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A writeup I did a few months back:

 

http://www.futureblind.com/2010/11/on-wal-mart-stores-inc/

 

I view Wal-Mart as a good "placeholder" position (with good payout yield: dividend + buybacks) while there aren't many great bargains in the market.

 

-----

 

Wal-Mart is often listed as a cheap large-cap, but is owned by surprisingly few value investors. One reason is that it’s big and well scrutinized and hence its price is more “efficient.”  This is partly true, and you won’t get stellar returns investing in Wal-Mart. But it is a cheap, well-managed company that returns cash to shareholders and should fare well under a number of different macro scenarios.

 

Competitive Advantages

 

The U.S. stores division of Wal-Mart (about 3/4 of pre-tax profit) has significant competitive advantages. To consumers, Wal-Mart’s brand represents one thing: low prices. Customers in the vicinity of a Wal-Mart remain loyal because they can be certain that they will have the lowest prices. And as long as Wal-Mart doesn’t slack off in the service and facility departments, there will be no good reason for customers to switch.

 

Wal-Mart can have the lowest prices because of their (1) efficient operations and (2) economies of scale. Operationally, expenses are lower because of their non-unionized workforce and other shrewd cost management (shrinkage, inbound logistics, etc.). This penny-pinching mentality has been ingrained in the company since it was founded by Sam Walton. The biggest cost advantages are from Wal-Mart’s economies of scale. The most obvious consequence is purchasing power—Wal-Mart can buy products at lower prices because they can purchase in such enormous quantities. But the biggest and most un-replicable scale advantage is geographic concentration. Wal-Mart has a “hub and spoke” system of a distribution centers with 100-150 stores around them, all within about a day’s drive. Because of this concentration, costs can be distributed over a larger base of potential customers: distribution, advertising, regional management, etc. Wal-Mart also has some of the most technologically advanced merchandise and logistics systems in the world. This is something that smaller or more spread-out retailers can’t match.

 

Capital Investment

 

Wal-Mart has turned their inventory at a faster rate for each of the past 7 years. This is due to better inventory management and logistics, which have allowed Wal-Mart to decrease their inventory per square foot to around $35, giving them an inventory turnover of 12x. This compares to turnover of 13-14x for Costco and 9x for Wal-Mart a decade ago. Return on inventory (margins * turnover) is at an all-time high. This, along with a slightly higher payables period, has turned working capital into a source of capital instead of a use of it.

 

Recent pre-tax ROIIC (return on incremental invested capital) is about 20% for the entire company, which includes lower-returning international acquisitions. Figures aren’t broken out perfectly, but I estimate that ROIIC for the Wal-Mart Stores division is around 30% with the International and Sam’s Club divisions at 10% and 14%, respectively. These returns once again reflect Wal-Mart’s advantages in the U.S. and their troubles replicating those advantages overseas.

 

Valuation

 

Though the price has been up over the past 3 months, free cash flow yield on equity is still around 6-7%, most of which is returned to shareholders through dividends (2.2% yield) and share buybacks (2-3% a year).  Current valuation is also lower than historic multiples. In fact, earlier this summer when shares hit $48, trailing EV/EBIT was 8.6x, the cheapest multiple Wal-Mart has traded at since 1985.

 

$55 * 3,636.5m shares + $37.8b net debt = $237 billion EV

Trailing EBIT = $24.8b; EV/EBIT = 9.6x

 

Sum of parts valuation:

 

$33b – Walmex stake (Market value of $48b, 68.5% stake)

$30b – Other International (10x pre-tax FCF)

$14b – Sam’s Club (11x pre-tax, vs. 10x for BJ and 13x for COST)

$240b – Wal-Mart Stores (15x pre-tax)

($38b) – Net debt

$279b equity value ($77/share)

 

Growth

 

U.S. stores are still being reformatted and converted into Supercenters: the percentage of stores in the Supercenter format is 74% versus 28% a decade ago. Also, the Neighborhood Market (NM) concept, which is basically a stripped-down grocery store, is still slowly being rolled out. Both should take share from lower-end grocery stores, and grow square footage 3-4%/year with another 1-2%/year growth in sales per square foot.

 

As for location growth, it’s hard to picture that many more Wal-Marts in the U.S. But there is still some opportunity here. In their home state of Arkansas, there is one Wal-Mart store for every 32,000 people. With NM’s that number could probably go lower, but that’s just about saturated. A bigger state like Texas has about 66,000 people per store which I figure is a reasonable goal for other areas. To push California to that figure, they’d have to open around 400 stores. To push other states to that level would add another 900. Wal-Mart has historically had trouble with major metropolitan areas like NYC, but that may change as they experiment with NM’s and smaller store formats.

