Important disclosures appear on the last page of this report. The Henry Fund Henry B. Tippie School of Business Matt Detweiler [[email protected]] Walmart Inc. (WMT) April 10, 2019 Consumer Staples – Retail Stock Rating Buy Investment Thesis Target Price $115-120 We recommend a buy rating on Walmart Inc. Walmart has shown strong growth in eCommerce sales, a unit that includes online orders and grocery delivery and pickup. As more retailers expand their online presence to compete with Amazon and other large online retailers, Walmart has shown they are committed to expanding their digital presence. Walmart has also shown efforts to increase efficiency in their international operations by exiting certain markets and increasing their presence in others. Drivers of Thesis • Walmart has had strong growth in eCommerce sales. eCommerce sales grew 40% for their 2019 fiscal year. We expect Walmart to continue to invest in online platforms, allowing them to compete more effectively against Amazon and other online retailers. • Developing countries in Central America and Africa present opportunities for Walmart to expand their presence. We forecast 3.00% annual growth in Central America, the highest of any reporting region. • Walmart is a strong incumbent firm in their industry. Their size allows them to capture economies of scale many smaller firms are not capable of. This allows them to compete directly on price. Risks to Thesis • Struggles in international markets such as India, China, and Japan could slow growth prospects in the Walmart International business unit. We forecast low growth in these areas, impacting Walmart’s total revenue growth. • Difficulty finding a buyer for their UK chain, Asda, could lead to prolonged inefficient capital management in their UK segment of Walmart International. This will hurt their overall revenue growth. Henry Fund DCF $129.59 Henry Fund DDM $107.63 Relative P/E $119.96 Price Data (Factset) Current Price $103.16 52wk Range $81.78-$106.21 Consensus 1yr Target $109.30 Key Statistics (Factset) Market Cap (B) $283.60 Shares Outstanding (M) 2,870.00 Institutional Ownership 30.00% Five Year Beta (Weekly) 0.595 Dividend Yield 2.10% Est. 5yr Growth 4.75% Price/Earnings (TTM) 19.50 Price/Earnings (FY1) 20.80 Price/Sales (TTM) 0.55 Price/Book (mrq) 3.50 Profitability (Factset) Operating Margin 4.50% Profit Margin 1.30% Return on Assets (TTM) 3.15% Return on Equity (TTM) 8.87% Earnings Estimates Year 2017 2018 2019 2020E 2021E 2022E Analysts $4.32 $4.42 $4.91 $4.75 $5.00 $5.29 EPS $4.32 $4.42 $4.91 $6.20 $6.52 $7.06 growth (5.88)% 2.31% 11.09% 26.27% 5.16% 8.28% 12 Month Performance Company Description Walmart Inc. is an international retailer that sells its products through brick and mortar stores and online through their eCommerce operations. Their main business units are Walmart U.S., Walmart International, and Sam’s Club. Within these units, they provide products in grocery, health and wellness, and general merchandise categories. Walmart focuses on having an “Every Day Low Price” and competes on cost. The first store under the Walmart name was opened in 1962 in Rogers, Arkansas. There are approximately 11,300 stores operating under Walmart Inc. today. 19.5 8.9 10.1 32.0 23.9 15.6 17.8 23.2 10.5 0 10 20 30 40 P/E ROE EV/EBITDA Source: Factset WMT Industry No AMZN -10% 0% 10% 20% 30% A M J J A S O N D J F M WMT S&P 500
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Walmart Inc. (WMT) April 10, 2019Walmart’s first international endeavor was in 1991 when they entered a joint venture in Mexico. In 1998 Walmart opened their first neighborhood market.
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Transcript
Important disclosures appear on the last page of this report.
Investment Thesis Target Price $115-120 We recommend a buy rating on Walmart Inc. Walmart has shown strong growth in eCommerce sales, a unit that includes online orders and grocery delivery and pickup. As more retailers expand their online presence to compete with Amazon and other large online retailers, Walmart has shown they are committed to expanding their digital presence. Walmart has also shown efforts to increase efficiency in their international operations by exiting certain markets and increasing their presence in others. Drivers of Thesis
• Walmart has had strong growth in eCommerce sales. eCommerce sales grew 40% for their 2019 fiscal year. We expect Walmart to continue to invest in online platforms, allowing them to compete more effectively against Amazon and other online retailers.
• Developing countries in Central America and Africa present opportunities for Walmart to expand their presence. We forecast 3.00% annual growth in Central America, the highest of any reporting region.
• Walmart is a strong incumbent firm in their industry. Their size allows them to capture economies of scale many smaller firms are not capable of. This allows them to compete directly on price.
Risks to Thesis
• Struggles in international markets such as India, China, and Japan could slow growth prospects in the Walmart International business unit. We forecast low growth in these areas, impacting Walmart’s total revenue growth.
• Difficulty finding a buyer for their UK chain, Asda, could lead to prolonged inefficient capital management in their UK segment of Walmart International. This will hurt their overall revenue growth.
Henry Fund DCF $129.59 Henry Fund DDM $107.63 Relative P/E $119.96 Price Data (Factset) Current Price $103.16 52wk Range $81.78-$106.21 Consensus 1yr Target $109.30 Key Statistics (Factset) Market Cap (B) $283.60 Shares Outstanding (M) 2,870.00 Institutional Ownership 30.00% Five Year Beta (Weekly) 0.595 Dividend Yield 2.10% Est. 5yr Growth 4.75% Price/Earnings (TTM) 19.50 Price/Earnings (FY1) 20.80 Price/Sales (TTM) 0.55 Price/Book (mrq) 3.50 Profitability (Factset) Operating Margin 4.50% Profit Margin 1.30% Return on Assets (TTM) 3.15% Return on Equity (TTM) 8.87%
Earnings Estimates Year 2017 2018 2019 2020E 2021E 2022E
Analysts $4.32 $4.42 $4.91 $4.75 $5.00 $5.29
EPS $4.32 $4.42 $4.91 $6.20 $6.52 $7.06
growth (5.88)% 2.31% 11.09% 26.27% 5.16% 8.28%
12 Month Performance Company Description
Walmart Inc. is an international retailer that sells its products through brick and mortar stores and online through their eCommerce operations. Their main business units are Walmart U.S., Walmart International, and Sam’s Club. Within these units, they provide products in grocery, health and wellness, and general merchandise categories. Walmart focuses on having an “Every Day Low Price” and competes on cost. The first store under the Walmart name was opened in 1962 in Rogers, Arkansas. There are approximately 11,300 stores operating under Walmart Inc. today.
19.5
8.9 10.1
32.0
23.9
15.617.8
23.2
10.5
0
10
20
30
40
P/E ROE EV/EBITDA
Source: Factset
WMT Industry No AMZN
-10%
0%
10%
20%
30%
A M J J A S O N D J F M
WMT S&P 500
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EXECUTIVE SUMMARY
Walmart Inc. operates in the retail sales industry. This industry is mature yet highly competitive in developed economies such as the United States, Canada, and Europe. In these developed economies, there are several large, entrenched firms including Walmart. In emerging markets such as Africa, Central America, and the Asia-Pacific region, there is high growth potential for firms entering the markets. Walmart is primarily based in North America, but they have stores and distribution centers in 26 countries outside the U.S.
