Walmart Inc. – Harnessing the Power of Omnichannel Retailing
Walmart Inc. – Harnessing the Power of Omnichannel Retailing
Every month we share 2 write-ups on companies we decided to examine as potential additions to our portfolio. Although the companies analysed may tick most of the boxes, if the margin of safety is not considered sufficient, we will not initiate a position but rather monitor the stock.
In case we decide to initiate a position at any time, we will share an Investment Thesis memo. For any additions to existing positions, we will update you through our Quarterly Portfolio Updates.
1. Key Facts
Description: Walmart Inc. (“WMT”, “Walmart”, “Company”) is the largest US retailer and operates supercenters, supermarkets, hypermarkets, warehouse clubs, and ecommerce websites across the world. Walmart is the largest employer in the US and as of 31 January 2023 it employs 2.1M people.
Key Financials: Over the period FY14 to FY23, the Company depicted a revenue Compound Annual Growth Rate (“CAGR”) of 2.8% and operating income CAGR of -3%, reaching a Trailing Twelve Month (“TTM”) revenue of c. $611.3B and operating income of $20.4B (margin of 3.3%). Walmart has cash and cash equivalents of $8.6 billion compared to total debt and lease liabilities of $58.3 billion.
Price & Market Cap (as of 20th March 2023): Its market cap is $377.1 billion with a 52-week high of $160.8 and a 52-week low of $117.3, whereas it currently trades at $140.9.
Valuation: WMT trades at a TTM EV/EBITDA of 11.2 (10 Year average of 9.8) and a TTM EV/Sales of 0.7 (10 Year average of 0.7).
The rest of the write-up includes the following sections:
2. Business Overview
3. Management
4. Industry
5. Financial Analysis
6. Competitive Advantages, Opportunities and Risks
7. Valuation
8. Concluding Remarks
2. Business Overview
History
Walmart history dates back to 1945 and from a single Ben Franklin franchise store it currently serves c. 240 million people across the world per week, through its 10,623 stores (including discount stores, supercentres, and neighbourhood markets) and its ecommerce sites. Walmart pricing philosophy is to price low every day (“EDLP” as it called) which worked well in setting Walmart as the ‘go to retailer’ for grocery and consumables.
Current offering goes well beyond groceries and consumables and includes among others health & wellness, apparel, pharmacies, gasoline stations, home and outdoor living and electronics.
Walmart’s mission is to ‘help people save money and live better around the world’ which not only served its customers but also helped the Company to reach $611.3B sales in FY23 and to generate superb returns for its shareholders, i.e. a return of 217,764% (or 16.4% CAGR) since inception and until 22nd of March (source: Stratosphere.io).
Additionally, on 21st February 2023, Walmart joined the exclusive club of Dividend Kings which are companies that have raised their dividend for over 50 years.
The below screenshot serves to explain how Walmart evolved over the years.
Source: Walmart Annual report FY23
Walmart US
The 3 reporting segments for Walmart are Walmart US, Walmart International and Sam’s Club.
Walmart US is the largest and most profitable segment of Walmart, both in absolute and in relative terms (highest gross margin and operating margin). Since FY14, Walmart US revenue grew by a CAGR of 4.6% reaching total sales of $420.6B in FY23, accounting for 69% of total sales.
Source: Stratosphere.io, StockOpine analysis
The increase in revenue is driven by revenues per store and the increase in number of stores. For example, revenue per store increased from $68.3M in FY14 to $88.9M in FY23 (CAGR of 3%) and number of stores increased from 4,203 to 4,717 (CAGR of 1.3%). During FY21 to FY23 an acceleration was observed, impacted by the growth in ecommerce sales and inflation (more details in ecommerce section).
Although Walmart used to resonate with low, medium income classes, an additional driver of growth would be the value proposition to the higher income cohort as high inflation drives more people to Walmart.
“We're gaining share across income cohorts, including at the higher end which made up nearly half of the gains we saw in the US again this quarter.” C. Douglas McMillon, President & CEO
The mix of merchandise impacts gross profits and given the grocery share gains in FY23 mix, the drop in operating margin from 5.5% to 4.9% is justified. Additionally, margins were negatively affected by inventory markdowns which was partly offset by SG&A leverage gains.
