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Company Name: Wal-Mart Stores Inc.
Stock Name/Ticker: Wal-Mart Stores Inc. / WMT
Coverage Region: USA
Wal-Mart Stores, Inc., doing business as Wal-Mart, is an American multinational retail corporation that operates a chain of hypermarkets, discount department stores and grocery stores.
Headquartered in Bentonville, Arkansas, the company was founded by Sam Walton in 1962 and incorporated on October 31, 1969. As of January 31, 2016, Walmart has 11,528 stores in 27 countries, under a total of 72 banners.
Walmart is the world's largest company by revenue, according to the Fortune Global 500 list in 2014, as well as the biggest private employer in the world with 2.2 million employees. Walmart is a family-owned business controlled by the Walton family. Their holding company, Walton Enterprises, is one of the world's most valuable companies by market value, and is also the largest grocery retailer in the U.S. In 2015, it generated 59.8 percent of its US$288 billion sales in the U.S. from its grocery business.
The company was listed on the New York Stock Exchange in 1972. In the late 1980s and early 1990s, the company rose from a regional to a national giant. By 1988, Walmart was the most profitable retailer in the U.S. and by October 1989, it had become the largest in terms of revenue. Walmart is also ranked the world's 18th largest public corporation by revenue, according to the Forbes Global 2000 list. Wal-Mart has tremendous real estate holdings (95+% of US store base is owned) and 35% of international stores.
Unexpectedly, Wal-Mart stock has badly underperformed the retail sector and the broader market in 2015, being the worst 2015 Dow stock during a year of spectacular oil price declines and a collapse of commodity prices. This is uncommon as retailers operate at lower expenses in such an environment.
Wal-Mart has recently closed 269 stores globally and ended the unsuccessful Wal-Mart Express. The store closures on the other hand only accounted for 1% of total sales. Generally, companies in the business of consumer staples can grow their profits and ultimately their stock prices by reducing costs.
We believe that the company is still at competitive advantage given tumbling oil and gas prices, considering its exceptional stock’s performance in 2016 with a 7+% increase since the turn of the year. The recent announcement of its strategy to increase the sales per square foot number in its superstores through pick up and e-commerce connectivity, coupled with their consistent dividend growth, buybacks, free cash flow levels and its present valuation will keep on attracting income investors. With a high risk of the US entering a recession, Wal-Mart should act as a flight to safety in equities if the S&P 500 continues to fall.
We view Wal-Mart Stores, Inc., possesses strong economic moat.
Wal-Mart business model is based on selling a wide variety of general merchandise at low prices. The average U.S. Wal-Mart customer's income is below the national average, and analysts estimated that more than one-fifth of them lack a bank account. A 2006 Wal-Mart report also indicated that Wal-Mart customers are sensitive to higher utility costs and gas prices.
"Saving people money so they can live better lives". This reflects the three main groups into which Wal-Mart categorizes its 200 million customers: "brand aspirationals" (people with low incomes who are obsessed with names like KitchenAid), "price-sensitive affluents" (wealthier shoppers who love deals), and "value-price shoppers" (people who like low prices and cannot afford much more).
Study found that some small towns can lose almost half of their retail trade within ten years of a Wal-Mart store opening. Wal-Mart's entry into a new market has a profound impact on its competition. When a Wal-Mart opens in a new market, median sales drop 40 percent at similar high-volume stores, 17 percent at supermarkets and 6 percent at drugstores.
Wal-Mart has an average 10-years EPS growth rate of 7.29%.
Lower percentage is reported in the recent 5 years. As of Dec 2015 reported on thestreet.com, their net operating cash flow has increased to $4,903.00 million or 37.33% when compared to the same quarter last year. The firm exceeded the industry average cash flow growth rate of -5.70%. They maintain healthy RoE reading at ~19% in the last 10 years.
The debt-to-equity ratio is somewhat low, currently at 0.56, and is less than that of the industry average, implying that there has been a relatively successful effort in the management of debt levels. Even though the company has a strong debt-to-equity ratio, the quick ratio of 0.17 is very weak and demonstrates a lack of ability to pay short-term obligations.
The gross profit margin is only at 25%, although it has managed to increase from the same period last year regardless of Wal-Mart's low profit margin. Despite the mixed results of the gross profit margin, Wal-Mart's net profit margin of 2.81% compares favorably to the industry average. We would rate PIEC score of ¾.
