WMT - Walmart Inc

[FCharlie]

I would not be surprised at all to see Buffett buying WMT at these prices.

 

What is amazing to me is that many people are now predicting the slow death of WMT. I've never known a company that is growing same store sales, growing square footage, and generating enormous and growing operating cash flow, to be dying. It's almost as if people are looking at the stock price decline and assuming it must be because the company is dying and this will continue forever, that anyone who invests is guaranteed to lose should they hold long enough.

 

WalMart just gave a three hour presentation to the investment community, the presentation is on their website. The main driver of flat sales is not declining same store sales. In fact, same store sales are rising. The main driver is currency headwinds. The main driver of declining E.P.S. is the massive investment in wages. These investments are stretched over two years and will moderate after next year.

 

WalMart generates a staggering amount of cash. Their capex is going to moderate after next year, at the same time the investments in wages will moderate. This company will generate a ton of additional free cash, on top of the significant free cash they generate today. The $20 billion buyback will create enough cash savings on the dividend to allow WMT to raise the dividend over 10% and still not pay out more total cash. The company owns a giant real estate portfolio, but unlike Sears and JCPenney, WalMart owns this property and still makes a ton of money too.

 

Ultimately, the investment thesis is that I can't see any possible way Wal Mart investors at today's prices lose money long term. The next couple years of dividend and buyback as noted above are worth $14 per share alone. The real estate is likely worth half the stock price. Sales are rising, the store footprint is growing, free cash flow will rise, the dividend is rising and has been increased every year for almost 50 years. The buyback is giant and puts a strong floor under the stock price. Amazon is not going to kill WalMart. WalMart has too much financial firepower to just roll over and die. At today's prices and using today's likely trough earnings, a discounted earnings or cash flow calculator tells us that WMT shares are pricing in only about 2% growth into perpetuity. Those types of assumptions, which can easily be exceeded simply through share repurchases, are the types of assumptions I look for. Combine those low growth assumptions with a growing top line, growing footprint, growing same store sales, massive real estate, massive buyback, rising dividend and I don't know what else a value investor would need to make this a significant position.

[CorpRaider]

Yeah i was sort of thinking about the potential opportunity here, but ive pretty much decided on adopting "no retail" as a permanent item on my checklist.

[Cardboard]

I agree that the assumption about Wal-Mart dying are grossly exaggerated. In Florida last year, the store close by my place was jam packed every day. They are very busy in Canada too and their addition of grocery is a success.

 

It is funny that people are destroying Wal-Mart share price with justifications like Amazon will take over the world but, not Kroger, Loblaws, Target (16 to 19 times earnings vs 12.5). Are these not the real fatalities down the road?

 

Wal-Mart is not cheap enough for me yet but surely getting there.

 

Cardboard

[johnny]

I realize that this is in some sense just polite adoption of corporate framing, but this idea that Walmart is "investing" in wage increases is nonsense. Wage increases are an expense, not an investment. The fact that some $9/hr employee in 2015 will make $10/hr in 2016 has absolutely no positive impact on the results of the company in 2017. This is not a sign of strength, but weakness. And considering labor productivity is perhaps the Number 1 domain where Amazon's retail model triumphs over Walmart's, I think it should be very concerning to see them tacitly acknowledge they'll have to spend even more on labor just to tread water.

 

Believe it or not, I'm still on the fence about Walmart. I am considering buying it right now, but more as a trade than anything (I do think their death will be quite gradual, and their buyback plans are aggressive). I don't think it is up for debate that they are currently losing the most important fight of their existence to Amazon. That doesn't mean they can't come back, but my concern is that they seem completely delusional about what it is going to take to do that, and in projecting their delusions, are building up an equally delusional base of investors. Not you guys though, you guys are lovely. ;)

 

I'll watch this video and share my unappreciated notes on it later.

[rb]

I realize that this is in some sense just polite adoption of corporate framing, but this idea that Walmart is "investing" in wage increases is nonsense. Wage increases are an expense, not an investment. The fact that some $9/hr employee in 2015 will make $10/hr in 2016 has absolutely no positive impact on the results of the company in 2017. This is not a sign of strength, but weakness. And considering labor productivity is perhaps the Number 1 domain where Amazon's retail model triumphs over Walmart's, I think it should be very concerning to see them tacitly acknowledge they'll have to spend even more on labor just to tread water.

