Wal-Mart: Coming Back to "Everyday Low Price" Strategy Works Out

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Anh Hoang
Nov 16, 2011
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Wal-Mart (WMT, Financial), with the strategy of everyday low price, has reported quite satisfactory results for the third quarter of fiscal year 2012. It was the first period of the quarterly gain at stores opened at least a year after nine consecutive quarters of declines in the U.S.


The CEO and president of Wal-Mart Stores, in the teleconference call, has said that the EPS from continuing operations was $0.97, within the company’s guidance. Both stores, Wal-Mart U.S. and Sam’s Club, have performed more than the comp guidance for the third quarter, with Wal-Mart U.S. comp sales increased 1.3% and Sam’s club, without fuel, up 5.7%. The top line increased 8.2%^ to $109.5 billion, including the strong gain of more than $32 billion in international sales, the advance of 20%, along with the acquisitions effect and currency impact. The consolidated earnings grew 4.8%, with the free cash flow generated in the quarter of $3.4 billion. The CEO estimated that the company has returned $2.7 billion to shareholders via dividend payments and shares repurchases during the quarter.


During this time, the company realized the needs of U.S. consumers to save more money. People are concerned about the jobs issue. In a survey, 1 in 10 Wal-Mart moms view the state of the U.S. economy as good, and the majority of them would like to save money. They use coupons and skipped restaurants and vacations. And in order to help customers out, the U.S. focused on saving customers money during the holiday by keeping its price investment strategy. In addition, there are several other programs such as the Christmas price guarantee, holiday layaway and free online shipping options.


Wal-Mart has lost its customer base because of a combination of two factors, the bad economy and its own bad decisions. Those have caused the U.S. consumers to move to competitors to shop. Wal-Mart has not been seen as “everyday low price” anymore as it had strayed away from offering everyday low prices on all products to just for selected items. In addition, Wal-Mart is not considered by U.S. shoppers to be one-stop shopping anymore as the the stores scaled back on plus-size clothing, crafts and other popular items. It seems like it was not a very good decision for Wal-Mart. And now, Wal-Mart is working hard to gain back its reputation with implementing the “everyday low price” strategy of Sam Walton again, and it is apparent that the strategy has been working well again. The indicator of the retailer's health is that the revenue of stores opened at least one a year, and for Wal-Mart in Q3, it rose 1.3% compared to the expectation of 0.3%.


That is a very good move for both consumers and shareholders of Wal-Mart. And financially, Wal-Mart has purchased around 27 million shares with the total value of $1.4 billion. That has brought the total repurchase value from the beginning of the year to $5 billion, with 92.4 million shares. And at the end of Q3, the company has $12.7 billion remaining under the current $15 billion share repurchase authorization. The repurchase combined with the dividend payments has been quite beneficial to shareholders, with $1.3 to $3.8 billion payments to shareholders through dividends for the quarter and year-to-date respectively. So altogether, the combined effect is $2.7 billion to $8.8 billion returned to shareholders for the quarter and year-to-date.


What should be noted here with the stock which fluctuates around the range of $40-$60 over the last 10 years is that it kept producing the positive and growing trend of operating cash flow and free cash flow over time. And the return on equity has been hovering around 20%.


2002200320042005200620072008200920102011
ROE (%) 19 20.4 20.8 20.8 21.1 18.3 19.7 20.5 19.7 23
OCF (USD million) 10,260 12,532 15,996 15,044 17,633 20,164 20,354 23,147 26,249 23,643
FCF (USD million) 1,877 3,632 6,169 3,104 3,070 4,892 6,374 12,362 15,067 11,433


We can see the great operating results combined with the growing cash positions from operation and free cash flow of Wal-Mart from 2002 until now. However, with the low volatility of the stock price for the past 10 years, it has pushed the valuation of WMT into quite low figure.


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As it can be seen from the bold green line, the valuation of WMT in the last 10 years, the line is trending downward in all four metrics of P/E, P/S, P/B and P/CF. In 2001, the P/E of WMT stayed at very high level of nearly 40x, and P/CF was at 26.5x. Now due to the narrow range stock price movement, the P/E is just 13x and the P/CF is only 8.7x.


Until now, with the more reasonable valuation and the coming back to the strategy “everyday low price,” value investors might feel comfortable to consider initiating a position in WMT. Even though for the last 10 years the stock price has nearly gone nowhere, but the next 10 years might see the different scenario, especially if WMT keeps building up its financial strength, the global franchise with lowest cost for consumers, and generating increasing levels of cash flows.

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