The possible risks include inflation and science & technology risks. Wal-Mart falls under the consumer staples sector, and characterized as noncyclical. Non-cyclical stocks are expected to outperform the market when economic growth slows due to their low price elasticity of demand. However, as there are many options to shop for low prices among competitors, this leaves Wal-Mart little room to raise prices of increase demand for their products, which eventually cutting on the profit margin. The power of change Internet has brought into people’s lives is indisputable. The convenience of online shopping has since replaced the need to have to leave home to shop for clothing, home essentials, groceries and etc. Wal-Mart is compelled to invest even more over the past several years as online sales, as a whole, continue to show massive growth. Cost remains a big issue for Wal-Mart’s experiment with online service.
Using the VIC calculator, we find that Wal-Mart achieves business confident level of 7 accordingly to the analysis. Based on long term EPS growth rate of 7.29%, the current price is overvalued with negative margin of safety.
Despite the steadily increasing dividends payout in the last 10 years, the latest dividend at 2.85% falls short of our required 5% dividend yield. The current P/B at 2.7 indicates that this stock is overvalued.
Although Wal-Mart has the lowest P/B (Target; 2nd lowest at 3.8) and highest dividend yield (Average of 1.75%) of the retail group, these valuation ratios leave a big gap to meet our requirements. Wal-Mart is more about capital preservation (Asset Play) in view of its slow but steady growth. This stock is neither attractively valued for investors seeking earnings-driven price appreciation nor dividend play.
Based on the FY17 Guidance on the projected figures on the key ratios, we shall review this stock again by last quarter of 2016 on its addition to our portfolio.
Wal-Mart Stores Inc., is headed by Gregory B. Penner, son-in-law of S. Robson Walton and the grandson-in-law of Sam Walton, who serves as Chairman of the Board. Doug McMillon serves as President and Chief Executive Officer. Wal-Mart is a family-owned business, controlled by the Walton family. After Sam Walton's death in 1992, Don Soderquist, Chief Operating Officer and Senior Vice Chairman, became known as the "Keeper of the Culture”. Sam Walton's heirs own over 50 percent of Walmart through their holding company, Walton Enterprises, and through their individual holdings. Wal-Mart is governed by a fifteen-member Board of Directors elected annually by shareholders.
The last dividend date of Wal-Mart is on February 19, 2015. The Board of Directors approved the fiscal 2016 annual dividend of $1.96 per share, an increase compared to the fiscal 2015 annual dividend of $1.92 per share, representing 42 consecutive years of dividend increases. For fiscal 2016, the annual dividend will be paid in four quarterly installments of $0.49 per share.
Shareholder returns were provided through dividends and share repurchases.
Wal-Mart Sales Strategies
Wal-Mart has plans to strengthen supercentre format, optimize neighbourhood markets, add supply chain capabilities and build a digital relationship with customers, all in an effort to increase their sales from year 2016 onwards.
Low income group as core customer
The company’s core customers fall in the $35,000 per year income group. As spending on gas and energy bills makes up a larger percent of their disposable income versus higher income demographics, incremental cash benefits are expected to be particularly acute. The average driver will save about $38 a month on gas in the fourth quarter, according to data from Bloomberg Intelligence. In total, consumers are spending 80 percent of their gas savings on goods and services, according to JPMorgan Chase & Co. Lower gas prices may coax shoppers to shop more frequently at Wal-Mart.
Private transportation fleet
Most retailers outsource ground transportation to trucking companies. Wal-Mart however has its own huge private transportation fleet consisting 6,650 delivery trucks that deliver 80 percent of its merchandise directly from Wal-Mart’s distribution centres to its stores. Wal-Mart will realize significant cost benefits due to the ongoing gas price deflation.
No slotting fees for suppliers
Unlike many other retailers, Wal-Mart does not charge slotting fees (listing fees) to suppliers for their products to appear in the store. Instead, it focuses on selling more popular products and provides incentives for store managers to drop unpopular products. The company's strategy has always been to offer the lowest prices possible, undercutting essentially all traditional retailers.
Investment on e-Commerce
Wal-Mart has been frantically trying to beef up its online presence to take on one of its largest competitors, Amazon.com. Wal-Mart has invested more resources into its e-commerce platform, testing faster shipping services and even the use of drones in its deliveries. Wal-Mart has sped up its free pick-up service for online groceries bringing the number of stores that offer the service to 140 in 25 markets. Wal-Mart board of directors consists of IT experts including Marissa A. Mayer, who is President and CEO of Yahoo!, Inc. and Kevin Systrom, who is CEO and Co-Founder, Instagram.
Free pick-up services for online groceries
Wal-Mart take full advantage of its 4,500+ U.S. stores in lowering delivery costs for its customers to give them a better incentive to shop online. Wal-Mart's Site-To-Store program, which was introduced in March 2007, enables walmart.com customers to buy goods online with a free shipping option, and have goods shipped to the nearest store for pickup. After all, studies have shown that ordering online costs 50% more than making in-store purchases. Wal-Mart stores are geared to handle in-store pickups of online orders by customers, with the recent opening of a 1-million square foot facility in Atlanta bringing its fully-optimized fulfilment centres to five.
