April 7, 2020
Walmart’s E-Commerce Strategy is Showing Signs of Success

Walmart’s E-Commerce Strategy is Showing Signs of Success

Mac Greer: It’s Thursday, November 15th.
Welcome to Market Foolery! I’m Mac Greer. Joining me in studio,
we have Motley Fool analysts Ron Gross and Andy Cross.
Gentlemen, how are we doing? Ron Gross: How are you doing, Mac? Andy Cross: I’m doing great. 
Greer: I’m doing good. We’ve got sleet, we’ve got snow —
Cross: Snow, Mac. Let’s say snow. Greer: There was sleet!
Cross: But let’s focus on the snow. It’s that time of year! Greer: 6AM, it was sleet. I went out, got the newspaper. Yes, I still old-school
read the newspaper, and it was sleeting. Gross: School’s closed in Montgomery County,
Maryland. Why, you ask? I don’t know. Cross: It was snowing —
Greer: Well, the sleet was — Gross: Alright, a little bit of sleet.
Cross: It was slippery. Greer: In the mean streets of North Arlington,
schools did not close. They stayed open. Gross: It’s rough and tumble.
Greer: We’re gritty. We’ve got lots to talk about here. We’re going to talk some
Warren Buffett, and we’re going to talk some Levi’s. And I am going to ask you guys to share your
jeans-wearing history. A little catnip for people to look forward to. 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.
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. 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. Greer: Speaking of nice performers, there’s
a guy named Warren Buffett who’s got a pretty good track record, is my understanding,
as an investor. His company, Berkshire Hathaway, just reported its third quarter holdings.
Boy, does Buffett, or someone over at Berkshire, really like banks. Guys, let me give you the
ten holdings quickly. See if you notice a theme here. Apple is the biggest holding.
Then we’ve got Bank of America, Wells Fargo, Coke, Kraft Heinz, American Express, U.S.
Bancorp, Moody’s, Goldman Sachs, and JP Morgan Chase. Five of the ten are banks!
Gross: You look at this portfolio and you say, a bunch of banks and a bunch of consumer
staple-ish stocks. It doesn’t seem to be a very exciting portfolio.
Greer: The curmudgeonly trader, there you go again!
Gross: Mr. Buffett doesn’t know what he’s doing. When I think of Buffett, I think
of that folksy guy who likes See’s Candy kind of businesses, old economy types of businesses.
But we forget, he’s a student of financials, whether it be insurance or financial services
or the big banks. You’ll remember long ago, he was actually interim chairman of Salomon
Brothers. Subsequently, in various financial crises, he’s helped bail out more than one
large bank. He understands these companies where I will say I tend to not, because they
seem like a black box to me. He clearly does. And I think that makes him comfortable
investing big portions of his portfolio, especially in this type of environment, where interest
rates are going to start to rise, less regulation. He sees some good stuff on the horizon.
And knowing what he knows about how these banks run, he’s comfortable.
Greer: Does this get you more interested in banks, Ron? Gross: No. Cross: Warren Buffett has insights, like
Ron was saying, into the financial world from his 60 years of investing in all types of
businesses. He also has the Todd and Ted partnership, helping him out in the investing landscape,
as well. You look through his portfolio, you do see companies like the airline investments
they’ve made over the last year or so, combined with a lot of financials. The financial investment
doesn’t really surprise me. Ron mentioned the rising interest rates. From a scale perspective,
from competitive position, the largest banks continue to widen those moats.
Frankly, Mr. Buffett is not one that’s going to pay 10X revenues, per se,
for software-as-a-service companies. And he has a lot of capital to put the work. They have $100 billion in
cash on the balance sheet. They generate so much cash from their operating businesses to be
able to invest. Making investments like this — including Oracle, which they bought last
quarter, as well. These are the kinds of investments you expect to see from Berkshire Hathaway.
