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Description

With almost 10,000 stores worldwide, Walmart (WMT) is the world’s largest retailer. Annual revenues reach about USD 400 billion per annum, of which ¾ are generated in the US and ¼ abroad. Historically, the company has operated through supercenters and warehouses, but in more recent times the company has started opening smaller sized plazas with the aim of gaining market penetration in urban areas. Sales revenues are split equally between foodstuffs and general consumer staples such as goods, apparel, health and wellness and other leisure articles.  

Due to economic headwinds and changing consumer behavior (e.g. the shift to branded-labeled products on which the sales volumes are lower at WMT), the company has lost market share in past quarters; however, at the same time gross margins have improved slightly as a result of drastically improving operating efficiencies. Because of its size, the company has a cost advantage over its competitors. We note, however, that WMT has made important infrastructure investments with the aim of ring-fencing its business to protect it from newly entered, low-cost online competitors such as Amazon.

Aside from the US, Walmart operates in a large number of other countries with Canada, Mexico and the UK being among the largest markets. And with the objective of becoming less dependent on developed economies, WMT is now planning openings in Brazil and China.

Historically, WMT has made the right capital allocation decisions and it is still benefiting from its choices; however, competitors are quick to copy its strategies and any hard gained advantages are expected to diminish quickly to competitors such as  Target and Costco.

WMT employs just-in-time inventory and logistics systems to absolute perfection. Its scrupulous approach provides the company with an important advantage on US soil where it achieves a total sales volume of some USD 300 billion.

The company’s capital expenditure in the next few years is expected to be in the region of USD 12.8 billion. The investment plan contains the opening of over 110 smaller sized plazas, over 120 supercenters, and the opening of about 100 locations internationally. WMT’s ROI is well above the weighted average cost of capital (WACC) which we calculate at 8%.

Over the past 12 months, WMT’s share price has shown an unusual under-performance compared with the S&P 500. Under normal conditions, WMT has a perfect inverse correlation with the market, with a relative outperformance in a down-market and a relative under-performance in an up-market. We strongly expect, given the company’s asset-driven returns that this paradigm could change in the coming months.  

Strengths and weaknesses analysis / Fundamental analysis:
Strengths: 

• WMT’s asset-driven financial returns will prove more durable than margin-driven returns in a price transparent world,
• With the opening of more than 110 smaller sized plazas, WMT is expected to stabilize sales volumes,
• WMT has an excellent sales balance between food and non-food,- WMT is projecting an interesting strategy to compete against the e-commerce retailers. 

Weaknesses:

• WMT has had major international exposure for more than 10 years,
• However, it has so far failed to produce meaningful value for shareholders,
• E-commerce providers are a threat to WMT’s heavy infrastructure,
• A change in US-consumer behavior is driving consumers more and more to branded-labels where the margins are lower.