“Over the last year, grocery and health and wellness sales, which have a lower margin than general merchandise, have increased by 330 basis points as a portion of our mix.” John David Rainey, CFO
Historically, margins dropped in FY16 due to material investments in people such as two-part wage increases, simplified paid time-off policy and increase in the number of department managers as well as investments in technology regarding ecommerce. Continuous investments led to a lower but relatively stable margin since FY18.
Source: Walmart 10K filings, StockOpine analysis
The largest merchandise category for Walmart US is Grocery, generating $248.3B and accounting for 59% of US sales, whereas the fastest growing segment is ‘Other’ which grew by 44.3% in FY23 (54.3% in FY22).
Other category is the most interesting and includes among others the in-house advertising offering through Walmart Connect and the Walmart Fulfilment Services through which Walmart offers fulfilment to online marketplace merchants. It is estimated that the merchants on Walmart marketplace are 135,000 (source: Bloomberg) which are considerably less than the 2 million on Amazon marketplace. This explains why the advertising revenues of Walmart (globally) of $2.7B are considerably less than Amazon ($37.7B in FY22). Moving forward, management expects these services (advertisement, fulfilment, and marketplace) to be the tailwinds for its success.
“We'll keep shaping the business model by scaling our newer, mutually reinforcing businesses in areas like Marketplace, Fulfillment Services and advertising. It's exciting to see our global advertising business grow to $2.7 billion for the year we just completed.” C. Douglas McMillon, President & CEO
“but one of the things that we're doing is with our expanding marketplace and growing that, that allows us to sell more third-party merchandise to have more assortment, which tends to carry a higher margin, at least in the U.S. than grocery.” John David Rainey, CFO
Positive signs are the ad growth of 29% in FY23 which is higher than Amazon’s growth (in its FY22) of 21%, yet absolute ad dollars speak for themselves as to who is the leader. Latest quarter shows a more favourable picture for Walmart as “Advertising sales were also strong this quarter, up 41%.” John Rainey, CFO, compared to the 19% growth of Amazon advertising sales.
As these efforts start to come to fruition we can expect a favourable impact on margins given that advertising operating margins usually range within 35%-40%. Nevertheless, it will take time until this has a meaningful impact on results since Walmart has to expand the number of merchants.
It is argued that a lower number of merchants can offer better Return on Investment for merchants’ ad dollars given the lower level of competition for merchants, yet we believe that without volume and variety, customers may look elsewhere.
Walmart International
This reporting segment has not followed the same trajectory as the US and there has been a lot of trial and error efforts, where Walmart invested and divested from various regions. It shall be noted that international sales include International Sam’s Clubs as well.
Currently, the international segment serves 19 countries outside the US with the largest in terms of stores and revenue being Mexico with nearly 3,000 stores (2,862 of which 168 are Sam’s Club) and Canada, Chile and China (43 Sam’s Club) each having c. 400 stores.
The most notable recent divestments were Walmart Brazil in fiscal 2019 (465 stores), Walmart Argentina in fiscal 2021 (Nov 2020, 92 stores), Asda in Feb 2021 in the United Kingdom (632 stores) and Japan – Seiyu in Mar 2021 (328 stores).
Source: Stratosphere.io, StockOpine analysis
Given this rough journey Walmart International revenue declined by a CAGR of 3.3% since FY14, reaching total sales of $101.0B in FY23 and accounting for 17% of total sales compared to 29% in FY14.
The drop in revenue was driven by the decline in revenues per store and the reduction in the number of stores. Revenue per store fell from $23B in FY14 to $19.1M in FY23 (CAGR of -2%) whereas the number of stores dropped from 6,107 to 5,306 (CAGR of -1.6%). The abnormal drop observed in FY16 revenues is driven by an FX impact of $17.1B whereas FY23 sales also had a negative FX impact of $3.7B.
The downward trend for revenues per store is likely to continue as Mexico stores increase faster than other countries, and as Mexico & Central America’s revenue per store in FY23 is lower at $11M Vs $55.1M for Canada and $38.6M for China. It shall be noted that Mexico stores increased from 2,199 in FY14 to 2,862 by FY23 (CAGR of 3%) whereas Canada was relatively flat (from 389 to 402) and China declined by 40 stores (from 405 to 365).