Given the size of the organization and amount of capital they generate. and the traditional
valuation bent and thinking, these don’t really surprise me. These investments,
he knows them well. Gross: Yeah. It’s good to see the Ted and
Todd influence. Buffett was notorious for staying away from tech. He said it’s because
he couldn’t understand it. It’s not really about not understanding, it’s about not being able to
predict the future, which I completely understand. But it’s nice to at least see
him in consumer electronics like Apple; Oracle, a business where either he or Ted or Todd
can understand. We saw recent investments in fintech, financial technology, companies.
Good to see, because clearly, that’s going to be a big place to put capital for the future.
I like to see some of that in addition to the old Kraft, Coke, AmEx kind
of stocks that he’s owned forever. Cross: And, by the way, let’s not forget,
he’s also buying his own stock. They bought almost a billion dollars’ worth of
Berkshire Hathaway stock in the last quarter. That’s significant. He doesn’t really go out there
and aggressively buy his own stock. Instead, he changed his methodology for thinking about
when to buy that stock from a price to book value target to “when we think the stock
is undervalued.” And they bought a bunch last quarter. Greer: I’ll be curious to see if he starts buying even more Apple. For perspective here,
Apple, his largest position by far, almost $57 billion worth of Apple stock.
Bank of America, around $25 billion. Wells Fargo, $23 billion. Apple, far away.
Gross: I would imagine, with the Apple weakness that we’ve seen lately, he’s in the market
buying more. That’s just a guess. I don’t think he gets hung up as much as traditional
Wall Street does on the quarter to quarter iPhone unit sales numbers. I think he’s thinking
longer-term about what Apple will do, in terms of generating cash flow and buying back stock
over the next five or ten years. So, I would imagine he’s increasing
his position on this weakness. Greer: If I’m an investor, and I hear about
these ten holdings, and I’m like, “Buffett’s had an incredible track record. One of
the most successful public market investors in history. Why not just mimic this portfolio?”
Why shouldn’t I just go out and buy these ten stocks? Cross: I think you’d
be better off buying Berkshire Hathaway. Gross: You could mimic
these stocks, but then what? He’s constantly changing the portfolio,
adding to other companies. But more important, you’re getting all the operating businesses
of Berkshire Hathaway, which are generating all those billions of dollars of cash flow.
Geico generating the float capital, which you then can invest in stocks. Just buying
these publicly traded companies, you would not be getting all those
operating businesses, as well. Cross: I think if you want to go investing in some
of these businesses, they can be fine investments. But considering he was buying
his own stock, and he’s pretty particular about when they buy that stock … Berkshire Hathaway is one
of my largest personal positions. Gross: Me, too.
Cross: I think the stock is undervalued now, so if you wanted to put your money behind
Mr. Buffett and that team, especially with the insurance operations that Ron mentioned
and the operating businesses, buy Berkshire Hathaway. Greer: Guys, our final story, one that is near and dear to my heart, we’re going
to talk Levi’s! We’re going to talk denim, we’re going to talk jeans. They’re getting ready
to open this massive flagship store in Times Square. It’ll be their largest store in the world.
But that’s not why we’re talking about Levi’s. We’re talking about Levi’s because,
according to reports, they are talking about going public again. I say again because Levi’s
was a public company from 1971 to 1985. Does a Levi’s IPO have us excited?
Gross: An iconic American brand, for sure. They’re trying to raise $600-800 million,
a valuation of around $5 billion, it looks like. I don’t know if it gets me excited
from a stock perspective. I have to see what kind of valuation this looks like relative
to cash flow and earnings. I don’t know what growth potential looks like, whether this
is an international play or retail play. Obviously, they have their own stores, almost 3,000 of them,
but they sell into 50,000 retail locations around the world. Levi’s Dockers,
Denizen brands. I’ll keep an eye on it. It’s not some hot tech IPO, that’s for sure, but I’ve never
been a hot tech IPO investor, anyway. Greer: Ron, we were talking about this before
— apparently, Levi’s T-shirts are all the rage these days. Who knew?
Gross: Who knew? I’m telling you, iconic. It’s an iconic American brand.
Greer: Do you ever wear Dockers? Gross: Do only old men wear Dockers, is my
question. Because then I’ll answer your question. Cross: With pleats!