Walmart’s three business units are Walmart U.S., Walmart International, and Sam’s Club. Each of these units are further divided into segments based on their revenue streams. Walmart U.S. is the largest unit, accounting for approximately 65% of net sales. Walmart International and Sam’s Club account for roughly 23% and 12% of net sales, respectively. Walmart has seen their strongest growth in the Walmart U.S. and Walmart International units. Walmart has rolled back store openings in the U.S. to focus on expanding their eCommerce services. We expect this to continue in the forecast period.
Our model shows that Walmart will have annual revenue growth between 1.4% and 2.25%. This accounts for annual increases in eCommerce sales between 12% and 15% due to Walmart’s increase focus on omni-channel offerings. Higher domestic and Central American growth is offset by stagnant or declining revenue in certain international regions. Our target price range of $115-$120 offers 16%-22% upside on Walmart’s current price of $98.69.
COMPANY DESCRIPTION
Walmart Inc. is a multinational retailer that provides products through retail stores and eCommerce channels. Their goal is to continuously improve the customer experience and they pride themselves on “helping people around the world save money and live better”1. Walmart has approximately 11,300 stores across 27 countries serving approximately 275 million customers each week1. Their products include grocery, health and wellness, and general merchandise.
Walmart was incorporated in Delaware in 1969. Their businesses were first started in 1945 when Sam Walton opened a franchised Ben Franklin variety store in Newport,
Arkansas. In 1962, the first Wal-Mart Discount City opened in Rogers, Arkansas. The first Sam’s Club was opened in 1983, and the first Walmart supercenter opened in 1988. Walmart’s first international endeavor was in 1991 when they entered a joint venture in Mexico. In 1998 Walmart opened their first neighborhood market. Walmart.com was created in 2000, the first eCommerce initiative for the company1.
Walmart’s operations are reported in three segments: Walmart U.S., Walmart International, and Sam’s Club. Historically, Walmart U.S. has constituted the majority of Walmart’s sales, as shown below.
Source: WMT 10-K, 2019
Walmart U.S.
Walmart U.S. is the largest of the three segments. It consists of all stores in the U.S., Puerto Rico, and related eCommerce sales. As of January 31, 2019, there were 4,769 stores in the Walmart U.S. segment. Locations by state are shown below.
Walmart Locations by State
Source: simplemaps.com
0
200000
400000
600000
2018 2019 2020E 2021E
Walmart Net Sales by Business Unit ($M)
Walmart U.S. Walmart International Sam's Club
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Walmart U.S. had $331 billion in sales in 2019. This segment was responsible for approximately 65% of net sales in 2019.
WMT 10-K, 2019
The stores within the Walmart U.S. segment are broken into three categories: supercenters, discount stores, and neighborhood markets and other small formats. The table below shows the total number of each store type for the previous 5 years.
Supercenters Discount Stores
Neighborhood Markets
2018 3,561 400 800
2019 3,570 386 813
2020E 3,564 376 818
2021E 3,569 366 823
2022E 3,574 356 828 Source: WMT 10-K, 2019
Supercenters average around 182,000 square feet and employ around 300 associates on average. They combine full grocery selection with general merchandise and health and wellness products. Most are open 24 hours and may have specialty shops such as banks, nail salons, vision centers, or restaurants such as McDonald’s or Subway. The table below shows the net change in supercenters for the past two years and three years of the forecast period.
2018 2019 2020E 2021E 2022E
Openings 30 6 0 0 0
Closings 0 (2) (11) 0 0
Conversions 9 5 5 5 5
Total 3,561 3,570 3,564 3,569 3,574
Net change 39 9 (6) 5 5 Source: WMT 10-K, 2019
Walmart has been opening fewer supercenters in recent years. This due to the company shifting their focus to the eCommerce portion of their business and reduced demand for full-size supercenters. We forecast no new supercenter openings in the five-year forecast period. However, we forecast an average of five conversions of discount stores to supercenters per year. This is in-line with Walmart’s recent store conversions and we believe this trend will continue.
Discount stores are smaller than supercenters, averaging just over 100,000 square feet with around 200 employees. These stores offer general merchandise and health and wellness products and occasionally a limited grocery selection. The table below shows the net change in discount stores in the previous two years and the first three years of the forecast period.
2018 2019 2020E 2021E 2022E
Openings 0 1 0 0 0
Closings (6) (10) (5) (5) (5)
Conversions (9) (5) (5) (5) (5)
Total 400 386 376 366 356
Net change (15) (14) (10) (10) (10) WMT 10-K, 2019
Walmart has opened a total of three new discount stores in the last five years. We do not forecast them opening any new discount stores in the forecast period. We forecast Walmart converting an average of five discount stores per year into supercenters, in-line with their actions in recent years. We also forecast Walmart to close an average of five discount stores per year in the forecast period. This is in-line with recent years and we believe it will continue as Walmart focuses on supercenters and neighborhood markets as well as eCommerce.
Neighborhood markets are designed to leave a smaller footprint on the communities they are in. They average 38,000 square feet with around 100 employees. Neighborhood markets have grocery products including produce, meat and dairy, bakery, and deli as well as household supplies and a pharmacy. The table on the next page shows the net change in neighborhood markets for the previous two years and the first three years of the forecast period.
331.666
120.824
57.839
Net Sales ($B)
Walmart U.S. Walmart International Sam's Club
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2018 2019 2020E 2021E 2022E
Openings 85 24 5 5 5
Closings (20) (11) 0 0 0
Conversions 0 0 0 0 0
Total 800 813 818 823 828
Net change 65 13 5 5 5 Source: WMT 10-K, 2019
Walmart has been aggressively adding neighborhood markets in the past several years. We forecast an average net gain of five neighborhood markets per year in the forecast period. We believe Walmart will continue adding neighborhood markets to increase their presence in areas that would not be able to support a full supercenter.
We forecast Walmart U.S. net sales to grow at an average of 2.50% per year between 2020 and 2023. This includes eCommerce sales. We forecast Walmart U.S. net sales to have a continuing value growth rate of 1.50% in 2024 and beyond. The table below shows historical and forecasted Walmart U.S. net sales annual growth rates.
2018 2019 2020E 2021E 2022E 2023E 2024E
3.46% 4.14% 2.50% 2.50% 2.50% 2.50% 1.50%
We forecast lower growth than previous years for multiple reasons. First, we believe this is a more conservative approach that accounts for possible slower economic growth in the forecast period. Additionally, Walmart’s business unit growth has been relatively volatile on a year-to-year basis. This estimate smooths that volatility over the forecast period.
Walmart International
Walmart International is Walmart’s second largest segment. It operates in 26 countries outside of the U.S. in regions such as Africa, Central America, Canada, China, Japan, and India. Walmart International’s formats include retail and wholesale stores including supercenters, hypermarkets, and warehouse clubs. They also have eCommerce platforms including Walmart.com variants tailored to specific regions, asda.com in the UK, and flipkart.com in India. On the next page is a table of stores by reporting region.