As it can be seen from the above graph, operating margin was on average 200bps lower than the US and the same applies for FY23 (International operating margin is 2.9% Vs 4.9% for US). Per the 10K report, gross margin is generally lower primarily due to format mix. For instance, Mexico which is the largest international segment has 2,290 Bodega Aurrera (including Express & Mi Bodega) that are smaller in size compared to supercentres which are the majority of stores in US. Fixed costs relative to square feet are relatively higher for smaller stores and as a result, operating margins are also lower. Divestures and restructurings also impact margins.
Source: Walmart 10K filings, StockOpine analysis
Internationally, Walmart offers similar services as in US and also aims to unlock value in marketplace, fulfilment, ads and financials (through PhonePe). Except the core retail (including ecommerce) these services are immaterial and although there is room for growth the timing to unlock it, is unknown. The most tangible medium term catalysts appear to be fulfilment services and financial services (especially PhonePe).
Before moving to Sam’s Club segment we want to dive into the position of Walmart in India through its ownership in Flipkart and PhonePe. The size of the opportunity is further addressed in the Industry section.
India
Flipkart, up until December 2022 owned PhonePe, a digital transaction platform in India. Following the separation, Walmart owns approximately 89% of PhonePe, up from c.76% prior to separation.
Flipkart is an eCommerce marketplace in India (including Flipkart and Myntra) in which Walmart is a majority shareholder with 75% ownership.
Flipkart also launched Flipkart Health+ (through the majority acquisition of SastaSundar Healthbuddy Limited), an online pharmacy and healthcare platform through which the company aims to tap India’s healthcare market. Seems to be late to the party as Amazon India started offering these services a year earlier. Needless to say that the market does not seem to be huge given Statista estimates of a $1.61B market in 2023 (expected to reach $2.61B by 2027).
To understand the strength and the flywheel for the Indian opportunity, and using Apptopia rankings, Flipkart was the 6th most downloaded shopping app globally in 2022 with total downloads of 115M (2021: 5th with 93M) whereas Shopsy (owned by Flipkart) was ranked as 5th with 141M downloads (2021: not in top 10).
Source: Apptopia
Looking at PhonePe it gets more interesting. Per Apptopia, PhonePe had 94M downloads worldwide for 2022 (2021: 79M) in Finance category, placing it 1st (2021: 3rd), even above PayPal which had 92M (2021: 106M and ranked 1st).
PhonePe is estimated to be used by 1 in 3 Indians or 450M users (a country with population of 1.4B) providing a significant opportunity for growth as PhonePe enhances its product offerings like Insurance, Wealth Management and UPI payments. For context, total PayPal active accounts as of 31st December 2022 were 435M (of which 35M are merchant accounts).
Walmart, strongly believes in the success and growth of PhonePe which explains the injection of $200M on 17th of March 2023 in PhonePe’s efforts to raise $1B.
To close this section, we lay down 3 quotes from the recent earning call (Feb 2023) that justifies the momentum in India (own emphasis):
“Our fast-growing businesses in India, Flipkart and PhonePe announced a full separation which allow both companies to focus on their own growth paths independently and help unlock value for shareholders. Flipkart has continued to strengthen its market leadership position in eCommerce and is entering this year with good momentum. PhonePe also announced the closing in January of the initial tranche of a fundraise that values the business at $12 billion pre-money. This is more than double the previous valuation just two years ago.” C. Douglas McMillon, President & CEO
Flipkart – “Flipkart continued its strong momentum through Diwali and other seasonal events. We are particularly pleased to see Flipkart's positive contribution margin expanding.” John Rainey, CFO
PhonePe – “PhonePe's recent valuation that Doug talked about was supported by annualized TPV reaching more than $950 billion, about 50% higher than just one year ago, while also exceeding more than 4 billion monthly transactions.” John Rainey, CFO
PhonePe (latest pre-money valuation $12B) is already huge in terms of volume when compared to PayPal (market cap of $83B) which had annual TPV of $1.36T in 2022 and processed 6 billion transactions in Q4 2022, though, considering its valuation we presume that monetization and profitability are well below PayPal. This provides a significant opportunity.
Sam’s Club US
Sam’s Club is a membership-only warehouse club having two types of memberships (Plus $110 and Club $50) which also operates samsclub.com (ecommerce). The members, depending on the type of membership are eligible for free deliveries, discounts, early shopping hours etc.