Greer: I wore pleats for like ten years too long. And finally, I had a group of friends,
it was like an intervention. They basically said, “You have to quit wearing pleated pants.”
No one had told me! And, apparently, the braided belt, that went out.
Gross: That went out, too. Did you wear the stretch waistband Dockers?
Or just the straight-up Dockers? Greer: No, the straight-up Dockers, but they
were pleated. It was a bad look. Someone should have just pulled me as side.
Sometimes tough love is the best love. Gross: Don’t throw out that
braided belt. That’ll come back. Greer: Oh, my gosh, I’m banking
on it. Andy, what do you think of Levi’s? Cross: As Ron was saying,
even though it’s headquartered in San Francisco,
not some high-tech investment, it’s not. It’ll probably be priced
around 1X sales. It looks profitable. It looks like it’s growing nicely. There has been a
resurgence here, along with the iconic brand, the Americana. There’s enough to get me kind
of excited. But the business in general has proven to be quite tough over the years.
Gap struggled. We know what the retail channels are looking like with them. More and more
of their business might be tied to their own distribution, rather than dependent on the
likes of the other storefronts, particularly those that are tied
more to malls. Traffic is down there. It will be interesting to see how they use
their brand, and how that translates to a new buying experience compared to where it
was the last time it went to the public markets. It’s a much different marketplace now.
Gross: I’d be curious why they need $600-800 million of capital. Is somebody trying to
cash out of this business? Do they need that capital because of some growth strategy?
I’d need to see their projected use of funds. Cross: Yeah, and how much the family still
owns may be tied to it. It is interesting. Why now? Why right now? Are they trying to
push the growth story that they can’t find internally with their own capital? Why offer
shares versus taking on more debt? That’d be pretty cheap right now. It might be a liquidity
event from a core group of shareholders. Greer: The business is 165 years old.
Gross: That’s amazing. Greer: It’s pretty cool. It’s very cool.
Here’s another fun fact, if you’re out and about and there’s a lull in the conversation. Worldwide
denim market, $95.5 billion. How much of that does Levi’s have, according to 2017 figures? Gross: 15%.
Greer: Andy? Cross: I’ll say a little bit less than that, 10%. Greer: 5.3%. Gross: Interesting.
Greer: There’s a lot of upside if you think denim is going to be around for a while.
Gross: Kids do not wear jeans anymore. Male children. The girls still wear them.
But there is no jean market right now for kids. Greer: That’s true.
Gross: So, that might be an opportunity, or it might be a red flag. 
Greer: That’s such a good point. My boys will not wear jeans. They wear athleisure wear.
I know Lululemon that hates that term, but that’s what it is. It’s athleisure. It’s something
I’m going to be wearing in 20 years when I drive a golf cart.
Gross: That sounds awesome. Sign me up. Greer: As we wrap up, I have to ask. We talked Dockers earlier. Let’s briefly
belly up to the bar here and talk about our jean-wearing history.
Andy Cross, give me the overview. Cross: I’ve gone through Wranglers,
I’ve gone through Lee’s. I’ve never been a super fashion person. But I did have a little bit
of one embarrassing jean moment. We were at The Motley Fool board of directors,
and Tom Gardner was trying to get us all to bond and was talking about an embarrassing story.
I had mentioned one thing that I just like to do when I try on jeans, back when I used to
go to the store. I’d try them on and turn around and check out how
my backside looks in the mirror. Gross: [laughs] At the board meeting?
Cross: So, I mentioned this to the board of directors. And it got a really good laugh.
But I wish I hadn’t told that story to the board of directors.
Greer: Wow. True confessions. Cross: It was a true confession.
But, yeah, I have a pair of Levi’s on right now. It’s a standard go-to. They’re affordable,
they’ve opened up lots of different types of styles that match what I want.
Greer: Ron? Gross: The jeans I’m currently wearing as
we speak are nine years old and from Gap. I’m sure they’re not in style anymore.
Cross: Were they ever? Gross: I don’t know.
