Wal-Mart’s (WMT, Financial) long term success is a favorite point of discussion for equity enthusiasts who want to show the magic of compounding (known as the eighth wonder of the world). Shares initially went public in October 1970, at a price of $16.50 per share (300,000 shares offered). Since then, the stock has split eleven times, the most recent of which took place in March of 1999. With those splits accounted for, the cost basis per share at the IPO is $0.0079/share today. At today’s close of 54.29/share, that means the stock has increased 687,115% (or 24.7% per annum over the 40 year period).
Unfortunately, looking back in awe isn’t going to make us much money. For many investors, the amazing success and size Wal-Mart has achieved is more of a setback than an opportunity. The thinking goes that Wal-Mart has seen their day, and has saturated the market with no where left to turn. The stock was actually down over the past ten years before the small gain today (not very meaningful, but many investors look for confirmation bias and use past price movements as justification for future strategy), and has a market cap over $190 billion, meaning a ten bagger is probably out of reach for about a quarter of a century. For many, these issues are enough to make a 2.2% dividend (which has increased more than 15% per annum over the past 10 years) and a P/E of less than 13.5x on FY2010 earnings seem like nothing to get excited about. Despite their reservations, I believe investors should reassess the international (growth) picture before turning away from WMT.
In 1991, Wal-Mart opened a Sam’s Club near Mexico City; two years later, Wal-Mart International was launched as its own division, with Bobby Martin taking the position of president. In 1999, the international division delivered sales of $12.247 billion, the first time they crossed the $10 billion mark. The next year, sales jumped to $22.728 billion, along with an operating profit of $817 million. For FY 2010, the company reached another milestone, with international sales exceeding $100 billion for the first time ($100.1B and 24.7% of total sales), along with impressive operating income of $5.033B. Based on these figures, sales and operating income increased by 16% and 20% per annum (respectively) over the period. That says a lot about the recent success; let’s take a look at how Wal-Mart got here.
Looking back, it’s amazing to see the lack of presence Wal-Mart had at the turn of the century; as of January 31, 2000, the Company operated units in Argentina(13), Brazil(14), Canada(166), Germany(95), Korea(5), Mexico(458), Puerto Rico(15), the United Kingdom (232), and in China(6). Today, the company has more than quadrupled the number of international stores compared to ten years ago, eclipsing 4,000 units in 2010. Something important to understand is that Wal-Mart has struggled in the past when they have entered certain countries. For example, Wal-Mart entered Germany in 1998; eight years later, they closed up shop (as well as in South Korea), a move that cost roughly $1 billion. Andreas Knorr and Andreas Arndt of the University of Bremen did a study on the decision, simply titled "Why did Wal-Mart Fail in Germany?" Their conclusion: "Wal-Mart's attempt to apply the company's proven US success formula in an unmodified manner to the German market turned out to be nothing short of a fiasco.” Noted issues include attempts to enforce American-style management practices and inappropriate product selections for the target market. As noted by then CEO of Wal-Mart Germany David Wild, "Many of our (product) buyers in Germany were Americans. Some real goof-ups occurred as a result.”
You may be asking yourself, why in the heck would this make you happy as an investor? First off, I like it when management messes up; as a result, they learn things, and hopefully won’t make the same mistakes again. Secondly, the failure is a blip on the timeline of Wal-Mart’s success; as a long term investor, this minor setback is of very little importance. The lessons learned, on the other hand, will pay proceeds for years to come. A great example of this is the strategy that Wal-Mart has implemented as of late in international markets: teaming up with local partners. Doug McMillon, who took over as the head of Wal-Mart’s international business in January 2009, has been an integral piece in implementing this strategy. Since his arrival, Wal-Mart has taken a majority stake in D&S, Chile’s largest retailer, opened cash-and-carry stores with Bharti, a partner in India, and is currently finalizing the acquisition of South African retailer Massmart Holdings. The strategy has shifted, and is squarely focused on providing locally demanded products while implementing Wal-Mart signature cost savings/supply chain efficiencies. As noted by Mr. McMillon, “What we want is to be more effective than a local retailer because we are global. But to be so locally relevant that we are not disadvantaged against other retailers.” The recent struggles of both Carrefour and Tesco (in the U.S.) only strengthen my beliefs that Wal-Mart can (and will continue to) beat competitors on price through both innovative supply chain techniques (like delivering goods both ways on shipments as opposed to sending empty containers back) and economies of scale. As an investor, it’s hard to ask for a much more sustainable competitive advantage (essential a patent on low prices).
Goldman Sachs (GS, Financial) downgraded WMT shares from buy to neutral on Tuesday, saying the improving economy will cause some shoppers to migrate away as the need to chase savings becomes less of a focal point in American life. Flip this idea on its head for the growing middle class that is the lifeblood of almost all emerging market growth stories, and you can see why I’m extremely optimistic for Wal-Mart’s future. Innovative growth strategies like e-commerce, which was recently added to operations in China, only make the current valuation look that much better. While I can’t fathom 20%+ returns per annum looking forward, I believe that investors would be well served to reevaluate the opportunity for stock price appreciation from global growth mixed with the safety of a leading position in global retail that should only expand looking forward.