 

Most new growth for the overall company will come from the International division. Within International, organic growth in emerging markets (South America and China) offers the best opportunities. The biggest segment is Wal-Mart Mexico (Walmex), which now includes Central America, with 2,122 stores. Walmex’s operating income has more than doubled over the past 5 years to $2 billion, and is growing 13% a year.

 

The biggest risk here is achieving low return on investment in new markets, primarily in growth through acquisitions. They haven’t done well in that regard over the past 5 years, the reason being they have no real advantages in starting or acquiring new companies far from their dominant U.S. business. They recently made an expensive offer for Massmart, a dominant South African discounter, and are bidding on a retailer in Indonesia. Hopefully they will be more disciplined in the future regarding expansion into new areas overseas.

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Hi Maxprogram,

 

I appreciate your posting your thoughts re Walmart.  I'm no longer holding, but there is some operational terminology in Walmart's press releases that I've wondered about.  Perhaps with your study of Walmart you understand what they are saying?  In their August/10 press release, for instance, they said...

 

"We continue to focus on our priorities of growth, leverage and returns. ... Our teams leveraged operating expenses for the third consecutive quarter, through their commitment to the productivity loop."

 

What does it mean to "leverage operating expenses"?  Is that like your illustration of sharing distribution costs by clustering stores?

 

And what is the "productivity loop", as something that employees can be committed to?  Is there a concept being trained to people?

 

Thanks for any light you can shed on Walmart's operational culture.

 

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"We continue to focus on our priorities of growth, leverage and returns. ... Our teams leveraged operating expenses for the third consecutive quarter, through their commitment to the productivity loop."

 

If you want my opinion it never means anything. If an educated person can't understand a sentence then that means the person that wrote it did not want you to understand. It sound neat... but seriously what's a productivity loop, and why not explain it in simple terms for the shareholders?

 

BeerBaron

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I went to Google and searched on the phrase:  "What is a productivity loop?"

 

http://intellacore.blogspot.com/2009/10/productivity-loop.html

 

Take Wal-Mart as an example. It sells similar products as its competitors, yet it is more successful than its competitors. The Wal-Mart and Kmart in the same shopping complex do not compete against the each other. Instead, the supply chains of each company compete against each other. How? Wal-Mart has always focused on improving sales, cutting costs, achieving greater efficiency in distribution, and using innovative IT tools. All of these strategies allow Wal-Mart to lower prices. Additionally, the company has a bigger supply chain, with more suppliers, and then has more opportunities to bring customers into their stores. Therefore, Wal-Mart is more competitive. This example illustrates the productivity loop - lower costs, then lower prices, sell more, and then increase profits.

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Woodstove:

 

Definitely some “corporate speak” going on there, so I can only make an educated guess.

 

I believe the productivity loop is their term for the cycle of (lower costs > lower prices > higher sales). (Edit: Ericopoly's post also illustrates this.)

 

As for “leveraging operating expenses”, I’m not quite sure. Despite how efficient their logistics and supply operations already are, there is still a fair amount of improvement remaining especially with advancements in technology. For example, they are taking over distribution for their suppliers, which takes advantage of their geographic concentration I mentioned and reduces costs. The CEO of the US Division is very engineering-oriented, from what I hear. If you read the annual letter to shareholders there’s more on this, but I think “leveraging operating expenses” could simply mean increasing expenses at a slower rate than sales.

 

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Thanks!  That's ok with me, if they have corporate-speak as an efficient way of communicating a concept.  But I hope it gets explained to shareholders!  The descriptions sounds sensible.  Good idea, Eric, to go to the internet!

 

I had no idea either -- I agree, why not just speak plainly.

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Every time I hear those esoteric terms it reminds me of a Dilbert episode where the employees have a BINGO card with buzz words like Proactive, Efficient, Synergy, Paradim, Etc... You gotta give Scott Adams credit for bringing plain English back with common sense.

 

As for productivity loop, thanks for the search Eric. I still don't understand how the words productivity and loop put together could get to the definition you gave tough.

 

I'm in the Buffet camp on this one most Annual Reports makes me wanna throw up.

 

BeerBaron

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I worked in corporate America for more than 40 years. Every three to five years we re-invented our business via new corporate-speak. Actually little ever changed, except what we called things.

 

The new lingo typically comes from highly paid consultants that coach executives with their new buzz words. The consultants either write their own book to expand the use of their terminology or embrace some other author's work.

 

Personally I'm working on an investing-value-loop process, but I can't go into any details yet. You'll have to wait for the book.  :)

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  • 3 weeks later...

Another strike against Walmart this morning.  Target buying out Zellers Canada.  Zellers has been the only coast to coast competition to Walmart in their particular space, and a pretty ineffectual one at that.  I am guessing that Target will do well here once they have the supply chains in place.  Zellers has not done well since Walmart expanded here. 

 

The problem with being number one (WMT) in a space is that everyone wants what you have and eventually someone will be able to take it.

