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The Science of Hitting
The Science of Hitting
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Wal-Mart: Update on International Markets

April 13, 2012 | About:

On Thursday, Wal-Mart (WMT) presented an in-depth discussion of their international businesses; here are some of the highlights from the conference:

Internationally, Wal-Mart serves 94 million customers a week at 5,651 units across 26 countries, which produced total sales of just under $126 billion in the most recent fiscal year (28.4% of the company total). In the coming year, nearly half of the footprint expansion (30 million to 33 million square feet) will be in Latin America, with Asia grabbing a third of the pie and the UK, Canada and Africa splitting the remainder. After this year, Wal-Mart will have added more than 100 million square feet of international stores since fiscal year 2009, a CAGR of 7.5%.

While sales growth and square foot expansion has been strong, the operating results have been less than stellar. Looking at the most recent 10-K, we see that domestically the company achieved operating profits of $20.4 billion on $264 million in sales, which is equal to an operating margin of 7.7%. Compare this to international markets, where the company achieved $6.2 billion in operating profits on the previously mentioned $126 billion in sales, an operating margin of less than 5%.

In their remarks, management focused on a couple areas of particular focus, including associate scheduling and inventory management, where the company is looking to leverage successful regional models on a global scale; as noted by Doug McMillion, president & CEO of Wal-Mart International, the company had become so focused on the freedom side of things (in attempt to limit centralized bureaucracy in a global company) that they weren't getting all the benefit that comes with economies of scale. Interested investors should read the transcript for specific examples (link here), but this quote from Cathy Smith, the CFO of Wal-Mart International, sufficiently expresses the opportunity that management sees from capitalizing on these changes: “Over the course of the next five years, we're going to improve our return on investment 300 to 400 basis points.”

As mentioned above, the company is focusing on growth in Latin America, particularly in Brazil. Mr. McMillion hinted that first quarter results (released May 17) will show some things “that you'll be encouraged by.” In the region, the company continues to focus on lowering the cost structure and helping customers understand “Everyday Low Prices,” or EDLP. In addition to the strength at retail, the soon-to-be four-year-old e-commerce business continues to shine in Brazil, and is one of the company’s strongest in the world.

In China, the company appears to still be in the early development stages; their market share stood at just 5.5% in 2011, and the company continues to lose share (the retail market in China grew by 16% in Wal-Mart’s most recent fiscal year, while company sales increased only 13%). Mr. McMillion summed it up as a mixed bag, saying that “the business isn't actually that bad… but it's just nowhere near what it could be.” The biggest change in the region to note is in the form of management: Greg Foran, the former CEO of the leading Australian supermarket group Woolworths, was appointed president and CEO of Wal-Mart China effective March 1.

In India, the company still faces issues due to shifting foreign direct investment (FDI) decisions by the government in regards to multi-brand retail; after clearing 51% FDI in multi-brand retail on November 24 of last year, the decision was overturned less than two weeks later. Mr. McMillion summed up the company’s current headache over the situation by saying, “We won't speculate on what's going to happen as it relates to multi-brand retail in India, except to say that we think we've made our case and we'll continue to make our case along with other retailers that are allowing foreign investment by multi-brand retail is good for that country.”

In the UK, under the brand ASDA, Wal-Mart has been outpacing overall market growth (due to a mix of organic growth and the Netto acquisition in the beginning of last year) and currently holds the second rank with an 18% share of the market (behind Tesco at 30.2%).

The UK continues to be a tough market, with unemployment above 8%, fuel prices at record highs, and disposable income in decline for the last year and a half. While this doesn’t help retail as a whole, it partly plays to the company’s strengths: For one, their mix is heavily weighted towards staples, with more than 83% of revenues coming from food (regardless of the economy, people need to put food on their plates); in addition, ASDA has the perception of being the value brand, and was recently voted the lowest-priced supermarket in that region for the 14th year running. Management discussed how they are capitalizing on this perception in a difficult economic environment:

“We introduced something about 18 months ago called the ASDA Price Guarantee. For a customer, they can come into our store, to our shop, take their receipt, [and] enter it online when they get home. And we guarantee them that for that basket of shopping, they will have been 10% cheaper than any of our nearest rivals. And if for any reason that were not, from the mix of the basket or promotions that somebody else is running, from that logging in, we will then give them a voucher for the difference and they can spend that back in our stores. It's a unique proposition, but it's really — and depend EDLP and journey. And the fact that customers trust us to be lower on price than anybody else in the market.”

In Africa, the company’s portfolio is based around Massmart (51% ownership), which operates over 300 stores across 12 countries. Looking at a portion of their market (sub-Saharan Africa) offers a glimpse of the opportunity that Wal-Mart sees with this investment: it is the fastest-growing and the youngest population on the planet, with more than 500 million new consumers over the next 20 years (with food and consumables becoming very important to the emerging middle class) and rapid urbanization (even today, there’s more than 50 cities with 1M+ people).

Across the brand, there are four different operating divisions and 10 different formats, which includes mass discount (Wal-Mart type stores), specialty electronics retailers, mass warehouse, builders merchants (similar to a Home Depot/Lowes), and others. For the time being, Wal-Mart’s priorities include working with management to continue driving core business growth and develop price leadership via EDLP.

From my perspective, Wal-Mart continues to be an interesting company; the ASDA Price Guarantee in the UK represents a trend that I’ve wondered about all along: Will the transformation to e-commerce and price transparency be a net positive or negative for the long term sustainability of Wal-Mart’s business model? Either way, I think it’s clear that Wal-Mart has the resources and the know-how to put themselves in a position to succeed on a global level.

About the author:

The Science of Hitting
I'm a value investor with a long-term focus. As it relates to portfolio construction, my goal is to make a small number of meaningful decisions a year. In the words of Charlie Munger, my preferred approach to investing is "patience followed by pretty aggressive conduct". I run a concentrated portfolio, with a handful of equities accounting for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

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