Stores by Reporting Region
2018 2019 2020E 2021E
MX/CA 3,136 3,253 3,303 3,353
UK 642 633 633 633
Canada 410 411 411 411
China 443 443 441 439
Other 1,729 1,253* 1,238 1,229 *The large drop in store count is due to Walmart selling their stake in their Brazilian operations in calendar year 2018.
Walmart International had net sales of approximately $121 billion in 2019, accounting for roughly 23% of Walmart’s total sales. Historically, Walmart International has accounted for 23-25% of total sales each year. We believe these proportions will hold relatively constant in the forecast period. However, overall revenue in the international segment may decline if Walmart is able to sell their chain of Asda stores in the UK. Due to uncertainty surrounding possible buyers and the timeframe to sell, we have not forecasted Walmart selling Asda in the forecast period. We have forecasted the UK as the only reporting region with declining revenues due to uncertainty of Asda’s future as well as heightened competition in the UK grocery market. Below are the forecasted revenue growth rates by Walmart International reporting region.
2020E 2021E 2022E 2023E 2024E
MX/CA 3.00% 3.00% 3.00% 3.00% 2.00%
UK (1.00)% (1.00)% (1.00)% (1.00)% (1.00)%
Canada 1.00% 1.00% 1.00% 1.00% 1.00%
China 2.00% 2.00% 2.00% 2.00% 2.00%
Other 2.50% 2.50% 2.50% 2.50% 2.50%
Total 1.47% 1.50% 1.52% 1.54% 1.29%
We forecast Mexico and Central America to be the strongest region moving forward. This is the largest reporting segment in the international unit. Mexico and Central America account for approximately 40% and 13% of stores in the unit, respectively. Countries such as Guatemala, Honduras, El Salvador, Nicaragua, and Costa Rica have shown heavy growth as Walmart has opened nearly 100 stores there in the last five years15. These stores have contributed strongly to Walmart’s EBITDA, allowing them to put more resources towards expansion in China and India as well as improving eCommerce platforms. Central America also presents a prime target for eCommerce expansion as Amazon has a small presence in
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the region along with several Latin American eCommerce sites. Central America is projected to see GDP growth of 4% in 201915, more than double that of South America. We believe this will drive strong growth in the reporting region.
We forecast the UK region to have declining revenues in the forecast period. This is due to increased competition as Aldi and Lidl have entered the UK grocery market, forcing Asda to compete on price. Walmart management has stated that selling their majority stake in Asda allows the company to drive international and eCommerce growth in new ways. It is possible Walmart can sell Asda in the forecast period, but we are unsure when they would finalize a deal as they have had to combat regulatory scrutiny.
Canada has held steady in recent years with approximately 400 stores in the country. We do not believe Walmart will open more stores there as they are focusing on eCommerce in North America.
Walmart has approximately 440 stores in China as of January 2019. In the past five years they have added about 10 new stores per year. We believe Walmart will focus more on eCommerce in China rather than in-store sales and forecast an average of two store closings annually in the forecast period. These store closings are related to declining store quality and we believe Walmart would rather close the stores than renovate or start new construction. We believe this will lead to our low-to-moderate growth rate of 2% in Chinese revenue.
The “Other” reporting region consists of Walmart’s African, Argentinian, Chilean, Indian, and Japanese operations. Below is a table of stores in these regions as a percentage of all stores in the Walmart International unit as of January 2019.
Region Percent of all WMT Int’l Stores
Africa 7.28%
Argentina 1.54%
Chile 6.19%
India 0.37%
Japan 5.54%
Total 20.92% Source: WMT 10-K, 2019
We forecast 2.5% annual growth in the revenue for this region. This is based on factors affecting each subregion in the segment.
Africa has seen large growth in recent years, adding between five and ten stores annually. We expect Walmart to continue expansion in Africa during the forecast period.
Argentina has experienced financial instability in recent years. This has led to Walmart closing stores, including 14 closures in 2019. We expect to diminishing store counts and overall sales in Argentina. Walmart has done relatively well in Chile in recent years. However, they have been closing stores as they focus on improving eCommerce in the country. Walmart recently acquired Cornershop, an online marketplace for on-demand grocery delivery in Mexico and Chile13. Walmart hopes to leverage their supply chain advantage to expand this service. We expect moderate growth from Chilean operations because of this.
India is a difficult market for Walmart to navigate. Walmart acquired a majority stake in Flipkart in May 2018 for approximately $16 billion. Flipkart is India’s largest online retailer. India has amended their foreign direct investment policy to restrict online marketplaces’ ability to enter exclusive vendor deals. Walmart has 22 stores in India, only adding two in the past five years. We currently see the Indian market as a large source of untapped potential for Walmart. As Indian policy currently stands, we are pessimistic on growth projections in the country. If Walmart can overcome regulatory restrictions, we would have a more optimistic outlook.
There was speculation in 2018 that Walmart could sell its stake in Seiyu, a large grocery and merchandise retailer in Japan16. Walmart is seeing increased competition from Amazon in Japan, as well as downward price pressure from competing grocers and retail stores. Seiyu also faces rising capital costs as they must renovate older stores16. Seiyu did make a positive move in 2018, partnering with Amazon-rival Rakuten to provide an online grocery-delivery service. We are neutral on the Japanese segment of Walmart moving forward. It does not appear Seiyu will be able to generate consistent profit, so a sale of the stores is possible in the near future.
Overall, we expect to see modest growth in the Walmart International unit. This growth will mostly come from Mexican, Central American, and African operations. There
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is potential for a large customer base in India if their foreign direct investment policy changes.
Sam’s Club
Sam’s Club is a membership-only warehouse club operating in 44 states and Puerto Rico. There were 599 Sam’s Club locations in operation as of January 2019. Sam’s Club’s main competitor is Costco (COST), another membership-only warehouse. Costco had 527 stores in operation as of December 2018. Membership income is a significant portion of Sam’s Club operating income, and the unit operates with lower gross profit rates and operating expenses relative to the other units1. This is due to their bulk, “warehouse-style” sales of grocery and general merchandise products that generates lower profits while selling larger quantities of items. They also sell products through samsclub.com.
Sam’s Club is the smallest of Walmart’s three business units. Historically it has accounted for approximately 11% of Walmart’s net sales. We believe this proportion will remain relatively constant in the forecast period.
Walmart does not disclose the number of current members or the proportions of membership types. Sam’s Club currently has two membership options, shown below.
Plus Membership Club Membership
Annual fee $100 $45
Number of add-ons
Up to 16 Up to 8
Cash rewards Yes No Source: WMT 10-K, 2019
Sam’s Club’s base price of $45 is priced competitively with Costco’s equivalent which costs $60. Costco also has an upgrade called the “Executive Membership” that brings the price to $120. The executive level offers rewards on purchases and other savings and benefits programs.
We believe the most important perk of the “Plus” membership level is free shipping on online orders. This is one way that Sam’s Club and Walmart are trying to match the benefits of Amazon and their Prime program. Online ordering also adds another layer of convenience that Amazon does not currently provide – the ability to return items to a physical store. This saves customers the time required to complete a return shipment of unwanted
merchandise. We believe these perceived conveniences will bolster Sam’s Club’s eCommerce sales. In 2019, eCommerce was 4.67% of sales and we project that amount to rise to 8.90% by 2024. The Plus membership also includes rewards programs similar to the Costco executive membership.
