It’s been a bumpy ride in the 2½ years since I first wrote about Walmart (WMT) on GuruFocus.
From a starting price of ~$75 per share in January 2014, the stock ran up by roughly 20% over the next year. From a high of nearly $90 per share, the stock found itself in the mid-$50s per share by November of that year. In the ensuing nine months, the stock has slowly climbed to a current price of ~$73 per share – just shy of where our adventure began.
As an investor, this activity can drive a wide range of emotions. Early on, with a nice gain on the investment, I probably thought I was pretty darn smart. Not too shortly thereafter, I was staring at a sizable loss on my original purchase (in addition to being down ~40% from the highs) – and was wondering if I had made a costly mistake. Now that we’re back near level ground, it’s only natural to wonder which direction the roller coaster will turn next.
Such thinking results in an acute focus on tomorrow’s price action – trying to outguess others on Mr. Market’s short-term emotions. In my opinion, this approach is highly unlikely to work.
Investment decisions should not be judged against short-term movements in the stock price. They should be measured against the assumptions underlying the investment thesis. Increasingly, I believe that quantifying your assumptions is an important step in this process; it provides tangible estimates to “measure” your thesis against (in the hope of avoiding hindsight bias). Even when done in a crude manner, this can help keep you level-headed when Mr. Market takes you on a wild ride.
Business update
Walmart reported second quarter results for fiscal 2017 last week (here), and they were encouraging. In the Walmart U.S. business, comparable store sales increased by 1.6% for the quarter. The two-year comp stack was up roughly 3% – the best number Walmart has reported in at least four years. These results include low double-digit growth in ecommerce sales and GMV, which was a nice move higher after a few quarters of deceleration in the growth rate.
In addition, the small format Neighborhood Market stores reported another impressive number (comps up 6.5%). Management has made large investments to improve the U.S. operations, and we’re seeing early signs of success. Hopefully we continue to see solid momentum going forward.
The International results, on the other hand, were underwhelming (constant currency revenue growth of just 2%). In particular, Walmart (Asda) is struggling against intense competitive pressures from the hard discounters in the U.K.; in the quarter, comparable store sales fell by more than 5%. Once again, the clearest pocket of strength in the international operations came from Mexico and Central America, where Walmex continues to report solid sales growth.
Through the first half of fiscal 2017, gross margins have increased ~55 basis points, to 24.9%. This has been more than offset by ~100 basis points of operating expense growth (measured as a percentage of sales), to 21.0%, reflecting the investments in associate wages and technology (I’ll discuss this further in a moment). The net impact is a material reduction in the EBIT margin, driving a 7% decline in operating income versus the year-ago period. Relative to the expectations laid out in October 2015, it looks like Walmart is on track to meet or exceed results for FY17.
Walmart has repurchased $7.3 billion of common stock over the last three quarters (shares out from 3.231 billion to 3.119 billion, or a reduction of 3.5%); the company is on pace with the guidance laid out in October 2015 ($20 billion over two years). At the same time, the balance sheet has improved meaningfully: Walmart had roughly $33 billion in net debt at the end of the most recent quarter – a reduction of more than $10 billion since the end of fiscal 2014.
Conclusion
Let me close with some thoughts on Doug McMillon, Walmart’s CEO since February 2014. I’m sure the last 2½ years have not been easy for him. With that said, I would argue that he has done a good job as the company’s leader. He has clearly articulated what he views as paramount to Walmart’s long-term success, and has been willing to make the necessary investments to move the company in that direction. From what I can see, it’s starting to work.
In October 2015, Mr. McMillon appeared on “Mad Money” with Jim Cramer to discuss Walmart’s commitment to significant investments that would impact short-term profitability (ultimately driving the stock well below $60 per share). I highly encourage you to go back and watch the interview (here). My takeaway at the time was McMillon was asking the right questions and had a reasonable plan to get the ship heading in the right direction; that still holds true today.
Over the past few quarters, comparable store sales – a key measure as it relates to assessing the investment in wages – have improved. In addition to cleaner stores (which have driven improved customer satisfaction scores), Walmart has made price investments in key categories like milk and eggs that drive repeat traffic. The company is doing the right things to attract customers to its stores and keep them coming back. In the interview, Mr. McMillon said, “If we don’t win with customers, we don’t have a business.” Walmart is back to winning with customers in its stores.
E-commerce, on the other hand, has been a work in progress (the improvement in the most recent quarter was much needed). As a customer, I have not seen the improvements that Walmart must implement if it wants to compete online. Simply put, the status quo was not working; change was needed at the top of Walmart’s ecommerce business. The decision to acquire Jet.com and hand the reins to Marc Lore is a big bet by Doug McMillon. I’ve watched a number of Mr. Lore’s old interviews over the past two weeks and believe he has a unique vision (here, here and here). I’ve also used Jet.com as a customer and was impressed with the unique customer experience (in addition to saving a lot of money, the website design was much more intuitive and enjoyable than Walmart.com). Hopefully this acquisition will push Walmart to truly start innovating online.
The management team is working hard to position Walmart for the future. Challenges clearly remain, and long-term success is far from guaranteed. If Walmart cannot effectively compete in ecommerce, that’s a serious long-term issue for the company. Ultimately, Doug McMillon will be judged based on how he shifts this behemoth for 2020 and beyond.
For where we stand today, I’m happy to continue owning Walmart shares.
Disclosure: Long Walmart.
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