 

Believe it or not, I'm still on the fence about Walmart. I am considering buying it right now, but more as a trade than anything (I do think their death will be quite gradual, and their buyback plans are aggressive). I don't think it is up for debate that they are currently losing the most important fight of their existence to Amazon. That doesn't mean they can't come back, but my concern is that they seem completely delusional about what it is going to take to do that, and in projecting their delusions, are building up an equally delusional base of investors. Not you guys though, you guys are lovely. ;)

 

I'll watch this video and share my unappreciated notes on it later.

"Investing" is just retail jargon the whole industry talks like that. "Invest in wages", "invest in price cuts", etc.

 

I don't really see how the wage hike is a weakness. They didn't have to do it because they couldn't find staff. I think they just tried to get ahead of a public and PR wave that's coming. That's actually better than in the past when they've been on the wrong side of that wave. I also think you're totally wrong in your thinking that Amazon will have a wage advantage over WalMart. Amazon whether they like it or not will have to hike/match wages. Other retailers probably as well. The only difference is that Walmart actually has the cash flow to pay the raise.

[Parsad]

I realize that this is in some sense just polite adoption of corporate framing, but this idea that Walmart is "investing" in wage increases is nonsense. Wage increases are an expense, not an investment. The fact that some $9/hr employee in 2015 will make $10/hr in 2016 has absolutely no positive impact on the results of the company in 2017. This is not a sign of strength, but weakness. And considering labor productivity is perhaps the Number 1 domain where Amazon's retail model triumphs over Walmart's, I think it should be very concerning to see them tacitly acknowledge they'll have to spend even more on labor just to tread water.

 

Believe it or not, I'm still on the fence about Walmart. I am considering buying it right now, but more as a trade than anything (I do think their death will be quite gradual, and their buyback plans are aggressive). I don't think it is up for debate that they are currently losing the most important fight of their existence to Amazon. That doesn't mean they can't come back, but my concern is that they seem completely delusional about what it is going to take to do that, and in projecting their delusions, are building up an equally delusional base of investors. Not you guys though, you guys are lovely. ;)

 

I'll watch this video and share my unappreciated notes on it later.

 

The "investing" word is definitely spin, but the truth is that by increasing wages at Walmart, they will reduce employee turnover.  This is a huge problem at big-box stores, especially in their distribution warehouses. 

 

Loblaws actually has a bounty out in Canada that if you refer a warehouse distribution employee, they will pay depending on region, anywhere from $2,000-3,000 referral fee when that employee is hired.

 

Big-box stores spend over $3,000-4,000 per floor/warehouse employee in training and recruitment costs, and roughly $8,000-10,000 on supervisor hires.  But they have something like 35% turnover on floor/warehouse staff and 10-15% turnover on supervisory staff annually.

 

Unfortunately or fortunately, another fact of reality is that big-box store employees are generally patrons of big-box stores because of the value received for their hard-earned dollars, and with increased wages will spend more of their income dollars at those stores, including Walmart.

 

So increased wages mean increased expenses, but the actual cost won't be as onerous as markets perceive.  Cheers!

[johnny]

Parsad: Agree totally that increasing wages is necessary for what they're trying to accomplish. I just don't like the idea that investors should adopt that spin when talking amongst each other. But I'm absolutely convinced that Walmart (and others) pushed way too hard on labor in the past to get margins where they wanted them to be, and that has helped accelerate the changes going on in retail.

 

rb: I didn't mean to suggest that somehow Amazon was going to get away with not raising wages. Rather, my point is that the rising cost of an input will generally be competitively advantageous for whichever party uses that resource most sparingly/efficiently/productively. Amazon's FCs are far more labor efficient than Walmart SCs, and there is a definite ceiling to how much efficiency Walmart can squeeze out of its higher-paid labor, since they are forcing employees to maximize two goals that are often in conflict (Goal 1: Maximize sales/payroll. Goal 2: Be there whenever a customer has a question, comment, or just wants to chat for five minutes about how many brands of toothpaste there are nowadays).

