shipping as long as the order is over $50.

 

hy

[Guest 50centdollars]

http://www.marketwatch.com/story/warren-buffetts-390-million-loss-on-wal-marts-stock-is-nothing-next-to-the-walton-familys-loss-2015-10-14

http://www.bloomberg.com/news/articles/2015-10-14/wal-mart-heirs-see-9-billion-vanish-in-a-day-as-shares-plummet

 

If you read the idiot news (see above), you would think that walmart is going bankrupt or warren buffett lost $400 million today or even worse, the waltons lost $11 billion.

 

Market Cap =the number of outstanding shares of a company multiplied by the last known share price it traded at. While this may at first seem like a neat way to value a company, it is fundamentally flawed in a number of ways:

 

1.  If anyone with a big share in a company (like the WalMart heirs) tried to sell their bulk shares, the stock price would plummet and they would never realize the full value of their stock.

 

2.  The price the last chump paid (the chump being retail investors like you and me) multiplied times the number of shares means nothing, as retail investors tend to overpay for stocks (act shocked).

 

3.  The market cap number doesn't accurately value what a company is worth in terms of liquidation value, take-over price, or whatever.  The real value of any company is usually far less than the "market cap" number - perhaps by half.

 

4.  Even when companies "buy out" another company, all they usually do is offer existing shareholders stock in the new combined company.  Very rarely does someone "take a company private" by purchasing all of the stock at market prices.

 

5.  You can't "lose money" in a company until you sell the stock.  So the Wal-Mart heirs did not lose $11 Billion today or any day, except the day they sell their stock and take a loss.  Since they inherited the stock, however, they get a stepped-up basis in the stock (the value of the stock the day Sam Walton died) and thus they may not see any loss, but perhaps a huge capital gain.

 

6.  Phantom or "paper" gains and losses thus mean nothing, until you actually cash out of a company and realize these gains or losses.  And as the market has demonstrated over the last two months, huge losses can be replaced by huge gains - negating any "loss" in short order.

 

 

Is Wal-Mart in trouble?  Hardly.  The world's largest retailer isn't about to close its doors.  Are profits down?  Yes, but probably for reasons you would not expect.  As the economy improves, more and more people are shopping in higher-end stores.  The Internet is siphoning off a lot of sales of commodity products.  Costs of Chinese-made goods are higher.  Wages are rising as the economy improves.  There are a number of factors.

 

Oh, but that is boring, right?  Better to have a click-bait headline that says "Wal-Mart Heirs lose $11 Billion" so the plebes can enjoy a little schadenfreude at their expense.  And let's face it, a lot of people hate Wal-Mart and hate rich people, so they click on these utterly meaningless articles in a knee-jerk fashion.

 

I saw one analyst say some bullshit like Buffett is probably mad today that this news came out. Mad you say? He is probably jumping for joy. How many times does the guy say he hopes his stocks go down?????? He is probably buying today and will buy more as it goes down further.

 

Financial journalist are something. Market Cap - or changes in Market Cap - are utterly meaningless.

 

Most financial news is a joke and should be ignored.

[Guest longinvestor]

http://www.marketwatch.com/story/warren-buffetts-390-million-loss-on-wal-marts-stock-is-nothing-next-to-the-walton-familys-loss-2015-10-14

http://www.bloomberg.com/news/articles/2015-10-14/wal-mart-heirs-see-9-billion-vanish-in-a-day-as-shares-plummet

 

If you read the idiot news (see above), you would think that walmart is going bankrupt or warren buffett lost $400 million today or even worse, the waltons lost $11 billion.

 

Market Cap =the number of outstanding shares of a company multiplied by the last known share price it traded at. While this may at first seem like a neat way to value a company, it is fundamentally flawed in a number of ways:

 

1.  If anyone with a big share in a company (like the WalMart heirs) tried to sell their bulk shares, the stock price would plummet and they would never realize the full value of their stock.

 

2.  The price the last chump paid (the chump being retail investors like you and me) multiplied times the number of shares means nothing, as retail investors tend to overpay for stocks (act shocked).

 

3.  The market cap number doesn't accurately value what a company is worth in terms of liquidation value, take-over price, or whatever.  The real value of any company is usually far less than the "market cap" number - perhaps by half.

 

4.  Even when companies "buy out" another company, all they usually do is offer existing shareholders stock in the new combined company.  Very rarely does someone "take a company private" by purchasing all of the stock at market prices.

 

5.  You can't "lose money" in a company until you sell the stock.  So the Wal-Mart heirs did not lose $11 Billion today or any day, except the day they sell their stock and take a loss.  Since they inherited the stock, however, they get a stepped-up basis in the stock (the value of the stock the day Sam Walton died) and thus they may not see any loss, but perhaps a huge capital gain.

 

6.  Phantom or "paper" gains and losses thus mean nothing, until you actually cash out of a company and realize these gains or losses.  And as the market has demonstrated over the last two months, huge losses can be replaced by huge gains - negating any "loss" in short order.

