Over the past few months, no stock has attracted more interest from value investors than Walmart (NYSE: WMT). It is easy to see why Walmart was trading at $65.79 (€59.05) a share on February 16, 2016, yet it reported a TTM revenue of $484.03 billion (€434.46 billion) on October 31, 2015.
Despite its well-publicized problems, Walmart is still a really good company with tremendous resources at its disposal. At the end of third quarter 2015, those resources included $15.09 billion (€13.54 billion) in net income, $6.99 billion (€6.27 billion) in cash and short-term investments, $28.1 billion (€25.22 billion) in cash from operations, and a free cash flow of $1.724 billion (€1.55 billion).
This means that Walmart meets the most important of the classic value investment criteria: It has vast amounts of cash at its disposal. Despite that, the retail colossus displays the other vital value characteristic: It appears to be undervalued. On February 16, Walmart reported a market capitalization of $210.3 billion (€188.76 billion) and an enterprise value of $254.29 billion (€228.25 billion).
Walmart’s Revenue Decline
The problem that critics have been focusing on at Walmart is its revenue decline. During the third quarter of 2015, Walmart’s revenue fell by $1.59 billion (€1.43 billion), dropping from $485.62 billion (€435.89 billion) in June to $484.03 billion (€434.06 billion) in October.
That’s bothersome, but it is unclear if it is the start of a trend or not. Walmart bulls will point out that the company could lose that much revenue a quarter for well over a decade and still not experience serious losses.
The question that investors are asking is, is Walmart at the beginning of a long steady decline like that at Sears, the company that preceded it as America’s premier retailer, or beginning to turn around? Sears, now part of Sears Holdings (NASDAQ: SHLD), started an epic decline in the 1980s that has shown no sign of reversal.
Retailers Can Turn Around
Some old line retailers have turned around dramatically by adopting new strategies, techniques and technologies. A classic example of this is Kroger (NYSE: KR), the giant American grocer, which reported $108.87 billion (€97.72 billion) in TTM revenues on October 31, 2015.
Kroger has seen dramatic revenue growth in recent years; as recently as October 2012 it reported $94 billion (€87.07 billion) in TTM revenue. That figure grew to $99.17 billion (€89.01 billion) in October 2013 and $106.48 billion (€95.57 billion) in October 2014. The revenue increases were reflected in the bottom line; Kroger’s net income rose by 18% during the third quarter of 2015.
The revenue growth comes from a dramatic increase in sales and market share. This growth has been driven by Kroger’s ability to deep discount, strategic acquisitions of regional grocers and its successful adoption of new retailing and marketing strategies.
Kroger has effectively copied some of the best practices of its competitors. Like Aldi, it offers a large selection of low-cost private-label products in its stores. Like Walmart, Kroger has successfully built supercenters and entered a wide variety of retail niches; some Kroger locations now contain cafes, filling stations, health clinics, and even jewelry stores.
Another characteristic Kroger shares with Walmart is its ability to deep discount. Analysts predicted that prices at Roundy’s, a Wisconsin supermarket operator Kroger acquired in 2015, will fall by up to 5% when the merger becomes complete.
Kroger has also successfully entered the high-profit high grocery niche and successfully competed with Whole Foods Market (NASDAQ: WFM) and Trader Joe’s. It now makes $1 billion (€900 million) a year from sales of its private label natural and organic goods brand, Simple Truth, alone, Bloomberg Business reported.
This success and strong management have enabled Kroger to engage in strategic acquisition. The company’s purchase of the Harris Teeter supermarkets in the South gave it access to new ecommerce capabilities. The Roundy’s acquisition put Kroger in possession of Mariano’s, a well-respected upscale market with locations in Chicago, America’s prosperous, third largest city.
Is Kroger a Model for Walmart?
The important point here is that Walmart shares some characteristics with Kroger. These include a strong and creative management team that keeps a close watch on new developments in retail, a willingness to change and innovate within the industry, deep-discounting capabilities and a commitment to long-term growth.
For all of its faults, Walmart is not Sears, because the company’s leadership clearly sees the threat that Amazon.com (NASDAQ: AMZN) poses for its future. To counter that threat, Walmart CEO Dough McMillon plans to spend $1.1 billion (€990 million) on ecommerce and digital initiatives in 2017.
Those efforts include the construction of several giant fulfillment centers. One under construction in Polk County, Florida, will contain nearly two million square feet of floor space and cost around $200 million (€179.52 million) to build.
Some of these efforts are paying off. Walmart.com is now the third most popular retail website in the United States, attracting 87 million visitors in August 2015. That makes Walmart the most popular brick-and-mortar retail website in the U.S., far outstripping Target (NYSE: TGT), which attracted 60 million visitors in the same period. Unfortunately, Amazon may still have an insurmountable lead in the ecommerce race; it attracted 188 million visitors in August 2015.
Like Kroger, Walmart is also trying to take control of its stock. Kroger successfully split its stock in 2015; Walmart is taking advantage of low share prices by initiating a $20 billion (€17.95 billion) stock buyback program that will last for two years. These moves reduce the company’s vulnerability to the market and to self-proclaimed activist investors who demand that management sacrifice sustainability and long-term growth for short-term profits.
Walmart’s Strategic Moves
The stock buyback is only one of a number of strategic moves that Walmart has taken in recent years. These moves could be the beginning of a turnaround that could lead to higher profits and revenue growth at Walmart.
The most recent of which was to abandon the low-margin dollar store business model by shutting down all 102 of its Walmart Express stores. Instead, the company will focus on its core supercenter business and its Walmart Neighborhood Market stores grocery outlets that are similar to an Aldi or Kroger location. Walmart also closed a number of under-performing supercenters and some of its Sam’s Club membership stores.
A more important move could be Walmart’s expansion of its financial services business. The company is developing its own payment application to counter Apple Pay, Walmart Pay, expanding its money transfer business and even offering auto insurance in some markets. Financial services is one market that some of Walmart’s most aggressive competitors, including Dollar General, Aldi and Amazon, have avoided, so it could attract additional foot and website traffic.
Technology is another one of Walmart’s strengths. In addition to financial services, it has been experimenting with a variety of ecommerce strategies, including same-day delivery, Click and Pull, in which customers pick up online orders at stores, and even its own version of Amazon Prime. Some of these efforts have gone unnoticed because, unlike Target, Walmart is not willing to roll them out until they actually work.
Walmart’s online spending is a clever move because Walmart.com is an effective advertisement for its stores. Each person who goes there to compare prices with Amazon sees what Walmart has to offer. Customers that go there see Walmart’s products and can even place orders they can pick up at a local store and avoid all shipping costs through the website.
These strategic moves indicate that Walmart could be at the beginning of a turnaround. Unfortunately, that turnaround could take two to four years to even begin to pay off. That makes Walmart a good stock for those interested in a low-cost buy and hold opportunity; it will be several years before we know if this company can change its direction or not.