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A writeup I did a few months back:

 

http://www.futureblind.com/2010/11/on-wal-mart-stores-inc/

 

I view Wal-Mart as a good "placeholder" position (with good payout yield: dividend + buybacks) while there aren't many great bargains in the market.

 

-----

 

Wal-Mart is often listed as a cheap large-cap, but is owned by surprisingly few value investors. One reason is that it’s big and well scrutinized and hence its price is more “efficient.”  This is partly true, and you won’t get stellar returns investing in Wal-Mart. But it is a cheap, well-managed company that returns cash to shareholders and should fare well under a number of different macro scenarios.

 

Competitive Advantages

 

The U.S. stores division of Wal-Mart (about 3/4 of pre-tax profit) has significant competitive advantages. To consumers, Wal-Mart’s brand represents one thing: low prices. Customers in the vicinity of a Wal-Mart remain loyal because they can be certain that they will have the lowest prices. And as long as Wal-Mart doesn’t slack off in the service and facility departments, there will be no good reason for customers to switch.

 

Wal-Mart can have the lowest prices because of their (1) efficient operations and (2) economies of scale. Operationally, expenses are lower because of their non-unionized workforce and other shrewd cost management (shrinkage, inbound logistics, etc.). This penny-pinching mentality has been ingrained in the company since it was founded by Sam Walton. The biggest cost advantages are from Wal-Mart’s economies of scale. The most obvious consequence is purchasing power—Wal-Mart can buy products at lower prices because they can purchase in such enormous quantities. But the biggest and most un-replicable scale advantage is geographic concentration. Wal-Mart has a “hub and spoke” system of a distribution centers with 100-150 stores around them, all within about a day’s drive. Because of this concentration, costs can be distributed over a larger base of potential customers: distribution, advertising, regional management, etc. Wal-Mart also has some of the most technologically advanced merchandise and logistics systems in the world. This is something that smaller or more spread-out retailers can’t match.

 

Capital Investment

 

Wal-Mart has turned their inventory at a faster rate for each of the past 7 years. This is due to better inventory management and logistics, which have allowed Wal-Mart to decrease their inventory per square foot to around $35, giving them an inventory turnover of 12x. This compares to turnover of 13-14x for Costco and 9x for Wal-Mart a decade ago. Return on inventory (margins * turnover) is at an all-time high. This, along with a slightly higher payables period, has turned working capital into a source of capital instead of a use of it.

 

Recent pre-tax ROIIC (return on incremental invested capital) is about 20% for the entire company, which includes lower-returning international acquisitions. Figures aren’t broken out perfectly, but I estimate that ROIIC for the Wal-Mart Stores division is around 30% with the International and Sam’s Club divisions at 10% and 14%, respectively. These returns once again reflect Wal-Mart’s advantages in the U.S. and their troubles replicating those advantages overseas.

 

Valuation

 

Though the price has been up over the past 3 months, free cash flow yield on equity is still around 6-7%, most of which is returned to shareholders through dividends (2.2% yield) and share buybacks (2-3% a year).  Current valuation is also lower than historic multiples. In fact, earlier this summer when shares hit $48, trailing EV/EBIT was 8.6x, the cheapest multiple Wal-Mart has traded at since 1985.

 

$55 * 3,636.5m shares + $37.8b net debt = $237 billion EV

Trailing EBIT = $24.8b; EV/EBIT = 9.6x

 

Sum of parts valuation:

 

$33b – Walmex stake (Market value of $48b, 68.5% stake)

$30b – Other International (10x pre-tax FCF)

$14b – Sam’s Club (11x pre-tax, vs. 10x for BJ and 13x for COST)

$240b – Wal-Mart Stores (15x pre-tax)

($38b) – Net debt

$279b equity value ($77/share)

 

Growth

 

U.S. stores are still being reformatted and converted into Supercenters: the percentage of stores in the Supercenter format is 74% versus 28% a decade ago. Also, the Neighborhood Market (NM) concept, which is basically a stripped-down grocery store, is still slowly being rolled out. Both should take share from lower-end grocery stores, and grow square footage 3-4%/year with another 1-2%/year growth in sales per square foot.

 

As for location growth, it’s hard to picture that many more Wal-Marts in the U.S. But there is still some opportunity here. In their home state of Arkansas, there is one Wal-Mart store for every 32,000 people. With NM’s that number could probably go lower, but that’s just about saturated. A bigger state like Texas has about 66,000 people per store which I figure is a reasonable goal for other areas. To push California to that figure, they’d have to open around 400 stores. To push other states to that level would add another 900. Wal-Mart has historically had trouble with major metropolitan areas like NYC, but that may change as they experiment with NM’s and smaller store formats.