 

 

Is Wal-Mart in trouble?  Hardly.  The world's largest retailer isn't about to close its doors.  Are profits down?  Yes, but probably for reasons you would not expect.  As the economy improves, more and more people are shopping in higher-end stores.  The Internet is siphoning off a lot of sales of commodity products.  Costs of Chinese-made goods are higher.  Wages are rising as the economy improves.  There are a number of factors.

 

Oh, but that is boring, right?  Better to have a click-bait headline that says "Wal-Mart Heirs lose $11 Billion" so the plebes can enjoy a little schadenfreude at their expense.  And let's face it, a lot of people hate Wal-Mart and hate rich people, so they click on these utterly meaningless articles in a knee-jerk fashion.

 

I saw one analyst say some bullshit like Buffett is probably mad today that this news came out. Mad you say? He is probably jumping for joy. How many times does the guy say he hopes his stocks go down?????? He is probably buying today and will buy more as it goes down further.

 

Financial journalist are something. Market Cap - or changes in Market Cap - are utterly meaningless.

 

Most financial news is a joke and should be ignored.

 

+1 to everything you said.

[Picasso]

Just go read the comments on the top Reddit post related to WMT.  This is why value investing works.  You'd think WMT was going out of business, nevermind the billions of FCF.  Everyone let's go invest in AMZN instead!  Isn't is so much better to have a bird in the bush versus two or three in the hand?

[Eye4Valu]

Not too far off Berkshire's cost basis of $56

[FCharlie]

 

Will Walmart survive or thrive with these low margins and lower prices?  Are there any examples of a non-niche brick and mortar company successfully competing against Amazon?

 

I'd much prefer to own a $192 billion Wal Mart that "unsuccessfully" competes against Amazon while generating $80 Billion of cash from operations over three years, repurchases $20 billion of stock at multi year lows, sits on $120 billion of real estate, with forty years of dividend increases,  than the "successful" $254 billion Amazon which has wonderful sales growth but none of those highly overrated other qualities like huge cash flow, buybacks, real estate, and dividend growth.

[bookie71]

As one of my son's said, "I would rather go to the dentist, than to shop at Walmart"

[fareastwarriors]

As one of my son's said, "I would rather go to the dentist, than to shop at Walmart"

 

Lots of people hate/dislike WalMart but every time I go, there are always a ton of people shopping there. Yes the demographics might not be what one sees at a Whole Foods or Trader Joes but WalMart gets the job done.

[Picasso]

$500 billion of sales probably means someone shops there. I think investors who are naturally in the 1% of the population just naturally think that everyone shops at Target or Trader Joes. It explains the love for Amazon.

[Palantir]

 

Will Walmart survive or thrive with these low margins and lower prices?  Are there any examples of a non-niche brick and mortar company successfully competing against Amazon?

 

I'd much prefer to own a $192 billion Wal Mart that "unsuccessfully" competes against Amazon while generating $80 Billion of cash from operations over three years, repurchases $20 billion of stock at multi year lows, sits on $120 billion of real estate, with forty years of dividend increases,  than the "successful" $254 billion Amazon which has wonderful sales growth but none of those highly overrated other qualities like huge cash flow, buybacks, real estate, and dividend growth.

 

Interesting you say this, because people like to talk about finding the "next WMT" or the "next BRK" or the next etc...but when the most likely candidate to be the next WMT is sitting right there in AMZN, it's greeted with mockery. Curious.

[handycap5]

i am concerned about the retail space broadly defined (separate from the discussion about what the right prices for the common stocks should be).

 

1) amazon will somewhat inevitably go to $300B+ gross merchandise sales in the next many years domestically, basically doubling. a) with negative working capital, there is no cash flow barrier to achieving this, b) bezos strategy is clear and no one else involved with the company has the influence to alter the strategy, whether or not it makes or loses money on an accounting basis, and c) the prime offering is and will continue to be very compelling for consumers (once you have a costco card, you never buy your toilet paper anywhere else - prime is similar). one can appreciate that this is a huge consumer giveaway, whether or not amazon proves down the road that it can make decent operating margins (remember that AMZN ROIC is not a disaster even today with the negative WC).

 

2) WMT has two options among many: a) age gracefully and try to milk the "melting icecube," to mix metaphors, or b) appreciate that amazon has changed the competitive dynamics unfavorably and engage in the competition aggressively, knowing that the eventual profit pool will be less than before. With their announcement, WMT seems to be going down the second path. this will add to the competitive pressure in the retail space broadly defined.

 

3) i think one needs to be very sensitive to store-level economics. BBBY, as an example, basically has stagnant comps, but costs inherently go up with inflation. Negative store-level operating leverage is a big deal for store-based businesses. No matter how fast its online business is growing off a small base, one primarily owns a store-based retailer. WMT is similar.

 

to sum it up, the profit pool in retail is going to shrink dramatically, and there will be a lot of wealth destruction - to the consumers benefit. Someday, I expect there will be some very attractive niche opportunities among the survivors, but I am skeptical they exist today. but does anyone disagree with my framework or believe they know interestig retail opportunities for the current environment?

[Palantir]

With 28B ocf-12b capex, we get 16b fcf/235=6.8% cf yield, hardly compelling. Assuming capex is all maintenance since there is such little growth.