Sam’s Club reports their revenue in five segments shown below with their 2019 sales.
Segment 2019 Sales (millions)
Grocery and consumables $33,708
Fuel, tobacco, other $12,110
Home and apparel $5,452
Tech, office, entertainment $3,388
Health and wellness $3,181
Total $57,839
We project annual revenue growth of 2% for Sam’s Club’s total revenue. We have forecasted each segment as the same proportion of revenue as 2019, as 2019 is the first year Walmart released individual segment revenue. We believe Sam’s Club will have moderate growth due to increases in their eCommerce sales. However, we are unable to forecast membership revenues, the largest portion of Sam’s Club revenue, as Walmart does not disclose these figures.
Company Analysis
Walmart’s total revenue is broken into three segments: grocery, general merchandise, and health and wellness. Their proportions of total revenue have remained extremely constant over time.
2016 2017 2018 2019
Grocery 56% 56% 56% 56%
GM 33% 33% 33% 33%
H&W 11% 11% 11% 11% Source: WMT 10-K, 2019
We expect these proportions to hold in the forecast period. The table below shows Walmart’s same-store sales change by business unit over the past several years.
Walmart does not report same-store revenues for their international segment at this time, making it difficult to forecast growth by same-store sales growth. Both the US and Sam’s Club segments saw significant growth in same-store sales in 2019. Walmart stated 1.3% and 0.9% of this growth came from eCommerce sales for the US and Sam’s segments, respectively. Walmart noted the remaining increase for the US segment came from increased store traffic and Sam’s Club benefitted from transfers of sales from stores they closed the previous year. We believe same-store sales growth will remain positive for both segments at 2.5% and 2% for the US and Sam’s segments, respectively. This accounts for eCommerce growth although it will takeaway from in-store sales.
Walmart’s target market is extremely wide-reaching. They appeal to shoppers seeking low prices on items they purchase frequently. They have a presence in all 50 states, DC, and Puerto Rico, as well as 26 other countries. Their stores compete against many other retailers with both brick and mortar stores and eCommerce segments. These competitors range from mega and large cap companies such as Amazon and Target, to mid-size grocers like Kroger, Costco, and Publix, as well as small local retailers.
Walmart has a large competitive advantage with the size and scope of their supply chain. They can leverage their buying power into lower prices on most goods they sell. This gives them a large advantage over small retailers and allows them to match almost any price from larger competitors. Amazon is the competitor that is most similar in overall size, although they do not sell out of brick and mortar locations. Walmart has been increasing their capital expenditures on their eCommerce platforms in the past several years. Management has given guidance of approximately $11 billion in the 2020 fiscal year, a 6.34% increase from 2019. We expect this to continue as Walmart tries to compete head-to-head with Amazon in the online shopping sector.
Retail is a dynamic industry with several large incumbent firms. Walmart should use their size and cost advantages to evolve with the industry. Relative to their peers, Walmart is around the industry average for profitability margins. The peers used for these comparisons are Amazon, Target, Kroger, Costco, Dollar General, CVS, and Walgreens. The comparison is shown in the table below.
Gross Margin
Operating Margin
Net Profit Margin
WMT 24.0% 4.5% 1.3%
AMZN 42.1% 5.5% 4.3%
TGT 28.7% 5.6% 3.9%
KR 21.6% 2.2% 2.5%
COST 13.0% 3.2% 2.2%
DG 30.3% 8.3% 6.2%
CVS 20.2% 5.5% (0.3)%
WBA 22.2% 4.8% 3.8% Source: Factset
Walmart’s performance looks considerably better when compared to traditional retail establishments. We believe Walmart can improve their margins as they shift their focus onto their eCommerce segments. However, margin improvement from eCommerce may be offset by increased costs due to tariffs and international trade agreements.
RECENT DEVELOPMENTS
FY Q4 Earnings and FY 2019 Annual Report
Walmart reported 2019 Q4 earnings on February 19, 2019. Their non-GAAP EPS of $1.41 beat the consensus by $0.08 and revenue of $137.74 billion beat by $113 million. GAAP EPS of $1.27 missed by $0.06. Adjusted EPS excludes two items: a $0.17 charge related to tax reform and a $0.03 unrealized gain on Walmart’s equity investment in JD.com. Their results are as follows:
Category Amount Increase (decrease) Y/Y
Total revenue $138.8 B 1.90%
Total rev excl. currency
$140.5 B 3.10%
Q4 2019 GAAP EPS
$1.27 73.97%
Adj. EPS $1.41 6.02%
FY 2019 GAAP EPS
$2.26 (31.10)%
FY adj. EPS $4.91 11.09% Source: SeekingAlpha
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Walmart’s results were interpreted well overall. There were several reasons why:
• The Walmart U.S. segment had comparable sales growth of 6.8% over two years. This is the strongest growth for the segment in nine years.
• Sam’s Club comparable sales grew 3.3% and eCommerce sales grew 21%.
• Walmart U.S. eCommerce sales grew 40% in 2019.
The most notable change is the large increase in eCommerce sales. Walmart now has 2,100 locations offering grocery pickup and 800 locations offering delivery. We expect Walmart to continue expanding these services as well as other online options to provide more convenience to customers. It should be noted that much of the gains in eCommerce sales are at the expense of in-store sales.
Partnership with Google Home
Walmart announced on April 2, 2019 a partnership with Google and their Google Home device. Walmart shoppers will be able to give voice commands to their Google Home system to add items to their Walmart shopping cart. This system is very similar to what Amazon and their Alexa/Echo speakers allow consumers to do. This shows an attempt by Walmart to offer their customers the same convenience as Amazon. Amazon still has the advantage in the smart speaker market share – of the approximately 66 million smart speakers in the U.S., Amazon is responsible for 70% through their Alexa and Echo systems6.
Asda Sale
Walmart has been attempting to sell their majority stake in its chain of supermarkets in the UK, called Asda. Walmart wants to use this move to increase investment in their eCommerce platform and developing markets. They believe their Asda division has struggled due to an increasingly-competitive environment in the UK, spurred by the entry of Aldi and Lidl9.
A tentative deal to sell the stores to UK supermarket chain Sainsbury for $9.6 billion (£7.3 billion) was blocked by the Competition and Markets Authority (CMA) in February 2019. The CMA said the acquisition would likely see higher prices and poorer choices for consumers8.
Sainsbury has offered to sell up to 150 stores to appease the UK regulatory authority. Although Sainsbury has received interest from potential buyers, they are concerned it will not be enough to satisfy the CMA. Sainsbury has also pledged to reduce prices by more than $1 billion over the next three years8.
Analysts believe a deal will be made even if it is not with Sainsbury10. An alternative, such as a private equity bid, is likely to emerge if the Sainsbury deal is ultimately unfeasible. An alternative bid would most likely fetch a lower price than the initial Sainsbury deal. We have not forecasted a sale of Asda in our forecast period. However, we have forecasted a stagnant number of stores in the UK as well as declining revenues for the UK reporting region as more competition has entered the market. It is possible Walmart may try to sell their stake in Flipkart if Indian legislation does not change, although we have not seen the company indicate that is their plan at this time.