Dynamic pricing is Amazon’s way of adjusting the prices of its products on an almost daily basis. Recently Wal-Mart online prices have remained within 5% of Amazon’s, and have been shifting with almost Amazon-esque regularity. The mere 5% difference between Amazon prices and Wal-Mart's is the best by any online retailer.
Wage hikes & training for employees
Wal-Mart is also investing in its employees by raising wages, improving training, and boosting benefits, all in an effort to reduce turnover, improve productivity, and make its stores more pleasant for customers. Better trained and paid staff and e-commerce gains should be able to up-sell customers on higher ticket items which carry more margins.
These actions will cause earnings to decline both this year and next year, according to the company. Once these near-term headwinds are overcome, free cash flow will return to (if not increase) former levels.
Wal-Mart now focuses on other payment options, such as increased use of six- and twelve-month, zero-interest financing, making it even more affordable for low-income shoppers.
Wal-Mart also introduced its first-ever mobile payment system called “Walmart Pay.” The payment system can be linked to any major credit card, debit card, prepaid credit card, or Walmart gift card. The mobile app also works with both “iOS”- and “Android”-based devices. With the launch of Walmart Pay, the company becomes the only retailer to offer its own customized payment solution to customers. The payment feature will be launched nationwide by the first half of 2016.
The neat part about Walmart Pay is that instead of becoming a rival for “Apple Pay,” the company is emulating something else—the Starbucks app. The coffee giant’s app’s mobile payment feature has grown tremendously since its launch. Right now, mobile payments account for 20% of all of Starbucks’ in-store transactions in the U.S., more than double the figure from a year ago. By integrating the payment feature into the Walmart app, Walmart could enjoy something quite big: the 22 million customers who are already actively using the Walmart app each month. The Walmart app also ranks among the top three retail apps in both the Apple and Google app stores.
As Wal-Mart grows more in areas such as superstores and e-commerce, it will wind down markets and stores where it hasn't been able to make an impact. In Brazil, for example, the company will close 60 stores as profit margins are too low. The stores that are being closed represent less than 1% of both global square footage and turnover which means earnings will only be adversely impacted in the near term before e-commerce and pick-up gain more traction
This should be good news for income investors in that the company is being prudent and disciplined in how it wants to grow. Wal-Mart's strategy is to significantly increase its net dollar amount in sales per square foot in its superstores. Protecting the financials is key; so expect at least a 2% rise in the quarterly dividend to $0.50 a share in fiscal 2017.
Wal-Mart possible downsides include the following:
Wage Hikes & Training for Employees
Wal-Mart was constantly heckled over its low pay for its workers. Following Wal-Mart employees’ strike during Black Friday 2014 in hopes of achieving higher pay, in February 2015, Wal-Mart announced their plan to hike the minimum wages for its US workforce, from minimum wage to $9/hour for 2015, and again to $10/hr in 2016.
While this should help solve Wal-Mart’s high employee turnover rate, it comes at a steep cost. The company estimates the wage hike will cost an additional of $1.2 billion and $1.5 billion respectively in 2015 & 2016. Wal-Mart has also pledged to continue providing employees with training to help promote career growth.
Investment on E-Commerce
Online shopping continues to be a massive area of growth and Amazon dominates the space. Wal-Mart is attempting to take some shares away from its competitor; however this move requires time and resources.
Wal-Mart’s e-commerce sales growth has slowed down from 30% recorded during Q3 2013 to just 10% during Q3 2015. Wal-Mart’s online sales totaled $13.2 billion through the first nine months of the current year, compared to $71.8 billion by Amazon, yet Amazon reported 23% sales growth during the last quarter, demonstrating the huge gulf between the two companies. Wal-Mart remains the second-largest online retailer, but risks losing too much market share to its rivals if its online sales growth continues on its downward spiral.
Conclusively, net income could fall further with wage hikes, e-commerce investment and re-modelling of superstores. Elevated capital expenditure spend can upset long term Wal-Mart investors as cash flows (which affect buybacks and dividend growth rates) are always smaller when more money is being pumped back into the business.
Nevertheless, as the top line has held up for Wal-Mart US, the bearish shift in sentiment was attributed to earnings pressure from labour/e-commerce investments, and with expectations now reset, we see little incremental earnings risk at this point.
[Case study written on 16 Mar 2016 by Winon Lye, Malaysia]
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