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Wal-Mart Earnings Preview: Revenue Still 3X That Of Amazon, But The Math Is Formidable – Wal-Mart Stores, Inc. (NYSE:WMT)

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Wal-Mart (WMT), the retail giant that was the “Amazon” (AMZN) of the 1980’s and 1990’s to mainstream America, reports their fiscal Q2 ’18 financial results before the opening bell on Thursday, August 17th, 2017.

While analyst consensus will be watched carefully, which is expected to come in at $122.8 billion in revenue and $1.07 in earnings per share for expected year-over-year growth of 3% and flat respectively, it is hard to avoid the bigger picture math happening around the “dueling banjo’s” of the mass merchant retail space.

Most pundits blame Amazon for the carnage amongst mass merchant retailers like Kohl’s (KSS), Macy’s (M), Dillard’s (DDS), Nordstroms (JWN) and J.C. Penney (JCP) but while the catalyst was Amazon’s price pressure certainly and their lighting-like move into apparel, the nail in the respective coffin’s will come from an invigorated and more efficient Wal-Mart, but it is unlikely that – over the long run – even a more efficient Wal-Mart operation with more products being sold online via Jet.com, won’t help the 20-year headstart Wal-Mart gave to Amazon.

And therein lies the longer-term issue: as Wal-Mart was the death star to higher-cost, more inefficient retailers like KMart, and Sears for most of the 1980’s and 1990’s, Amazon has now assumed that cost and price leadership (every day low price) to steal Wal-Mart’s phrase, and I do think Wal-Mart will be running up hill, or – like Sisyphus – pushing that rock up a hill for a very long, long time to try and stave off market share losses to Amazon.

Here is the math that becomes a problem:

WMT rev’s y/y gro AMZN rev’s y/y gro
2019 est $507 2% $248 20%
2018 est $495 2% $206 21%
2017 est $486 1% $170 25%
2016 – actual $483 0% $136 27%
2015 – actual $486 2% $107 20%
2014 – actual $476 2% $89 19%
2013 – actual $469 5% $74.5 22%
2012 – actual $447 6% $61 27%
2011 – actual $422 3% $48 41%
2010 – actual $408 1% $34 40%
10 yr avg rev gro rt 2% 26%

Source: internal spreadsheet. Wal-Mart has been modeled since the mid 1990’s and revenue and EPS are available from 1991.

Since Wal-Mart’s fiscal year end Jan 31 of each calendar year, 2010 is actually calendar 2009, with the year closing on Jan 31, 2010.

WMT’s “2017 est” revenue is actual revenue for fiscal year 2017

The math of the revenue growth is formidable: in 2010 Amazon was less than 10% of Wal-Mart’s revenue, but today, Amazon is expected to be roughly half of Wal-Mart’s revenue by 2019.

That still gives WalMart time, though.

Just torturing the revenue numbers and the percentage growth, my guess is Amazon will be generating the same amount of revenue as WMT within 4 – 5 years. Maybe sooner if the health care entry works for Amazon.

So where does that leave Wal-Mart shareholders ?

There could still be upside for the stock as Wal-Mart continues to gain share from the more inefficient bricks-and-mortar that operate today.

Wal-Mart revenue is now 53% grocery, and that is low-margin, higher-turnover product that fits perfectly with Wal-Mart business model. Can Wal-Mart continue to gain share in grocery versus Kroger, Safeway, et al ? Here is an article from April, 2017 that talks about the country’s 10 largest grocery chains – presumably Wal-Mart is competing with all of them in some form or fashion today.

The other plus today is Jet.com and the significantly-expanded online offering of Wal-Mart products for traditional Wal-Mart customers. Anecdotally, I’ve heard people talk about how Wal-Mart has made it easier to shop online, and the stores will now pack everything up for the Wal-Mart customer BUT, the Wal-Mart shopper still has to drive to the store to pick up the items.

Will that extra step of picking up the items purchased online at Wal-Mart, will that be the eventual killer for Wal-Mart ? Why not use Amazon and have the exact same online experience and get the goods delivered to your door ? Is there a “local retailer/employer” aspect to this that people will support versus the impersonal Amazon ?

Wal-Mart by the numbers:

Q2 ’18 est Q1 ’18 act q4 ’17 Q3 ’17
2020 EPS est $4.91 $4.92 $4.92 $5.03
2019 EPS est $4.60 $4.60 $4.54 $4.61
2018 EPS est $4.36 $4.36 $4.33 $4.34
2020 exp EPS gro rt 7% 7% 8% 9%
2019 exp EPS gro rt 6% 6% 5% 6%
2018 exp EPS gro rt 1% 1% 0% 0%
2020 P.E 16(x) 16(x) 14(x) 14(x)
2019 P.E 18(x) 17(x) 15(x) 15(x)
2018 P.E 19(x) 18(x) 16(x) 16(x)
2020 rev est ($’s bl’s) $520.5 $520 $521 $530
2019 rev est $507.4 $506.8 $506 $508
2018 rev est $495.0 $495 $494 $496
2020 est rev gro rt 3% 3% 3% 4%
2019 est rev gro rt 2% 2% 2% 2%
2018 est rev gro rt 2% 2% 2% 2%

Source Q2 ’18 estimates from Thomson Reuters I/B/E/S as of 8/12/17

1.) Both revenue and EPS estimates have finally started to firm up, and while not climbing sharply, are not being revised lower either.