 

Amazon is able to completely segregate the vast majority of its retail workforce so that Goal 2 is nonexistent and irrelevant, leaving everybody to focus entirely on Goal 1.

 

I haven't finished the video yet, but here's the impression I have so far: They've got a perfectly good plan for improving the experience of Walmart stores, but they still haven't confronted the reality that a -great- Walmart in-store experience is completely inferior to the no-store experience that Amazon represents.

 

The Supercenter was a specific piece of technology, perfectly suited to the 1990s. Now we have a company with thousands of Supercenters run by a management facing a lot of incentives to try and argue that the Supercenter is -the- right technology for today. 3,000 supercenters, at 150,000 square feet, serving a dual-role as retail storefront and miniature-distribution center do not seem to me like the format of the future. 1 million square foot fulfillment centers, run almost entirely by software and robots, utilizing humans only for thumb-related tasks, really strikes me as the technology that is going to "win the future of retail," to borrow a phrase I have heard approximately 500 times so far in the past two hours.

 

There is nothing about this reality that precludes Walmart from competing effectively, except their apparent reluctance to actually acknowledge it. I can see a perfectly good strategy here, where the Supercenter business continues generating tons of cash, and that cash is then used to built out an intelligent e-commerce platform. I am just skeptical of that actually happening, and I cringe every time I hear somebody mention things like "delivering your online order to you in the Walmart parking lot".

 

Sorry if I sound like a broken record guys! I'm just trying to use the conversation to clean up my thinking here.

[Guest longinvestor]

Being a shopper at both Amazon and Walmart, I find some of the pronouncements about B&M stores' demise ludicrous.

 

I spend about $1000-2000 a year on Amazon. Of $15000-20,000 in total retail spending. I don't see this ratio changing by much for the foreseeable future. And I am a guy with 24 hour internet access, available credit, a checkbook etc.

 

Many folks that shop B&M because that's the only place they can. Payday loans, cash and even tax rebate checks etc. is all they ever will likely use. Wal-Mart is often the only place they go to.

 

They likely also don't get on this board

[vinod1]

I do not agree with folks who think Amazon would eat Walmart's lunch. There are quite a few barriers for Amazon online model as it relates to Walmart

 

1. The core Walmart customer - lower income level and living on paycheck to paycheck with low cash balances - buys stuff just for that week or next two weeks. These customers are not going to be Amazon shoppers for the vast majority of their purchase of essentials. As longinvestor already pointed out above, they are vastly different from COBF board members.

 

2. More than 50% of Walmart sales are groceries. Majority of the people prefer buying fresh produce after they look and feel them, look at expiration dates, etc. These constitute a a significant part of the grocery basket.

 

3. It is going to be more expensive to deliver small quantities to customers then it would be to buy them at store. So Walmart would retain a cost advantage on some of the products at least in some of the markets - rural and suburban markets.

 

So Walmart is going to have a segment of the market where it is competitively advantaged relative to Amazon.

 

Walmart has not really focused on Online so far and their current efforts so far have been subpar.

 

My question is, what competitive advantage does Amazon have when it builds its distribution centers - automated with robots as they might be, why would Walmart not be able to build them if it deems them necessary? Is there anything that Amazon does in these distribution centers that Walmart would not be able to copy? They certainly can afford it and the Walton family with 50% stake would certainly be understanding if short term results need to take a back seat to protect long term viability.

 

Vinod

 

 

 

[vinod1]

I bought some garden furniture at Walmart online and when I tried to pick up at around 6 PM on a Saturday, the said that online pickup section was closed. The email confirmation said it would be open until 10 PM. As I was talking with the store manager, one of the employees gave the excuse that the person who is responsible closed it as "no one was coming anyway" :)

 

Vinod

[ccplz]

Last year, 56% of Walmart's revenues came from groceries. Do people buy groceries online? Is it even possible?

[rb]

They do have online grocery in certain large cities.

[krazeenyc]

Last year, 56% of Amazon's revenues came from groceries. Do people buy groceries online? Is it even possible?

 

source please. this is not accurate.