I wouldn’t even know how to tell. Greer: And what would you say was your most stylish
jeans? If we go back, get in the way-back machine. Gross: Oh, this is sad.
I don’t know how much of our audience remembers Jordache or
Jordache and Sasson jeans. In sixth grade, I had a brand-spanking-new pair of Jordache that
I refused to wear because they were designer and tight and ridiculous. But yet, I found
myself having to throw them on to attend a band concert that the parents
all attended in our sixth grade auditorium. I remember it to this day. I’m sure I dream about it
consistently. It was just so embarrassing and traumatic.
Greer: And how did that work out for you? Gross: It was just so embarrassing and traumatic.
Cross: You guys ever go the Mavi route? I did Mavi’s for a while.
Greer: No, what is that? Cross: It’s a brand. They’re still around.
You can still buy them on Zappos and Amazon. Gross: Lucky makes a nice pair of jeans. Cross: Lucky, yeah. Greer: I’m surprised neither of you mentioned
Toughskins. I would rock the Toughskins in elementary school.
Cross: [laughs] Toughskins?! Gross: Are they for husky children?
Cross: There you go! If the jean fits … Greer: I was not husky. Then I went through
a dark period in college where I wore Wranglers with Stan Smith tennis shoes, which is a
terrible look. If you’re going to wear Wranglers, you have to wear boots. And I think technically,
you probably have to dip or chew. I didn’t do any of that.
Gross: Are you wearing Kirkland jeans right now? Costco?
Greer: I’ve gotten religion. I was wearing Kirkland for a while. I love Costco.
You know I love Costco. Gross: Yeah, we know.
Greer: But Kirkland is just … I feel like you’ve just given up. So, I finally said,
“I’m going back to Levi’s.” Now, I’m wearing Levi’s 501s. Gross: They look amazing. Greer: I’m happy as a clam, but I’m not
turning around. I don’t do that. I just put them on and there you go.
Gross: You know that strip that goes along the leg that says what size they are?
The adhesive strip? I once went to a party forgetting to remove that adhesive strip. And I got there,
and luckily, it was friends who pointed out. But before they told me, they took a picture
of it. I as wearing a blazer, jeans, and the adhesive strip. I forget what size they were.
Greer: I think that that means you’re just incredibly secure.
Gross: Because I didn’t check myself out in the mirror before?
Greer: You’re so confident that you’re like, “This is how I roll.”
Gross: It was there on purpose. Greer: Then again, I didn’t get
married until I was 40. Consider the source. Gross: [laughs] Yeah, you’re no source.
Cross: Acid wash? Did you guys go the acid wash route? Gross: I loved acid wash. Greer: More stone wash,
but yeah. You like acid wash? Gross: It worked for me for a good
two years in New York and Jersey. Greer: Full-on Bon Jovi.
Gross: Good times. Greer: The desert island poll, it’s a little tricky this time.
I think I know where you’re going with this. If you had to invest in one
of these companies that we’ve talked about, you’re on a desert island for the next five
years — I should preface this by saying, don’t invest this way. It’s just a fun game.
Walmart, Berkshire Hathaway, or the maybe soon-to-be Levi’s IPO. Berkshire?
Cross: Yeah, I have to go Berkshire on that. Gross: No-brainer. I think it’s my biggest
holding, actually, and I’m a proud shareholder. Greer: There you go. Andy Cross,
Ron Gross, thanks for joining me! Gross: Thanks!
Cross: Thanks, Mac! Greer: [email protected] is our email.
If you have any questions or comments, or if you just want to talk about your jeans
history, we would love, love, love to hear it. As always, people on the show may have
interest in the stocks they talk about, and the Motley Fool may have formal recommendations
for or against, so don’t buy or sell stocks based solely on what you hear. That’s it for
this edition of Market Foolery. I’m Mac Greer. For the Jordache-wearing Ron Gross, and
for the very fashionable Andy Cross, the show is mixed by Austin Morgan.
Thanks for listening! We’ll see you tomorrow.

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