Stock of the week: Walmart

Summary:
- Walmart (WMT.US) experienced another year of over $500 billion revenue
- eCommerce segment is thriving, further robust growth expected
- Will expansion to India be successful?
- Solid dividend policy rewarding long-term investors
- Stock tends to react to Fibo retracement levels

Walmart is the world’s biggest retailer that held superior position in the North America for decades. However, changing environment caused the company to pay bigger attention to rapidly growing online segment rather than traditional brick-and-mortar stores. In this analysis we will take a look at Walmart’s traditional business, expansion plans and the latest earnings report.

Walmart managed to boost its revenue from below $100 billion quarterly at the beginning of 2010 to over almost $140 billion in the final quarter of 2018. A significant drop of EPS in the second quarter of 2018 resulted from loss realized on the sale of majority stake in Walmart Brazil. Source: Bloomberg, XTB Research

Solid business model

Big-box stores, a category that Walmart fits into, have a really strong business model. Offer ranging from grocery through electronics to furniture allows consumers to make significant portion of their purchases at a single location. It goes without saying that such model is preferred by consumers as it facilitates major time savings. Walmart managed to win a lion’s share of the market early as it was among the first retailers to prioritize low prices and high sales. As it started to expand into the Western and Northeastern regions in 1990s, it became the biggest US retailer by revenue. Highly diversified offering helps Walmart continue to thrive at times when specialised retailers struggle amid industry-specific factors. Grocery, a household expense difficult to skip even at times of major drop in consumer confidence, accounts for more than 55% of all Walmart’s sales in the United States, company’s biggest market, what provides another buffer for tough times. Walmart is also quickly expanding into a relatively new marketplace for retailers - Internet.

Walmart’s net income to operating cash flow ratio managed to stay below 1 during the major part of the decade hinting at good quality of company’s earnings. Excluding impact of one-off items a net loss of $861 million in Q2 2018 would translate into net profit of almost $3.8 billion. Source: Bloomberg, XTB Research

eCommerce remain key to future success

When speaking of eCommerce it is usually Amazon or Alibaba that comes in the first place to one’s mind. Those two companies are among unquestionable leaders of the online retailing but the truth is that Walmart does not fare poorly either. The company constantly expands delivery network as interest in its eCommerce services turned out to be huge. Company’s online sales increased 44% in 2017 and 40% in 2018. According to eMarketer estimates, Walmart recently became the third biggest online retailer in the US with a market share of 4% in 2018. This is quite noticeable increase from 3.3% in 2017 but what is even more promising is that Walmart managed to replace Apple at top3 spot. In terms of the US market share Walmart is now trailing only Amazon (48% in 2018) and eBay (7.2% in 2018). The company plans to spend as much as $11 billion on investments throughout fiscal 2020 (started in February 2019), a move that will more than double the number of delivery locations. Sales growth in the online segment should reach 35% this year. Apart from that, reports surfaced recently saying that Walmart is also eyeing taking a bigger step into the advertising business. Given that Walmart has around 17-18% share in the US food and beverage market, companies may be willing to use Walmart’s advertising services due to its vast reach.

Usually when companies grow bigger they are likely to experience declining share of domestic sales in total revenue. The case looks different for Walmart as share of US sales jumped from around 60% in early-2014 to over 65% at the end of 2018. United States seem to be more profitable market for Walmart when we compare revenue per footage figures but this may be ascribed to slower pace of new US store opening and growing importance of ecommerce segment there. Source: Bloomberg, XTB Research

Success at home and struggles abroad

However, not everything is so rosy. While Walmart is a really successful company in the North and Central America, its performance elsewhere paints a bit different picture. An attempt to expand into the German market in late 1990s was failure to say the least and the company withdrew from the Europe mainland in less than a decade. Poor performance in Brazil also caused the company to sell most of its operations there to a private equity firm. Expansion in China was limited due to company’s faux pas in the early years of its presence in the country. Finally Walmart as well as other international retailers, like for example Carrefour, failed hard in South Korea on the back of a strong position of domestic retailers. The US company is also fleeing the UK soil where increasing competition prevents Walmart’s ASDA chain from generating desired profits. Nevertheless, Walmart is not discouraged. The company bought Flipkart, Indian eCommerce company, for $16 billion and hopes to score big in the world’s second most populated country. However, new regulations concerning eCommerce market proposed by the Indian authorities can be considered a risk factor there. The draft is generally aimed at regulating industry and protecting domestic companies. In turn foreign companies would need to, for example, set up data centers in India. Such rules would result in higher costs and may limit growth. What is somewhat positive here is that Amazon, who also decided to penetrate Indian market and is Walmart’s biggest rival there, will be subject to the same rules.

While Walmart’s payout ratio rose significantly throughout the past 15 years it is still on the level that warrants safety of dividend payouts in case of a temporary, adverse turn in business. Source: Walmart, Bloomberg, XTB Research

Good year behind and more revenue growth ahead

Last but not least, let's take a look at the most recent annual report from Walmart. We have already mentioned earlier that Walmart had another year of stellar performance in the eCommerce segment but was the rest of its business similarly strong? In short - yes. Revenue grew 2.8% YoY to $514.4 billion while at constant FX rates growth would reach 3% YoY. Operating income increased 7.2% YoY to $22 billion. Walmart upheld its previous guidance of 3% revenue growth and low single-digit EPS decline this fiscal year. The company is also actively returning cash to its shareholders. Throughout fiscal 2019 (02.2018-01.2019) Walmart spent $13.5 billion on dividend payouts and share buybacks programmes. Speaking of dividends, Walmart stands out among other US companies. While it is quite common for the US stock to pay dividend, finding a stock that did not skip a single dividend payout during the past 45 years may be challenging. However, if one needs to find a stock that not only paid dividends for the past 45 years but also increased payout in each of those year, look no further than Walmart.

Walmart scorecard. Source: Bloomberg, XTB Research

Walmart (WMT.US) surged strongly in tandem with the broad US stock market at the beginning of 2018. However, failure to break above the $104 handle initiated downward move that brought price back below $100. Note that the stock is quite reactive to Fibo retracement levels (orange circles on the chart above). Source: xStation5

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