2.) Coming into Thursday’s earnings, WalMart stock has railled to the $80 – $81 area but EPS estimates haven’t supported the move yet.

Valuation:

Walmart’s P.E-to-Growth (PEG) ratio is pretty lofty (compare the above P.E’s to the earnings growth rates) but Wal-Mart’s cash-flow valuation looks a lot more appealing.

WMT is trading at 8(x) cash-flow and 12(x) free-cash-flow both trailing twelve-months, and WMT sports a 4% free-cash-flow yield.

Long-term-debt-to-capital has actually fallen to 17% from 21% the last few years. Why this is significant will be discussed shortly.

Wal-Mart’s dividend as a percentage of free-cash-flow is in the low 30% range so its very conservative and over the last 12 quarters Wal-Mart has only returned 63% of their free-cash-flow to shareholders.

Technical analysis:

WalMart monthly chart

Analysis / conclusion:

The biggest opportunity for Wal-Mart shareholders probably will come from the Walton Family Trust and the Walton family limiting their position to 50% of Wal-Mart’s stock.

The implications of this restriction is that Walmart (the company) cant be aggressive in repurchasing stock, because (as I understand it) as the float is diminished, the shares within the Walton Family Trust increase as a percentage of shares outstanding, and the Walton Family doesn’t like it when that percentage rises over 50%. Hence, because Wal-Mart is limited in stock repurchases, they are now paying down debt, which in this environment is ok, but think of the EPS growth that could have been, with free-cash-flow being used for share repurchases.

Wal-Mart has been one of the few large-cap companies that hasn’t goosed EPS by spending all their free-cash-flow on returning capital to shareholders (Costco is another) or spending more than 100% of free-cash-flow and supplementing it with debt.

Look at what Home Depot did for their share price, aggressively buying back stock with debt. I dont agree with that strategy entirely, but the stock has risen from $35 to $150.

If the Walton Family would let up on that 50% restriction or even sell shares, it might allow the company more flexibility in terms of returning free-cash to shareholders, and that is usually a good thing for shareholders.

In the meantime though, if readers look at the first table, the revenue growth math is formidable. Amazon could overtake WalMart in total revenue within 4 – 5 years, and my guess is that it will sooner rather than later in terms of that period.

It must be very difficult culturally for WalMart to accept the fact that they are now #2 in retail, after they were the “death star” and the most hated kid on the retail block for years, during the 1980’s and 1990’s.

The other opportunity for Wal-Mart is the operating margin: as the giant slows store growth, particularly in the US, and more ecommerce revenue is generated, this SHOULD be higher margin sales, but last quarter’s Wal-Mart’s operating margin fell below 3%.

Here is another quick table on WMT’s operating margin over various time periods:

Avg operating margin
4 qtrs (1 year) 2.90%
12 qtrs (3 yrs) 3.14%
20 qtrs (5 yrs) 3.26%
40 qtrs (10 yrs) 3.36%

Source: internal spreadsheet

For a retailer that does $500 billion in annual sales, basis points start to add up.

Note how the margin pressure has come mostly in the last five years too.

Wal-Mart’s US comp’s often can be a catalyst for the stock and the stock often tracks US comp’s closely, but even if US comp’s are 2.5% on Thursday morning, does that mean that WMT is returning to 5% revenue growth ? I doubt it – at least not without a strong burst of domestic inflation – since the economics of retail and Amazon today are like a tsunami that is inevitable.

Amazon is disinflation, and disinflation hurts Wal-Mart revenue.

The longer-term picture in terms of the economics of retail seem clear today. Could readers pick off Wal-Mart for a few bucks on a trade? The increase in the price of the stock the last month seems to portend favorable numbers on Thursday morning.

Clients hold no position in Wal-Mart and I don’t know what would trigger a purchase other than the Walton Trust giving up that 50% percentage limit qualifier, which will allow Walmart to add to debt and repurchase stock aggressively over many years. It would put an automatic floor under the stock.

Wal-Mart is a great American company and the Walton’s are a great American family, but Schumpeter’s “creative destruction” is alive and well, that’s for sure.

(Here and here are some earlier articles on Wal-Mart and this article comparing Home Depot’s strategy to Wal-Mart. )

Disclosure: I am/we are long AMZN.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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