Flipkart
Walmart purchased a majority stake Flipkart in May 2018, India’s largest online retailer, attempting to leverage Flipkart’s online retail market share in India. Walmart paid approximately $16 billion for this stake. However, Walmart has faced several obstacles after acquiring the majority stake.
Days after the acquisition was announced, it was protested by small traders in India who saw it as a threat to their businesses. The Confederation of All India Traders (CAIT) filed an anti-trust petition with the Competition Commission of India (CCI) over the deal. This is a troubling start to Walmart’s foray into India, as they face opposition from CAIT, representing over 70 million traders12.
On February 1, 2019, the Indian government implemented several new restrictive changes to their foreign direct investment (FDI) policy for eCommerce. The new rules prohibit online marketplaces from entering exclusive deals for selling products and having a single vendor supply more than 25% of the inventory12. This change will result in negative effects for Walmart as well as other large online vendors in India, such as Amazon. Because of this, we forecast stagnant revenues in the India portion of the Walmart International business segment.
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Lawsuits
Walmart is involved in several legal proceedings. Accruals have been made, where appropriate, and are reflected in their consolidated financial statements. If a liability is not probable or cannot be reasonably estimated, an accrual has not been made. Walmart may enter into settlement agreements if they believe it is in the best interest of the company and shareholders.
Their Asda stores are currently a defendant in a class-action “equal value” claim. The claimants allege there was a disparity in pay between male and female workers doing the same jobs and are requesting differential backpay. Walmart has not disclosed an accrual amount for this lawsuit.
Walmart is also a named defendant in a consolidated lawsuit asserting claims generally concerning the impacts of widespread opioid abuse. The consolidated lawsuit is pending in the U.S. Northern District Court of Ohio as of late March 2019. Walmart is unable to reasonably estimate any potential loss in this matter and makes no assurances as to whether operations or cash flows will be materially, adversely affected.
We have not factored Walmart’s lawsuits into our forecasts because Walmart is unsure of how they will impact earnings. This is something to monitor going forward.
INDUSTRY TRENDS
Retail is an evolving industry where firms constantly compete to keep up with each other. Over the past decade, eCommerce has become a very common way for consumers to shop. As consumers’ preferences shift, Walmart and other retail firms must change their business channels to meet those needs.
Firms in the industry try to differentiate from one another and compete on various advantages. Walmart primarily competes on price. As their supply chain has become more efficient, they are able to lower prices and move product more efficiently.
eCommerce
eCommerce sales have grown at very high rates in the past several years, as shown below.
Source: Statista
Walmart’s eCommerce revenue grew 40% from 2018 to 2019. We do not forecast such extreme growth in the model, rather 12%-15% annual growth in eCommerce sales. We believe this is possible for Walmart as they have supply chains capable of handling higher online orders and plan to invest more in the coming years.
A large portion of eCommerce sales come at the expense of in-store sales. Grocery pickup, for example, replaces grocery orders that may have been shopped in the store. We do not see eCommerce growth as a liability to Walmart’s physical locations as these locations are needed to service pickup orders. Ecommerce also has potential for “impulse buys” that may not be as accessible when shopping in a physical store.
A key driver in the growth of online sales is smartphone penetration in the U.S. and around the world. As more people have access to smartphones, their access to online retailers is increased. On the following page is the smartphone ownership rate in select countries.
0.00%
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20.00%
30.00%
2014 2015 2016 2017 2018 2019E 2020E 2021E
eCommerce Annual Growth Rate
eCommerce annual growth rate
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Source: Statista
Many western countries have the highest smartphone penetration rates. The U.S. is Walmart’s largest eCommerce market, followed by Mexico and Central America. China, India, and Japan represent the biggest opportunity to increase eCommerce sales through smartphones as they have very high percentages of the population with cell phones. If those with non-smart mobile phones make the switch to smart devices, a large segment of customers could easily access mobile marketplaces through the web and phone apps.
Store Closings
Many large retail chains have experienced store closings in recent years and brands such as Toys R Us and Sears have filed for bankruptcy, partially at the hands of Walmart. While Walmart and some of their peers have closed stores, there is a focus on converting stores as well. For example, Walmart has been converting discount stores carrying only general merchandise and limited grocery into full supercenters.
Walmart has also been opening neighborhood markets at a fast rate and Target has been opening similar locations as well. Firms are strategically placing these smaller stores in areas without a strong grocery presence as they are untapped markets. These locations don’t require the space or labor of full supercenters while still providing a full grocery selection. We expect these to be Walmart’s primary U.S. store openings along with conversions of discount stores.
Private Label Growth
Private labels are a new way for mass merchandisers to differentiate their products from the competition while increasing margins. Retailers can earn 25%-30% higher gross margins on private labels compared to manufacturer brands19 and private label sales growth is three-times that of branded products19.
Large firms such as Walmart, Target, Costco, and Amazon have the manufacturing and supply chain capabilities to create products customers want at a much lower prices than traditional manufacturers.
Walmart already has multiple private label brands across clothing, food, household products, and furniture. Currently, they do not report results for individual brands or private labels.
MARKETS AND COMPETITION
Industry History
Department and retail stores began to take hold in the early 1930s the first malls and supermarkets were introduced along with the invention of the shopping cart. It wasn’t until the early 1960s when big box retail stores such as Target, K-Mart, and Walmart appeared. Malls and department stores dominated the retail landscape until the late 1990s when online retailers, such as Amazon, began to appear. Since then, technological advancements have led to eCommerce growing at a rapid rate with omni-channel retail becoming the norm in the 2010s.
Industry Dynamics
Retail is a highly-competitive, ever-evolving industry. It encompasses a high number of firms, some large multinational companies and others are small, local shops. For comparison with Walmart, we focused on large companies in grocery and general merchandise sales.
The largest traditional competitors in Walmart’s general market are Target, Kroger, Costco, CVS, and Walgreens. Amazon is a unique competitor in that they are primarily in online sales but do have physical locations in Whole Foods.
0%
25%
50%
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Smartphone Penetration by Country (2018)
Smartphone Mobile phone (not smart) No mobile phone
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Threat of New Entrants
New retail establishments are constantly entering and leaving the market. Some smaller outlets are bought by the larger firms mentioned above. It would be very difficult for a new firm to enter the market and compete on the level of Walmart or Amazon due to their sheer size advantage. It is possible that multiple smaller firms could merge to create a larger entity, but it is mostly established firms competing for market share.
Threat of Substitution
Large firms in this industry do not have to worry about the threat of substitutes in a traditional sense. They have very complex supply chains that are already vertically integrated, allowing them to reduce costs. Suppliers above them cannot vertically integrate up the supply chain as many of the products they supply would not be feasible for customers to purchase directly from the manufacturer.
Walmart’s main threat for substitution comes from consumers’ ability to compare prices online. Consumers must no longer travel to multiple stores but can check prices at multiple outlets with a few clicks on a computer. This forces Walmart to compete with many more retailers than they have historically.