Unfortunately, looking back in awe isn’t going to make us much money. For many investors, the amazing success and size Wal-Mart has achieved is more of a setback than an opportunity. The thinking goes that Wal-Mart has seen their day, and has saturated the market with no where left to turn. The stock was actually down over the past ten years before the small gain today (not very meaningful, but many investors look for confirmation bias and use past price movements as justification for future strategy), and has a market cap over $190 billion, meaning a ten bagger is probably out of reach for about a quarter of a century. For many, these issues are enough to make a 2.2% dividend (which has increased more than 15% per annum over the past 10 years) and a P/E of less than 13.5x on FY2010 earnings seem like nothing to get excited about. Despite their reservations, I believe investors should reassess the international (growth) picture before turning away from WMT.
In 1991, Wal-Mart opened a Sam’s Club near Mexico City; two years later, Wal-Mart International was launched as its own division, with Bobby Martin taking the position of president. In 1999, the international division delivered sales of $12.247 billion, the first time they crossed the $10 billion mark. The next year, sales jumped to $22.728 billion, along with an operating profit of $817 million. For FY 2010, the company reached another milestone, with international sales exceeding $100 billion for the first time ($100.1B and 24.7% of total sales), along with impressive operating income of $5.033B. Based on these figures, sales and operating income increased by 16% and 20% per annum (respectively) over the period. That says a lot about the recent success; let’s take a look at how Wal-Mart got here.
Looking back, it’s amazing to see the lack of presence Wal-Mart had at the turn of the century; as of January 31, 2000, the Company operated units in Argentina(13), Brazil(14), Canada(166), Germany(95), Korea(5), Mexico(458), Puerto Rico(15), the United Kingdom (232), and in China(6). Today, the company has more than quadrupled the number of international stores compared to ten years ago, eclipsing 4,000 units in 2010. Something important to understand is that Wal-Mart has struggled in the past when they have entered certain countries. For example, Wal-Mart entered Germany in 1998; eight years later, they closed up shop (as well as in South Korea), a move that cost roughly $1 billion. Andreas Knorr and Andreas Arndt of the University of Bremen did a study on the decision, simply titled "Why did Wal-Mart Fail in Germany?" Their conclusion: "Wal-Mart's attempt to apply the company's proven US success formula in an unmodified manner to the German market turned out to be nothing short of a fiasco.” Noted issues include attempts to enforce American-style management practices and inappropriate product selections for the target market. As noted by then CEO of Wal-Mart Germany David Wild, "Many of our (product) buyers in Germany were Americans. Some real goof-ups occurred as a result.”
You may be asking yourself, why in the heck would this make you happy as an investor? First off, I like it when management messes up; as a result, they learn things, and hopefully won’t make the same mistakes again. Secondly, the failure is a blip on the timeline of Wal-Mart’s success; as a long term investor, this minor setback is of very little importance. The lessons learned, on the other hand, will pay proceeds for years to come. A great example of this is the strategy that Wal-Mart has implemented as of late in international markets: teaming up with local partners. Doug McMillon, who took over as the head of Wal-Mart’s international business in January 2009, has been an integral piece in implementing this strategy. Since his arrival, Wal-Mart has taken a majority stake in D&S, Chile’s largest retailer, opened cash-and-carry stores with Bharti, a partner in India, and is currently finalizing the acquisition of South African retailer Massmart Holdings. The strategy has shifted, and is squarely focused on providing locally demanded products while implementing Wal-Mart signature cost savings/supply chain efficiencies. As noted by Mr. McMillon, “What we want is to be more effective than a local retailer because we are global. But to be so locally relevant that we are not disadvantaged against other retailers.” The recent struggles of both Carrefour and Tesco (in the U.S.) only strengthen my beliefs that Wal-Mart can (and will continue to) beat competitors on price through both innovative supply chain techniques (like delivering goods both ways on shipments as opposed to sending empty containers back) and economies of scale. As an investor, it’s hard to ask for a much more sustainable competitive advantage (essential a patent on low prices).
Goldman Sachs (GS, Financial) downgraded WMT shares from buy to neutral on Tuesday, saying the improving economy will cause some shoppers to migrate away as the need to chase savings becomes less of a focal point in American life. Flip this idea on its head for the growing middle class that is the lifeblood of almost all emerging market growth stories, and you can see why I’m extremely optimistic for Wal-Mart’s future. Innovative growth strategies like e-commerce, which was recently added to operations in China, only make the current valuation look that much better. While I can’t fathom 20%+ returns per annum looking forward, I believe that investors would be well served to reevaluate the opportunity for stock price appreciation from global growth mixed with the safety of a leading position in global retail that should only expand looking forward.
