April 10, 2020

Walmart’s E-Commerce Business is Big, But is the Stock Worth Buying?

Mac Greer: Let’s start with Walmart.
Stronger than expected earnings. 11 straight quarters of sales growth now.
E-commerce sales up 43%. And, Walmart raised full-year guidance.
That all sounds great. And then I go and I quote
the stock, and shares are down. Andy Cross: Of course, one day,
the stock price can move on a lot of reasons. The story here with Walmart, as we talked
about last quarter, is really the e-commerce, the change that they’re really
trying to push ahead. Even the commentary, there’s so much conversation
about the investments they’re making in more sophisticated distribution. Warehouses, online grocery, delivery,
grocery pickup is a big push for them. The e-commerce business, Mac,
like you said, up 43% this quarter. That’s an improvement of 40% last quarter,
33% increase the quarter before that, and 23% four quarters ago. A year on year improvement, and a continuing
of the trend on e-commerce sales for Walmart. Continues to be impressive. The stock
reaction today, it’s still kind of slow-growing. Sales are up 1.4%, 2.4% if you back out some
of the currency. Maybe not quite so exciting. But really, for such a large company,
they continue to make these investments to try to move the needle and, obviously,
compete against Amazon. Ron Gross: Yeah, a lot of good
things to focus on in this report. I think the curmudgeonly traders out there
today are probably focusing on margins that got hit a little bit due to higher transportation
costs, rising e-commerce fulfillment costs. And actually, that’s a good thing, because that
means they’re growing their e-commerce business. But nevertheless, it does
come with higher costs. Profit is actually down 2%. It’s hard to get excited about a report where
profits are down from the previous period last year. I think that’s probably what folks are
focusing on. But I do like the raised guidance. I think that makes sense. The stock
has been all over the place this year. From February through August,
it was a woof, as you like to say. But it’s come back since then.
Kind of flat year to date. Nothing really exciting coming from
the stock. I like the raised guidance. Only 21X earnings right here for a company
that will probably grow in the low single digits. We’ll see how that
e-commerce continues to ramp. Cross: They also closed the Flipkart acquisition, which
is the Indian business which they competed a lot for. That’s expensive, and it
added to the debt pile for what they have. But that’s an exciting investment to make. They’re definitely not standing still, certainly
not the Walmart story of even five years ago, with the investments they’re making. And they have to, because it’s so much more
of a competitive space, with free shipping from the likes of Amazon and
others who are not standing still. You have a company that’s going to generate
$15 billion or so in free cash flow. They’re basically going to spend that all
in dividends and share buybacks. It’s really a return of
capital story for investors. The stock’s reacted very nicely
off the lows here earlier this year. At $100 now, it sells
for about 21X earnings. A slight premium to the market
when you look at forward earnings. Probably not a ton to get
excited about in the stock price. But from the business side, they’re making
the investments that are important. Greer: And not curmudgeonly, right?!
You don’t have to be curmudgeonly about it. Cross: No, I don’t think so. Gross: Years ago, we used to talk about how
they have to right size the U.S. business. The U.S. business is everything we
talked about. Now, they’ve got it humming along. International, though,
isn’t where they would want to be. Andy, you mentioned the Flipkart acquisition,
which I think is a really interesting one. Unfortunately, the CEO of that business unit
had to resign following an allegation of sexual assault. Obviously, that throws a little
bit monkey wrench into some works. They had to shed control
of their Brazil operations. They merged their U.K. operations with a rival to focus
on the U.S. business and their e-commerce business. So, international is kind of floundering.
They need to figure that out next, I think. Cross: On the U.S. side, the comp growth
of 3.4%, that’s a 1.2% increase in traffic. More people coming into the stores.
But, a 2.2% increase on the average ticket price. That’s a little bit higher than inflation. They actually are seen some benefits from some of
the pricing mechanisms that they’re putting forward. And that’s an increase off of
the 1.2% from last quarter. They are actually seeing some pricing benefits,
which you don’t really particularly expect to see from Walmart in
this kind of environment. Greer: Along those lines, let’s talk about two areas
of the business that really appear to be growing. Toys, benefiting from the
Toys R Us bankruptcy, and groceries. By the end of the year, Walmart expects to be able
to deliver groceries to 40% of the U.S. population. Cross: If you look at my household, groceries
and toys are pretty good spots to focus on, with two young kids. That’s bread and butter, trying to serve the
customer base that Walmart wants to serve in ways that are more convenient.
As Ron mentioned, they’re investing in that. The new distribution center they’ve been working
on in California will allow them to ship product goods at a 40% faster rate than
the traditional distribution centers. A lot of investments, a lot of robotic
investments going into the distribution center. Amazon’s done this so well,
Walmart is now playing catch up. The groceries, we all buy groceries.
I eat every day, Mac. And I’ve seen you eat almost every day. Greer: It’s not pretty.
Cross: And certainly Ron. It may not be pretty. Gross: I don’t like to miss a meal. [laughs]
Cross: [laughs] We all depend on food. It’s a good spot for them to focus on, and
trying to now meet the customers where they want to be met.
Gross: I love this quote. CEO McMillan said, “Walmart can offer fresh
food within ten miles of 90% of the U.S. population.” That’s pretty powerful.
Greer: And you’re still curmudgeonly? Or are you coming off that? Gross: This company and this stock are not
going to knock the cover off the ball. But, from a total return perspective, as part
of the more conservative portion of your portfolio, I have no problem with it.
Cross: A 2% dividend yield. Don’t expect fireworks, but certainly,
over the last couple months, it’s been a nice performer for people who have held on.

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