Supplier Power
Many of the large firms, especially Walmart, can leverage their buying power into lower prices from their suppliers. This is so common with Walmart it is sometimes known as the “Walmart Effect”23. Walmart and other large firms offer a level of exposure that suppliers are almost forced to sell to Walmart at a price of their choice. This forces the supplier to either cut production costs or take a loss on their sale to Walmart. Large retailers also have the power to display name brand goods and private labels where they wish, usually placing private labels in customers’ line of vision.
Buyer Power
Buyer power is not as concerning to Walmart, Amazon, etcetera, as it is to smaller firms. Because of the power these large firms exert over their suppliers, they can undercut many small firms’ prices. This gives customers more power, but they will use that power to shop at
Walmart or another retailer with lower prices. This is most commonly seen in online price comparisons when shopping. If customers can wait a day or two for an item to arrive, they will most likely choose the retailer with the lowest price.
Peer Comparisons
Walmart competes in a variety of retail spaces including grocery, general merchandise, and eCommerce. Because of this, they have a wide selection of competitors offering varying products and services to compare against. For peer comparison we selected seven companies that are similar in size and product scope to compare against Walmart: Amazon, Target, Kroger, Costco, Dollar General, CVS, and Walgreens.
Grocery Comparison
There are approximately 40,000 grocery stores in the United States. Below are the grocery locations for each comparison company.
Firm Grocery Properties
WMT 4,413
TGT 1,844
KR 2,764
COST 527
AMZN (Whole Foods) 479 Source: Company 10-K Forms
Together these firms account for approximately 25% of the grocery store market share in the United States. Below is their market share relative to each other based on store locations.
4413
1844
2764
527 479
Relative Store Market Share 2018
WMT TGT KR COST AMZN
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It is not common for these firms to acquire specific stores. New stores are built by the firm or are converted from an existing building. The grocery industry is relatively fragmented as there are many private chains operating in varying geographic regions. These include Publix in the southeastern U.S. and Meijer and Hy-Vee in the midwest31.
Dollar General is not included in these numbers because they do not have a traditional selection of groceries, nor do they break out sales for groceries specifically. They had 15,472 stores as of March 1, 2019. Their consumables segment which includes groceries accounts for approximately 77% of total revenue30. DG is a tangential competitor to tradition grocery and big box stores. They do not have the inventory selection or store size to supply large populations but have a niche in small towns that can’t support a full-size grocery store. These would compete more with Walmart’s discount store locations; which Walmart has been reducing in recent years.
Pharmacy Comparison
There are approximately 67,000 pharmacies in the United States. Below are the pharmacy locations for each company.
Firm Pharmacy Properties
WMT 4,403
CVS 9,900
WBA 9,451 Source: Company 10-K Forms
Together these firms account for approximately 35% of pharmacies in the United States. Below is their market share relative to each other by store count.
CVS and Walgreens account for a very large share of the pharmacy market compared to Walmart.
Overall Comparison
Although these are all large firms in their respective markets, their sizes vary drastically from each other based on revenue and market capitalization.
Firm Revenue ($M) Market Cap ($M)
WMT $514,405 $283,209
TGT $74,433 $41,647
KR $121,162 $19,112
COST $138,434 $107,731
AMZN $232,887 $901,770
DG $25,625 $32,216
CVS $194,579 $69,697
WBA $131,537 $49,829 Source: Company 10-K Forms, Yahoo Finance
Although Walmart has the highest revenue, Amazon has a much higher market capitalization. This is due to Amazon having other operations that solely retail and thus it is not valued the same as a consumer staples or retail company. For that reason, they will be excluded from some comparisons.
Below is the revenue per store and revenue per square foot for each company, Amazon excluded.
Firm Rev/Store ($M) Rev/Sq. Ft.
WMT $45.28 $729.65
TGT $40.36 $323.20
KR $43.84 $676.88
COST $181.67 $1,250.53
DG $1.66 $231.00
CVS $19.65 $2,417.13
WBA $13.92 $876.91 Source: Company 10-K Forms
Walmart outperforms every competitor except for Costco on a revenue per store basis. This is partially due to Walmart having online operations that KR, CVS, and WBA do not have, although WMT is relatively close to KR and TGT on a revenue by store basis. We believe Costco has large advantage here because they sell exclusively wholesale in a warehouse club format, like Sam’s Club. This allows them to sell mass quantities at fewer total locations. CVS and WBA most likely have lower per store
4403
9900
9451
Relative Pharmacy Market Share 2018
WMT CVS WBA
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revenues due to selling fewer items at many more locations including pharmacies inside larger stores.
Walmart has a much higher revenue per square foot than TGT or KR. We believe this is due to WMT having higher online sales than TGT and KR as well as Sam’s Club inflating the revenue per square foot. Costco has a higher revenue per square foot for the same reason Sam’s Club would; they are able to move more inventory in less space due to their warehouse format. CVS and WBA have high revenue per square foot figures because their average store size is much smaller than WMT, TGT, KR, or COST and they sell pharmaceuticals which have much higher prices than traditional retail products.
The table below contains various ratios for the comparison companies for their most recent reported years.
Op. Margin ROA ROE ROIC
WMT 4.5% 3.1% 8.9% 9.9%
TGT 5.6% 7.3% 25.5% 12.8%
KR 2.2% 8.0% 41.5% 7.5%
COST 3.2% 8.5% 26.9% 16.3%
AMZN 5.5% 7.0% 26.9% 15.8%
DG 8.33% 12.27% 25.34% 17.65%
CVS 5.5% (0.4)% (1.2)% 5.7%
WBA 4.8% 7.3% 19.7% 13.7% Source: Factset
WMT is towards the bottom of the pack based on common ratio analysis. Compared to traditional retailers TGT, KR, and COST, they have a high operating margin but a below-average ROA, ROE, and ROIC. This leads us to believe that WMT’s management may not be effectively using their assets. We believe that WMT has an acceptable ROIC although they could improve on it moving forward. We forecast a ROIC of 17%-20% for WMT in the forecast period.
It is difficult to compare Amazon and Walmart because Amazon is not a traditional retailer. Although Amazon is a direct competitor in the eCommerce marketplace, we do not believe comparing certain comparable measures of Amazon and Walmart yields meaningful conclusions. In the next column is a table with more comparison metrics.
D/E Div. Yld. Beta Int. Cov.
WMT 80.0% 2.17% 0.60 9.67x
AMZN 113.2% 0.00% 1.24 8.97x
TGT 119.0% 3.57% 0.81 9.15x
KR 193.1% 1.94% 0.70 4.39x
COST 46.8% 0.92% 0.82 30.55x
CVS 126.1% 3.05% 1.00 4.15x
WBA 72.8% 2.39% 0.87 9.04x
DG 44.6% 1.01% 0.71 20.61x Source: Factset
Aside from AMZN and TGT to an extent, most of these stocks are considered traditional consumer staples companies. We can see they all have betas less than or equal to 1 (AMZN excluded), indicating they are less volatile than the market. WMT, TGT, KR, CVS, and WBA have strong dividend yields for the sector. COST and DG have the lowest dividend yields, mostly due to their lower leverage and overall risk. COST and DG appear to be the “safest” choices in the industry as they have very high interest coverage (EBIT/interest expense) along with low debt to equity ratios. WMT, TGT, and WBA also have strong coverage ratios with WMT and WBA being on the lower end of the debt to equity ratios.