[ccplz]

Last year, 56% of Amazon's revenues came from groceries. Do people buy groceries online? Is it even possible?

 

source please. this is not accurate.

 

WMT 2015 10-K p.10

 

"The percentage of net sales for the Walmart U.S. segment, including online sales, represented by each strategic merchandise unit was as follows for fiscal 2015, 2014 and 2013:... Groceries: 56%"

 

http://www.sec.gov/Archives/edgar/data/104169/000010416915000011/wmtform10-kx13115.htm

 

???

[sampr01]

Last year, 56% of Amazon's revenues came from groceries. Do people buy groceries online? Is it even possible?

 

source please. this is not accurate.

 

WMT 2015 10-K p.10

 

"The percentage of net sales for the Walmart U.S. segment, including online sales, represented by each strategic merchandise unit was as follows for fiscal 2015, 2014 and 2013:... Groceries: 56%"

 

http://www.sec.gov/Archives/edgar/data/104169/000010416915000011/wmtform10-kx13115.htm

 

???

 

Thats Walmarts revenue NOT amazon's?. You indicated 56% OF AMAZON revenue from Grocereis

[ccplz]

That was obviously a typo.

 

It's fixed now.

 

 

[rkbabang]

Last year, 56% of Walmart's revenues came from groceries. Do people buy groceries online? Is it even possible?

 

Do people really buy groceries from Walmart?  Go into your nearest Walmart and look at the groceries, really look at them, or even try to do your shopping there.  Unless your local Walmart is VERY different from mine, what you will see is disgusting.  The meats are gross and the produce is worse.  I ran into a Walmart on the way home once to buy a case of Corona and some limes and walked out without any limes, because I wasn't even going to put those disgusting things in my beer and certainly wasn't going to serve them to guests.  I had to drive out of my way to a grocery store.

 

I know that they serve the lower income demographic, but that is just one of the many trends running against them as the world gets wealthier.  Their products are sub-par (a generous understatement), their online service is terrible beyond compare, the employees!!... (it appears that they must hire people from local homeless shelters and/or insane asylums), the stores are not appealing or well kept, and their groceries (meats/produce) are inedible.  Sure all this is all fixable, but will they fix it?

 

[tng]

Last year, 56% of Walmart's revenues came from groceries. Do people buy groceries online? Is it even possible?

 

Do people really buy groceries from Walmart?  Go into your nearest Walmart and look at the groceries, really look at them, or even try to do your shopping there.  Unless your local Walmart is VERY different from mine, what you will see is disgusting.  The meats are gross and the produce is worse.  I ran into a Walmart on the way home once to buy a case of Corona and some limes and walked out without any limes, because I wasn't even going to put those disgusting things in my beer and certainly wasn't going to serve them to guests.  I had to drive out of my way to a grocery store.

 

I know that they serve the lower income demographic, but that is just one of the many trends running against them as the world gets wealthier.  Their products are sub-par (a generous understatement), their online service is terrible beyond compare, the employees!!... (it appears that they must hire people from local homeless shelters and/or insane asylums), the stores are not appealing or well kept, and their groceries (meats/produce) are inedible.  Sure all this is all fixable, but will they fix it?

 

I think there are certain areas where Walmart is pretty much the only grocery store. As with all grocery stores, they need to have a ton of customers or sales buying up their inventory in order for their stuff to be fresh. If you are in a more populated area where there are multiple competing grocery stores/chains, most people won't go to Walmart for their groceries because that is not the first store that comes to mind when they need food. I live in the northeast and it doesn't seem like many people buy groceries at Walmart, but some of the Walmarts still have the grocery section.

[rkbabang]

Last year, 56% of Walmart's revenues came from groceries. Do people buy groceries online? Is it even possible?

 

Do people really buy groceries from Walmart?  Go into your nearest Walmart and look at the groceries, really look at them, or even try to do your shopping there.  Unless your local Walmart is VERY different from mine, what you will see is disgusting.  The meats are gross and the produce is worse.  I ran into a Walmart on the way home once to buy a case of Corona and some limes and walked out without any limes, because I wasn't even going to put those disgusting things in my beer and certainly wasn't going to serve them to guests.  I had to drive out of my way to a grocery store.

