Many reasons should be obvious. The company has a distinct cost advantage with its size and distribution system and is still able to price competitively. This is evident in its operating margins in which it beats Amazon’s 4.1% with its 5.9% (2010). Wal-Mart’s margins have also shown much more stability compared to Amazon’s declining margins.
A comparison of Wal-Mart and Amazon’s return on equity is also revealing. Wal-Mart logged a higher return on equity than both Amazon and Target, but it beat Amazon in all three areas that comprise the metric. Wal-Mart was less leveraged, had an asset turnover ratio that was 32% higher than Amazon’s and its razor thin profit margin bested Amazon’s by 10 basis points.
This does seem counterintuitive as you’d imagine Amazon being the much more bare boned operation. If Wal-Mart is able to edge out Amazon now, it’s hard to see Amazon gaining a step. Amazon is starting to feel the heat of cash starved states. As is happening in Texas and Illinois, states are taking aim at Amazon and trying to collect on sales taxes which Amazon does not pay. This maneuver on Amazon’s part has certainly been a boon to their business, but the states are not oblivious to the impact on their coffers. Perhaps there will be negligible impact to Wal-Mart’s revenues when and if Amazon starts paying taxes, but it’s a scenario worth considering for those anxious about the online threat
Amazon aside, Wal-Mart’s primary competitors remain Target, the growing dollar stores and increasingly the grocers. Wal-Mart diversified into the grocery business and now counts 50% of its revenues from grocery. Here again Wal-Mart is able to undercut its competitors in pricing and obtaining produce at a lower cost. One of New York’s largest grocers in A & P recently filed for bankruptcy at the mercy of Wal-Mart, Target and Costco.
Wal-Mart is highly regarded for its outstanding leadership. Bloomberg included the company along with some other Buffett holdings; Coca-Cola, Proctor and Gamble, GE and Goldman Sachs as part of the top 20 companies for leadership. It is no question the leadership excellence came from the founder Sam Walton. Buffett has not been quiet about his admiration for Walton and has praised his biography as well as Jack Welch’s. A well led company is certainly what Buffett looks for. Buffett’s stake in Kraft was reduced earlier this past year as the company pursued what he believed to be deals that eroded shareholder value.
Of course the single most important factor for any of Buffett’s investments is price. He nearly doubled his stake in the company this past year at price in the low $50’s. The price was not cheap, but certainly fair for a company of its caliber. Perhaps he's trying to avoid mistakes of years past. In the 2004 shareholder conference Buffett was quoted as saying "I set out to buy $100 million shares of Wal-Mart at a [pre-split price of] $23. We bought a little and it moved up a little and I thought maybe it will come back a bit. That thumbsucking has cost us in the current area of $10 billion."
On a side note I was reading a comment on a Wal-Mart story that was left by someone that does business with Wal-Mart and I thought it was worth sharing. You can read about Wal-Mart’s frugality, but as a shareholder its hearing comments from the peanut gallery like this that puts a smile on my face:
“I haven't worked for them, but I have dealt with Wal-mart. I've been to their head offices and man is it sparse. This is a company that must try and justify each and every single expense.
I go to other companies and you get nice meeting rooms, lunches... you know the kind of corporate goodies you expect at that level. Walmart... they drag a flip table... they probably sell at walmart and some ghetto chairs and have a meeting with us. It's a sight to see”
Disclosure: Long Wal-Mart