We believe, WMT, COST, and DG present the best potential moving forward in the industry. These companies each operate in slightly different areas of the retail landscape and use their strengths to their advantage while actively improving weaknesses.
Disruption
The internet will continue to disrupt the way traditional retail transactions have taken place. Consumers no longer need to leave their house to compare prices or order anything they want. The main trade-off will be time – would customers rather get the product immediately in a physical location or wait to receive it in the mail. The firms that can adapt to technology quickly and efficiently will be the ones poised to capture the most market share. We believe Walmart has taken the proper steps to improve their eCommerce platforms and compete with Amazon in both the U.S. and abroad.
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ECONOMIC OUTLOOK
Trade Agreements
Increased tariffs with China would affect Walmart in several ways. Walmart imports and exports both finished goods and materials for manufacturing goods. Household appliances were some of the first items to have tariffs imposed on them. It was a 20% tariff imposed in mid-2018.
3-Month Percent Change – Other Appliances
Source: Bureau of Labor Statistics
This graph shows the three-month percent price change for non-major appliances, like the types Walmart sells. This chart shows that the tariff was passed almost entirely to consumers, as prices of laundry equipment rose approximately 3%, a steeper increase than most years in the past decade. Some companies can pass these tax burdens onto consumers; however, we do not believe Walmart will be able to do this as easily. Since Walmart competes on price, they must compete to keep prices low. This means they would assume the losses that come from the tariffs or lose customers as prices increase.
Economic Downturns
Historically, Walmart has performed well relative to peers in the event of an economic downturn or recession. However, Walmart has been slow to catch up to the market during bull periods. This is shown on the chart below.
Walmart is a relatively safe defensive stock. The negative side of that is they do not see large price increases when the economy is doing well. This is due to their beta being 0.595.
Labor and Employment
Unemployment has been at historic lows for the last couple years as shown in the chart below. This has caused upward pressure on wages as companies like Walmart compete for workers in the United States.
Seasonally Adjusted Unemployment
Source: Bureau of Labor Statistics
Walmart has responded by raising their starting wage from $9/hour to $11/hour as well as expanding maternity benefits beginning in early 201932. Walmart may be forced to raise their starting wage higher as Amazon has hiked their minimum wage to $15 beginning in late 2018, and Target plans to do the same by 202033.
Walmart has had a long history of dubious employment practices. Issues include a 2017 report stating Walmart penalized workers for sick days and lawful absences and settled a dispute with union-supporting employees in 201834,35. These public issues make it harder for Walmart to attract new employees and retain current workers. The company has stated they are working on improving worker relations and working conditions.
CATALYSTS FOR GROWTH
Developing Economies
Developing economies in Asia, Africa, and Central America present the greatest international growth potential. On the next page is an annual GDP growth map of the world. Darker shading represents higher growth.
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Source: WorldBank
The markets with the highest growth are China, India, and several African countries. Walmart has an established presence in these countries and has been adding stores rapidly, especially in Africa. China presents a lucrative opportunity to expand eCommerce sales, however tariffs could dampen these results. India has a share of regulatory hurdles as well. Walmart will need to overcome these obstacles to harness the sales potential in developing regions.
Online Grocery
Online grocery has been the key driver for Walmart’s eCommerce revenue growth. As of January 2019, Walmart offers grocery pickup at over 2,100 locations and delivery at over 800 locations. The map below shows Walmart locations with grocery pickup available.
WMT Grocery Pickup Locations 2019
Source: Walmart.com
Walmart has been rapidly expanding grocery pickup and delivery services in the past two years, increasing from 1,100 locations in 2017 to 2,100 in early 2019. We believe they will continue expanding online grocery services to serve markets with few online options. Currently their grocery pickup service is free – consumers pay what they would if they shopped in the store. Their delivery service has a variable fee depending on time and order size. Tipping is an option but not required, and Walmart would not see those revenues anyway.
INVESTMENT POSITIVES
• Strong eCommerce growth gives Walmart an opportunity to increase revenues while lowering costs. eCommerce growth has been strongest in the Walmart U.S. unit; however, Sam’s Club could also see higher growth with their Plus Membership perks. The acquisition of Cornershop will drive eCommerce growth in Mexico and Chile.
• As Walmart expands their eCommerce operations they will have an advantage in their economies of scale. If they can efficiently utilize their existing supply chain, they can distribute online orders without large capital outlays.
• Walmart can expand further into developing economies. There is increasing demand for retail goods in African, Central American, and Asian-Pacific countries. They can sell products through both brick and mortar stores and eCommerce platforms.
INVESTMENT NEGATIVES
• An economic slowdown could hurt overall sales. Although Walmart has fared relatively well during slowdowns, they are not immune to reduced consumer spending.
• Walmart has potential for larger losses impacting 2020 earnings stemming from continued problems with the Flipkart acquisition. Indian FDI policy could make Walmart’s investment unable to generate the revenue they expected at the time of the acquisition.
• Difficulty finding a suitor for Asda could hurt Walmart’s bottom line in the short-term. Asda has not fared well
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against increased competition in the UK market, and UK regulators are making it difficult to sell the stores.
VALUATION
Model Valuations
The model valuations for Walmart are as follows:
• Henry Fund DCF/EP: $128-$130
• Henry Fund DDM: $104-$107
• Relative P/E: $72-$76
• Relative P/S: $70-$72
Walmart’s current stock price is $103.16. The DCF model indicates the stock is undervalued. The DDM, relative P/E and P/S models indicate the stock is overvalued. It should be noted the P/E and P/S models do not use AMZN as a comparison due to the unique nature of the company. There are currently 33 analysts covering Walmart. The analyst consensus one-year target price is $109.30. Our target price range of $115-$120 represents an 11%-16% upside on the current price and a 5%-10% upside on the analyst target price.
We believe the target price lies somewhere between the Henry Fund models and the relative models. We believe the undervaluation of the relative models do not account for the size and market saturation of WMT and their strong position in the industry. The DCF and DDM models reflect our optimism for WMT’s future as well as a consistently rising dividend for the company.
Cost of Capital Assumptions
Walmart’s weighted average cost of capital was calculated using the yield on the 10-year U.S. Treasury Bill for a risk-free rate of 2.48%. The assumed market risk premium is 4.95%. This is the Henry Fund consensus based on historical and forward-looking data. The beta used was 0.595, calculated using five-year weekly returns against the S&P 500. The pre-tax cost of debt was 3.78%, via Factset. These gave a 5.42% cost of equity using the capital asset pricing model. We used a 17.80% marginal tax rate based on Walmart’s marginal tax rate given in their 10-K. This resulted in a 5.08% WACC that is used in all years.
Revenue Growth Assumptions
Revenue growth was projected by Walmart’s three business units: Walmart U.S., Walmart International, and Sam’s Club. Below is their respective annual growth rates and continuing value growth rate for the 2024E year.
