Target (TGT) can’t seem to get out of the spotlight; its expansion into Canada has come under some heat from investors (with the company doubling their expected loss in the region for the fourth quarter on Friday), and now it's facing some bad press over a sizable data/credit card breach.
I’m not too interested in Target. I’ve never taken a very close look at its financials, but my sense is that its target customer (no pun intended), over time, is much more likely to shop with the Amazons (AMZN) and the Costcos (COST) of the world than your average Wal-Mart (WMT) customer. In addition, I believe that food sales will prove relatively difficult to replace outside of brick and mortar. Food accounted for just 20% of Target’s total sales last year (in its defense, this was about 15% five years ago); by comparison, grocery accounted for more than half of Wal-Mart’s U.S. sales - making the company the nation’s largest grocer. On a dollar basis, Wal-Mart’s U.S. grocery sales in the most recent year exceeded Target’s by a factor of ten.
By the way, I have taken a pretty close look at Wal-Mart’s financials – and I like what I see; after rereading Sam Walton’s autobiography, and thinking about how the company has evolved over the past quarter-century (and where it plans on going in the future), I think there’s much to be excited about. Here, in no particular order, are a few numbers worth considering:
$466 billion – This was the dollar amount of sales that Wal-Mart reported worldwide in the most recent fiscal year; as of the most recent data I can find, this total is approximately equal to the next four largest retailers combined. As I noted in a recent article, Wal-Mart’s sales were only one-tenth of Kmart’s 30 years ago; in the past 15 years, they’ve more than quadrupled (off a starting base of $112 billion, and good for a 15-year CAGR of 10 percent). The vast majority of that growth has come from building new stores; international comps have been disappointing.
40 Basis Points – This was the range in Wal-Mart’s operating margins in any individual year over the past decade (peaked at 6.1% a few times and bottomed at 5.7% in fiscal 2009). Considering the bouts of volatility over the period in question (like when more than one million jobs were lost in the U.S. in the last 60 days of calendar year 2008), that level of stability is astounding.
21.8% - This was Wal-Mart’s average return on equity over the past 10 years; this includes an average return on assets just shy of 9%, and average financial leverage of approximately 2.5x. Again, the stability is quite amazing – the figure never fell below 20% or exceeded 23% in the past decade.
$25.6 billion – This was the dollar amount of cash flow from operations reported in the most recent fiscal year; it has increased by $1 billion a year, on average, over the past five years. That resulted in a 4.4% compounded annual growth rate on an overall basis since fiscal 2008 – and more than 8% per annum on a per share basis (more on this in a moment).
$6.6 billion – This is my estimate of how much Wal-Mart spent on growth capex in fiscal 2013. The company breaks out its U.S. new store capex in the 10-K, which was $4.3 billion in fiscal year 2013 (and more than 50% of the total U.S. spend); If we assume 50% of International capex is spent on new stores (the figures are not broken out), we arrive at $6.6 billion in total. If anything, I think that my estimate for International would prove too conservative (by way of comparison, approximately 25% of WMT’s U.S. capex has gone to remodels in the last five years).
$0.68 per share – This is the difference between Wal-Mart’s reported earnings per share and my estimate of owner’s earnings in fiscal year 2013: $5.02 per share versus $5.70 per share, respectively. Slapping a multiple of 15X on your measure of choice would result in a $10 swing in the stock (not my preferred method, but I know how much our analyst friends love arbitrary P/E ratios).
13X - Assuming growth of 5% for the current fiscal year (in line with the first nine months), my measure of owner’s earnings will approach $6 per share; at Friday’s close of $78, this suggests a multiple of 13x on current earnings (shown above 15x on Google Finance, MSN Money, etc.).
58X – According to GuruFocus data, this was the peak in the TTM P/E multiple, reached in the final days of 1999. The market was willing to pay $68 per share on 4.45 billion shares – equal to a market cap of $300 billion – for a business generating just over $5 billion in earnings; today, the market cap is $50 billion lower than it was at that time – while annual earnings have more than tripled. That says nothing about the current attractiveness of the stock – but it says all you need to know about the bouts of inefficiency that can grab hold of the market from time to time.
$7820 – The average dollar amount of sales per Wal-Mart store in the U.S. per hour in fiscal 2013; the average store generated nearly $70 million in sales last year. The company’s U.S. sales as a whole (excluding Sam’s Club) have more than tripled in the past 15 years, to $275 billion, while the number of stores has increased by less than 70% (from 2,360 to 4,000).
$10 billion – Wal-Mart’s projected e-commerce sales in fiscal year 2014, an increase of roughly 30% from an estimated $7.7 billion in fiscal 2013. In fiscal year 2015, the company expects the figure to increase by at least 30% yet again, and cross $13 billion – pushing the company ahead of Staples (SPLS) and right behind Amazon as measured by e-commerce sales.
1990 – This was the first year the company reported more than $1 billion in net income; 23 years later (fiscal year 2013), the company came up $1 million short of hitting the $17 billion mark.
1991 – This was the first year that Wal-Mart expanded outside the U.S.; in just over 20 years, the company has gone from the starting gate to annual sales in excess of $135 billion – about $20 billion more than Target, Sears (SHLD) and Kmart’s combined global sales in 2012.
$22 million – This was the average sales per Wal-Mart store outside of the U.S. in fiscal year 2013 – equal to just 30% of the average sales per domestic location; in addition, the operating margin for the International division was 5.0% in 2013, compared to 7.8% in the U.S. (again, not including Sam’s). Clearly the non-US operations are a significant challenge – and opportunity – as the company looks to the future; the announcement that the former international head (Doug McMillon) will become the company’s next CEO is not a coincidence.
9% - This was the company’s International unit growth in fiscal year 2013, the lowest percentage increase since fiscal year 2004; the number of International units has increased 5x in the past decade, and crossed 6,000 in fiscal year 2013. Wal-Mart has 40% more stores internationally than in the U.S. – including Sam’s.
18% - This was the 10 and 15-year dividend CAGR through fiscal year 2013; while the payout ratio has crept higher (from a starting point in the high teens), it still stands at less than 35% of earnings.
2.8% - This equals the compounded annual decrease in shares outstanding over the past decade, from 4.5 billion to 3.4 billion out (good for a cumulative decline of around 25%); the company spent more than $56 billion repurchasing shares over that period, around 42% of cumulative reported earnings. The number of shares out has decreased by 3.2% over the past year, to 3.27 billion.
The folks in Bentonville have caught my eye. I’ve got a bit more work to do, but you shouldn’t be too shocked if future articles about the company come with the disclosure “Long WMT.”
Any opinions, particularly those that disagree with this conclusion, would be greatly appreciated.
About the author:
I hope to own a collection of great businesses; to ever sell one, I demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over many years.