[dwy000]

With 28B ocf-12b capex, we get 16b fcf/235=6.8% cf yield, hardly compelling. Assuming capex is all maintenance since there is such little growth.

 

Market cap is down to $190 after yesterday.  I haven't researched it but they claim $11bn capex going forward.  And they specifically stated the $80bn in cash being added over the next 3 years in the press release.  But they don't derail how that is calculated (maybe asset sales in there or better working capital if they aren't opening stores).

 

Still, 40% of market cap in cash over the next 3 years is pretty compelling, especially if the underlying business continues to grow over that period (albeit very slowly).

[Jurgis]

There's no way they gonna do $80b-over-3-years FCF if you include maintenance capex.

 

$80b-over-3-years is OCF.

[Palantir]

With 28B ocf-12b capex, we get 16b fcf/235=6.8% cf yield, hardly compelling. Assuming capex is all maintenance since there is such little growth.

 

Market cap is down to $190 after yesterday.  I haven't researched it but they claim $11bn capex going forward.  And they specifically stated the $80bn in cash being added over the next 3 years in the press release.  But they don't derail how that is calculated (maybe asset sales in there or better working capital if they aren't opening stores).

 

Still, 40% of market cap in cash over the next 3 years is pretty compelling, especially if the underlying business continues to grow over that period (albeit very slowly).

 

Are you adding back 49b debt? Idk if they have a pension liability. That 80b cf has to be OCF, as noted above. Forgot to add back 2b interest, so 18/235= 7.7% yield, which is okay....

[dwy000]

With 28B ocf-12b capex, we get 16b fcf/235=6.8% cf yield, hardly compelling. Assuming capex is all maintenance since there is such little growth.

 

Market cap is down to $190 after yesterday.  I haven't researched it but they claim $11bn capex going forward.  And they specifically stated the $80bn in cash being added over the next 3 years in the press release.  But they don't derail how that is calculated (maybe asset sales in there or better working capital if they aren't opening stores).

 

Still, 40% of market cap in cash over the next 3 years is pretty compelling, especially if the underlying business continues to grow over that period (albeit very slowly).

 

Are you adding back 49b debt? Idk if they have a pension liability. That 80b cf has to be OCF, as noted above. Forgot to add back 2b interest, so 18/235= 7.7% yield, which is okay....

 

I didn't add back debt because, even using OCF that's after debt service (so just equity cash flows). 

[wachtwoord]

I'm considering freeing up some cash for this. Thanks for the discussion.

[johnny]

Seems to me like Walmart has had the past ten years to get ready for a fight to the death with Amazon and has accomplished absolutely nothing.

 

I think it should take more than a single digit FCF yield to get excited about the business.

[valueinvestor82]

Johnny, and Amazon will win this battle how? Since Amazon has such amazing financial stats and FCF? It doesn't take a genius to sell products at a loss and deliver terrible results every quarter. Bezos' genius has been to be a good salesman to Wall Street. Walmart actually has a moat, sustainability, and attractive valuation. Call me a sadist but I can't wait to see amzn finally fall victim to reality.

[Parsad]

Walmart just needs to spin-off Sam's Club and sell off all other non-core assets.  If they focus solely on the big box stores, smaller city stores and their online business, they will be just fine.  Cheers! 

[johnny]

Johnny, and Amazon will win this battle how? Since Amazon has such amazing financial stats and FCF? It doesn't take a genius to sell products at a loss and deliver terrible results every quarter. Bezos' genius has been to be a good salesman to Wall Street. Walmart actually has a moat, sustainability, and attractive valuation. Call me a sadist but I can't wait to see amzn finally fall victim to reality.

 

Maybe you think Bezos is an idiot, and Amazon is a scam, but that doesn't change the fact that they are throwing billions of dollars every year into a fulfillment infrastructure that Walmart will eventually be forced to compete with. Those fulfillment centers filled with tens of thousands of Kiva robots are sort of like oil rigs set up with dubious economics: 1. They are going to continue to exist no matter how bad of an investment they turned out to be, and 2. Marginal costs will determine market outcomes, not total cost.

 

When Amazon has (maybe stupidly) invested ten billion dollars in fulfillment centers, robots in those centers, cars running routes emanating from those centers, will they have a cost-advantage for marginal fulfillment? I think a common phenomenon offers a glimpse of the future: sometimes when people order something for 2-day shipping on Prime, they are surprised to receive the package a day early (or occasionally even same day). What does this mean? Amazon is doing so much business in certain areas that the cost-difference between same-day, 1-day, and 2-day delivery disappears. As sales volume increases in a given area, this phenomenon becomes more common.

 

Prime Now is an app that specifically filters down to inventory held in local fulfillment centers, offering a 2-hour delivery window (1 hour if you're willing to pay). This is all textbook scale advantage stuff. And if it has taken them billions in losses to get there, rather than being dismissive and condescending about it, you should be asking how and when Walmart plans to compete with that.

 

How have they competed so far? Well, it has been 10 years since Prime launched, and Walmart has just recently started pushing ShippingPass, which notably offers "3-day shipping" to members. It took them ten years to (soft)launch an offering that is 50% slower. What about that makes you feel confident about the future?