 

I know that they serve the lower income demographic, but that is just one of the many trends running against them as the world gets wealthier.  Their products are sub-par (a generous understatement), their online service is terrible beyond compare, the employees!!... (it appears that they must hire people from local homeless shelters and/or insane asylums), the stores are not appealing or well kept, and their groceries (meats/produce) are inedible.  Sure all this is all fixable, but will they fix it?

 

I think there are certain areas where Walmart is pretty much the only grocery store. As with all grocery stores, they need to have a ton of customers or sales buying up their inventory in order for their stuff to be fresh. If you are in a more populated area where there are multiple competing grocery stores/chains, most people won't go to Walmart for their groceries because that is not the first store that comes to mind when they need food. I live in the northeast and it doesn't seem like many people buy groceries at Walmart, but some of the Walmarts still have the grocery section.

 

Good points.  I live in the North East as well and there are so many better places to buy groceries, even in the lower income areas that it is hard to imagine buying food there.  But maybe things are different in rural areas.  Is there a breakdown somewhere of rural sales compared to urban/suburban sales?  This seems like another trend working against Walmart (and in Amazon's favor) as population grows, suburbia spreads, and urban areas become more dense.

 

[FCharlie]

Last year, 56% of Walmart's revenues came from groceries. Do people buy groceries online? Is it even possible?

 

Do people really buy groceries from Walmart?  Go into your nearest Walmart and look at the groceries, really look at them, or even try to do your shopping there.  Unless your local Walmart is VERY different from mine, what you will see is disgusting.  The meats are gross and the produce is worse.  I ran into a Walmart on the way home once to buy a case of Corona and some limes and walked out without any limes, because I wasn't even going to put those disgusting things in my beer and certainly wasn't going to serve them to guests.  I had to drive out of my way to a grocery store.

 

I know that they serve the lower income demographic, but that is just one of the many trends running against them as the world gets wealthier.  Their products are sub-par (a generous understatement), their online service is terrible beyond compare, the employees!!... (it appears that they must hire people from local homeless shelters and/or insane asylums), the stores are not appealing or well kept, and their groceries (meats/produce) are inedible.  Sure all this is all fixable, but will they fix it?

 

 

No disrespect intended, but if 56% of their half trillion of sales are from selling groceries, then I'd say that people really do in fact buy their groceries from Wal Mart.    Your description of the produce dept. is nothing like the Wal Mart nearest me. and regarding the world getting wealthier, I can't recall any period in history where there weren't far more poor people than wealthy people.

[rkbabang]

Last year, 56% of Walmart's revenues came from groceries. Do people buy groceries online? Is it even possible?

 

Do people really buy groceries from Walmart?  Go into your nearest Walmart and look at the groceries, really look at them, or even try to do your shopping there.  Unless your local Walmart is VERY different from mine, what you will see is disgusting.  The meats are gross and the produce is worse.  I ran into a Walmart on the way home once to buy a case of Corona and some limes and walked out without any limes, because I wasn't even going to put those disgusting things in my beer and certainly wasn't going to serve them to guests.  I had to drive out of my way to a grocery store.

 

I know that they serve the lower income demographic, but that is just one of the many trends running against them as the world gets wealthier.  Their products are sub-par (a generous understatement), their online service is terrible beyond compare, the employees!!... (it appears that they must hire people from local homeless shelters and/or insane asylums), the stores are not appealing or well kept, and their groceries (meats/produce) are inedible.  Sure all this is all fixable, but will they fix it?

 

 

No disrespect intended, but if 56% of their half trillion of sales are from selling groceries, then I'd say that people really do in fact buy their groceries from Wal Mart.    Your description of the produce dept. is nothing like the Wal Mart nearest me. and regarding the world getting wealthier, I can't recall any period in history where there weren't far more poor people than wealthy people.

 

That has always been true and still will be true world wide for a long time to come, but in the US it already isn't true and in many other 1st world countries it won't be true for very long.  There are very few poor people in the US (compared with much of the world).  You can certainly say that less than half the US population is poor.  And if I'm looking at the numbers correctly Walmart's non-US sales are only about 28% of its total sales.

