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Panos Mourdoukoutas
Panos Mourdoukoutas
Articles (97) 

Walmart Has a Real Growth Problem

The retail giant is getting too big to continue growing at hefty rates

February 18, 2021 | About:

Walmart Inc. (NYSE:WMT) has a real growth problem, according to Quo Vadis Capital President John Zolidis.

He thinks that the company's recent efforts to recast itself as a fintech incubator, health care provider, venture capital player or subscription service (via Walmart+) ignore the reality that all these efforts are miniature relative to the size of the base business.

"Our call is that assigning this business a hefty growth multiple (near the highest valuation in 17 years) is inconsistent with the real growth rate, which remains very modest and reflective of a mature business with margin headwinds," he said.

Zolidis' comments follow the release of Walmart's fourth-quarter financial report, which showed a 3% decline in Ebit and less than 1% earnings per share growth, well below the full-year growth of 11%.

Meanwhile, the retail giant lowered its 2021 earnings guidance due to the divestiture of profitable businesses. "It's unclear whether the company is factoring in the benefit it will receive from another stimulus checks or other stimulus for its customers included in pending legislation," Zolidis said. Regardless, he doesn't see much growth ahead for the retail giant.

For years, Walmart grew by leaps and bounds by offering low prices that undercut smaller retail chains.

Then Amazon.com Inc. (NASDAQ:AMZN) came and lured shoppers away from brick-and-mortar stores to online avenues, bringing to a halt Walmart's growth.

But Walmart fought back by developing its own online business and leveraging its stores to expedite shipping and delivery of orders.

For a while, Walmart's strategy of merging online and offline sales have been working, helping the retail giant resume its growth, though it has yet to catch up with Amazon in most critical financial performance metrics:

Company

Walmart

Amazon

Three-year Revenue Growth (%)

5.4

28

Three-year Ebitda Growth (%)

3.5

45.2

Current Operating Margin (%)

4.08

5.93

Average Annual Total Return (2010-20)

13.71

34.75

Market Price

$138.99

$3,306.99

Intrinsic Value

$121.38

$3,182.8

Wall Street took notice, pushing Walmart's shares well above its GF Value.

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The trouble is that the strategy of merging online and offline sales may be running its course, as evidenced by Walmart's recent financial reports and by a decline in its economic profit. That's why the company has been searching for growth opportunities outside its core business.

Company

ROIC

WACC

ROIC-WACC (Economic profit)

Walmart

9.08%

3.62%

5.46%

Amazon

12.40%

7.58%

4.82%

But that won't be easy given the company's size, as Zolidis points out. He has a sell recommendation on the stock.

Disclosure: No shares.

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About the author:

Panos Mourdoukoutas
I’m a Professor of Economics at LIU Post in New York. I also teach at Columbia University. I’ve published several articles in professional journals and magazines, including Forbes, Barron’s, The New York Times, Japan Times, Newsday, Plain Dealer, Edge Singapore, European Management Review, Management International Review, and Journal of Risk and Insurance.

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