 

Most new growth for the overall company will come from the International division. Within International, organic growth in emerging markets (South America and China) offers the best opportunities. The biggest segment is Wal-Mart Mexico (Walmex), which now includes Central America, with 2,122 stores. Walmex’s operating income has more than doubled over the past 5 years to $2 billion, and is growing 13% a year.

 

The biggest risk here is achieving low return on investment in new markets, primarily in growth through acquisitions. They haven’t done well in that regard over the past 5 years, the reason being they have no real advantages in starting or acquiring new companies far from their dominant U.S. business. They recently made an expensive offer for Massmart, a dominant South African discounter, and are bidding on a retailer in Indonesia. Hopefully they will be more disciplined in the future regarding expansion into new areas overseas.

 

 

Many thanks maxprogram. That's the best short write up on WalMart I've seen.  :)

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  • 1 month later...
  • 3 months later...

Not a company I'd buy, but here's an argument for it being cheaper than in 2009 right now. I thought I'd add it to the pile here:

 

http://www.gurufocus.com/news/138076/why-steven-romick-thinks-walmart-wmt-stock-is-cheaper-than-it-was-in-march-2009

 

Wal-Mart stock was traded at as low as $46.5 in March 2009. It appreciated about 15% to today’s $53.7 over the past two 27 months. Why is it cheaper today? Because Wal-Mart’s earnings per share has grown by more than 15% during the past 27 months. Since the fiscal year ended in Jan. 2009, Wal-Mart has grown its total revenue by 5%. The company’s net profit margin expand from 3.3% to 3.9%. Its earnings has grown 23%. In the meantime, Wal-Mart has retired more than 11% of its shares during the past 27 months. Therefore its earnings per share has grown 34% over the past 27 months.
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  • 1 month later...

Bill Cara update on Walmart on 8/7:

 

http://caracommunity.com/content/bill-caras-week-review-32-2011-0

 

"This week in the quarter-yearly WIR 6-19-32-45 series; Value Line reported on one DJIA component, Walmart (WMT), a Cara 100 company.

 

Previously I stated in this space: “All traders carry their biases into portfolio management decisions. I may not be a big trader of WMT, but I certainly understand the continuum of financial and operational success of the company, if not the share price.” Now, I can tell you that, late this week, we bought some WMT. In fact, we built a new Cara 100 and started to put cash to work at the low prices of the past few days.

 

Clearly I like the Walmart stock at these levels. You don’t buy WMT to flip it, but as part of a core portfolio, because over the years the company has strong and improving fundamentals.

 

This Friday, Value Line lowered the 6-month Technical (“short-term”) outlook from an outperforming ‘2’ to a market average ‘3’. I think they panicked. Maybe, on the other hand, VL decided to weight all the Dow 30 as a ‘3’? Maybe they decided to over-weight the cyclicals? No; I think they just panicked.

 

There are many times to seize the opportunity in the cyclicals, but seldom do you see these situations arise in the staples, and when you do, you have to go for it, i.e., if you want a fairly well-balanced portfolio.

 

Interesting is that 54% of Walmart’s US revenue comes from groceries, where huge volume enables the company to reduce the prices below any competitor. Also noted; the public doesn’t want to food shop in mega-stores, so Walmart is proceeding to build 300 small-format stores in the next five years.

 

I note that a lot of cash flow is going to buy back shares. Within a couple years, there will likely be just 2.90 billion shares outstanding from today’s 3.47 billion, and well down from the 4.45 billion outstanding ten years ago. While the share price may not have done much over this time, the per share revenues, cash flow, earnings, and book value has almost tripled. The dividends have gone from $0.27 to $1.44/share for 2011 and are expected to be $1.75 for 2012. The latter would, as already pointed out, yield a high return of 3.44% on today’s cost base. Return on shareholder equity (23.0%) and Gross Margin (25.0%) is the highest ever and will likely hold or possibly increase a tad. Global revenues are expected to continue growing at a rate of +9.0% or more per year.

 

At this week’s close of $50.85, it makes sense to me to buy with a view to a long-term hold."

 

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  • 8 months later...

I live in Mexico. I understand that sometimes it's impossible to do anything real estate related without lubricating the system.

 

But to use bribes as a strategy in scale to crush the competition directly from the very top? And let's not talk about the hush-up.

 

http://www.nytimes.com/2012/04/22/business/at-wal-mart-in-mexico-a-bribe-inquiry-silenced.html

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  • 3 years later...

Anyone kicking the tires of WMT after today's bloodbath?

 

When they come out and detail that sales will grow 3-4% annually and that they will generate $80bn of cash over the next 3 years, on a market cap of $190bn, my ears definitely start to prick up!

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I would be somewhat interested in learning more if they were buying back shares like crazy right now.

 

To be fair they announced that they have fully used up their previous share repurchase allocation and committed to buy back $20bn of stock over the next 2 years.  That's more than 10% of market cap (today) over the next 2 years.

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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?

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