 

[rpadebet]

 

Walmart has not really focused on Online so far and their current efforts so far have been subpar.

 

My question is, what competitive advantage does Amazon have when it builds its distribution centers - automated with robots as they might be, why would Walmart not be able to build them if it deems them necessary? Is there anything that Amazon does in these distribution centers that Walmart would not be able to copy? They certainly can afford it and the Walton family with 50% stake would certainly be understanding if short term results need to take a back seat to protect long term viability.

 

Vinod

 

Vinod,

 

Here is something to think about,

WMT's distribution centers are/were their competitive advantage with respect to other retailers. The era they have grown in and the model they followed caused them to strategically locate their distribution centers such that they could most efficiently service their customers (the big box retail stores around them). It was perfect as long as customers went to the store to shop.

 

Enter Amzn - their distribution centers (called fulfillment centers) were built and located strategically in this era. They located them such that they could efficiently service their customers (not retail stores but direct customers).

 

The location of distribution centers is key in retail as it influences what inventory you carry, how much you carry and by when you can restock if necessary. Your suppliers are plugged into these systems and for both WMT and AMZN it works perfectly given their model.

 

Now if WMT has to replicate AMZN locations, it would clearly be very expensive. Not only that, it would be disruptive to their existing business model with suppliers- it is a classic problem incumbents face in business. That is also why you see an effort from WMT to use their retail locations as part distribution centers for their online model.(pick up from store model)

 

They will have to do something like MSFT did - scrap the old unwieldy internet explorer and build a totally new browser for the new gen. This is difficult to do, but certainly possible. It would take a lot of investment and patience from investors.

 

My difficulty with WMT is - do you think the current management is not entrenched enough to overhaul the internet strategy? I would think you need new blood to come in to make such big changes (again like MSFT)

 

[Parsad]

Last year, 56% of Walmart's revenues came from groceries. Do people buy groceries online? Is it even possible?

 

Do people really buy groceries from Walmart?  Go into your nearest Walmart and look at the groceries, really look at them, or even try to do your shopping there.  Unless your local Walmart is VERY different from mine, what you will see is disgusting.  The meats are gross and the produce is worse.  I ran into a Walmart on the way home once to buy a case of Corona and some limes and walked out without any limes, because I wasn't even going to put those disgusting things in my beer and certainly wasn't going to serve them to guests.  I had to drive out of my way to a grocery store.

 

I know that they serve the lower income demographic, but that is just one of the many trends running against them as the world gets wealthier.  Their products are sub-par (a generous understatement), their online service is terrible beyond compare, the employees!!... (it appears that they must hire people from local homeless shelters and/or insane asylums), the stores are not appealing or well kept, and their groceries (meats/produce) are inedible.  Sure all this is all fixable, but will they fix it?

 

 

No disrespect intended, but if 56% of their half trillion of sales are from selling groceries, then I'd say that people really do in fact buy their groceries from Wal Mart.    Your description of the produce dept. is nothing like the Wal Mart nearest me. and regarding the world getting wealthier, I can't recall any period in history where there weren't far more poor people than wealthy people.

 

I agree.  The Walmart's in BC are very nice...no worse or better than Loblaws, Save-On-Foods or even Safeway.  The meat department is perfectly fine, although most of the meat is prepackaged, so you aren't going to get a butcher to cut it some special way for you.  It is clean and looks perfectly fine.  Not sure what Walmarts look like elsewhere, but they are just fine around here. 

 

Granted, on a busy weekend, the stores can become unwieldy because of the sheer number of people shopping there, but that isn't any different than Superstore/Loblaws or Costco.  They are just that busy!  Cheers!

[Palantir]

If WMT can replicate AMZNs competitive advantages by building out these distribution centers why have they not done so?

[Peregrine]

If WMT can replicate AMZNs competitive advantages by building out these distribution centers why have they not done so?

 

It's not easy to replicate Amazon's distribution network. Amazon itself would have difficulty doing that themselves today, in spite of a decade of learning via trial and error.

 

Add that to the fact that WMT originally built its supply chain to support brick and mortar stores in small towns and you get a sense of just how difficult that task can be.