Unit Annual Growth CV Growth
WMT U.S. 2.5% 2%
WMT Int’l 1.5% 1.3%
Sam’s Club 2% 2%
Walmart U.S. sales projections were based on historical trends as well as accounting for a possible economic slowdown and the effects of tariffs with China and other countries. We believe 2.5% annual growth is on the conservative side, especially if Walmart has continued high growth in eCommerce sales.
It should be noted that Walmart International growth fluctuates around the 1.5% mark. This is due to forecasting the individual reporting regions that make up the international unit. Further detail can be found in the Walmart International section of the Company Description. We believe the international growth rate encapsulates the uncertainty in certain international markets as well as the strong growth shown in others.
Sam’s Club has fluctuated between slightly negative and positive growth in recent years. We believe a 2% annual increase in-line with inflation is appropriate for the business unit.
Margin Assumptions
Walmart has had decreasing cost of goods sold as a percentage of sales in recent years. We believe this will continue as they expand their eCommerce sales. We have forecasted a COGS/sales percentage of 74.50% in the first year with a 20 basis-point annual decrease. We believe this adequately reflects the cost-savings of higher eCommerce sales. Walmart’s gross, operating, and net profit margins are shown on the following page.
2019 2020E 2021E 2022E 2023E 2024E
GM 25.10% 25.70% 25.90% 26.10% 26.30% 26.50%
OM 4.27% 4.95% 5.15% 5.35% 5.55% 5.75%
PM 1.30% 3.51% 3.64% 3.82% 4.00% 4.17%
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The main driver behind Walmart’s increasing margins is the decrease in the COGS/sales ratio. We believe Walmart will see rising margins as they focus on eCommerce growth and improving efficiency in their international markets.
Capital Expenditure Guidance
Walmart management has given capital expenditure guidance of approximately $11 billion. This is an increase from 2019’s expense of $10.34 billion. We believe this is due to increased capital expenditures put towards improving their eCommerce platforms. Below is a breakdown of their capital expenditures over the past two years.
Capex Allocation 2019 2018
eCommerce/tech $5,218 $4,521
Remodels $2,152 $2,009
New stores $313 $914
Total U.S. $7,683 $7,444
WMT Int’l $2,661 $2,607
Total Capex $10,344 $10,051 Source: WMT 10-K, 2019
International and remodeling capital expenditures show small increases. Most of the increase is coming from an increase in eCommerce spending which is partially offset by a decrease in new stores. We believe this trend will continue in the short term as Walmart continues to compete with Amazon. Our capital expenditure forecast is shown below.
It is possible capex will decrease as Walmart refines their eCommerce operating efficiency.
KEYS TO MONITOR
Walmart’s success in their eCommerce endeavors will be one of the most important factors in their future growth. They will need to successfully compete with Amazon’s pricing, convenience, and supply chain logistics to capture market share.
Walmart International’s growth in specific regions should be monitored carefully going forward. The most important region is India because of their massive potential consumer base. If Indian foreign direct investment regulation is relaxed, Walmart will have a much easier time tapping into this market. Other firms such as Amazon would be competing with Walmart for market share, but Walmart has an advantage in Flipkart. If they are not able to successfully penetrate the Indian market, there could be large impairment charges on Flipkart. It is also important to monitor progress on a potential Asda sale, as Walmart would be exiting the UK market.
Trade agreements could affect how Walmart buys and sells in international markets. Tariffs would hurt domestic manufacturing that relies on foreign parts as well as increase the prices of finished goods that Walmart sells. It will be important to monitor further negotiations to assess the impact on Walmart’s costs.
0
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WMT Capex Forecast
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REFERENCES
1. WMT 10-K, 2014-2019 2. Factset 3. Bloomberg 4. Yahoo Finance 5. Deloitte – 2019 Retail Industry Outlook 6. SeekingAlpha 7. Reuters – Asda overtakes suitor Sainsbury to become
UK’s No. 2 supermarket 8. Bloomberg – Sainsbury and Asda Offer to Sell Stores to
Save $9.6 Billion Deal 9. Forbes – Why Tesco Says Sale Of Walmart’s ASDA
Should Not Be Cleared 10. The Wall Street Journal – Walmart’s Multibillion-Dollar
U.K. Merger Faces Big Hurdle 11. CNBC – Walmart is keeping the faith in its $16 billion
bet to take on Amazon 12. Quartz India – Despite the many policy pricks, Walmart
can’t just walk away from Flipkart 13. Walmart.com – Our Business 14. Simplemaps.com – Custom maps 15. Bloomberg – Walmart’s Killing It in Central America 16. Motley Fool – Walmart Says It’s Not Leaving Japan 17. Statista – e-commerce sales growth worldwide 2014-
2021 18. Mordor Intelligence – Retail Industry Trends 19. CB Insights – Private Labels Rising 20. CNN Money – Walmart is where the trade war comes
home 21. Bureau of Labor Statistics 22. WorldBank – GDP growth 23. Investopedia – Walmart Effect 24. Kroger 10-K, 2019 25. Costco Wholesale 10-K, 2018 26. CVS 10-K, 2019 27. Walgreens Boots Alliance 10-K, 2019 28. Amazon 10-K, 2019 29. Target 10-K, 2019 30. Dollar General 10-K, 2019 31. Forbes – America’s Largest Private Companies –
Grocery Stores 32. CNBC – Walmart to raise its starting wage to $11 33. CNBC – Amazon’s minimum wage hike puts pressure
on Walmart, Target, others to follow 34. New York Times – Walmart Is Accused of Punishing
Workers for Sick Days
35. Washington Post – Walmart to settle with labor activists in dispute over union organizing
IMPORTANT DISCLAIMER
Henry Fund reports are created by students enrolled in the Applied Securities Management program at the University of Iowa’s Tippie College of Business. These reports provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of our students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold an investment position in the companies mentioned in this report.
Weighted Average Cost of Capital (WACC) Estimation
Inputs Source
Risk-free rate 2.48% 10 Yr TreasuryEquity market risk premium 4.95% Henry Fund consensus
Beta 0.595 5 year weeklyCost of debt 3.78% Factset
Cost of equity 5.42% Risk-free + Beta(MRP)Marginal tax rate 17.80% Based on historical, accounting for tax rate changeCost of preferred stock 0 Factset - no preferred stock
Total payout ratio (Dividends+repurchases)/Net income 44.68% 61.06% 92.06% 45.63% 46.46% 46.68% 46.86% 45.84%
Present Value of Operating Lease Obligations (2019) Present Value of Operating Lease Obligations (2018) Present Value of Operating Lease Obligations (2017)
Operating Operating OperatingFiscal Years Ending Jan. 31 Leases Fiscal Years Ending Jan. 31 Leases Fiscal Years Ending Jan. 31 Leases
2020 1856 2019 1933 2018 2270
2021 1655 2020 1718 2019 1787
2022 1420 2021 1532 2020 1679
2023 1233 2022 1381 2021 1524
2024 1063 2023 1158 2022 1342
Thereafter 6891 Thereafter 7644 Thereafter 9537
Total Minimum Payments 14118 Total Minimum Payments 15366 Total Minimum Payments 18139