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The Science of Hitting
The Science of Hitting
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Walmart: Continued Progress at the World's Largest Retailer

A look at the company's 3rd-quarter financial results

November 18, 2019 | About:

Last week, Walmart Inc. (NYSE:WMT) reported financial results for the third quarter of fiscal 2020. Revenue increased 2.5% to $124 billion, with constant currency revenue climbing by more than 3%. The results were led by another solid quarter in the U.S., with comparable store sales up 3.2% (with traffic and ticket both contributing to the increase). Walmart continues to take market share in key categories that encourage repeat customer visits, like food and consumables, as well as driving higher private label penetration.

As shown below, comp store sales growth on a two-year stacked basis (which removes some of the noise in any given period, such as the early SNAP benefits headwind that we’ll see in the fourth quarter) stayed north of 6%. This is near the high end of what the company has delivered in any period over the past five-plus years:

Comps have been supported by a tailwind from the e-commerce business: In the third quarter, revenues were up more than 40%, once again led by strong growth in online grocery. By the end of the fiscal year, the company expects to have more than 3,100 locations that offer grocery pickup, along with 1,600 that offer same-day grocery delivery. These grocery offerings are clearly making a meaningful contribution to the business. As you can see, the contribution to comps from e-commerce has consistently been 150 to 200 basis points in recent quarters.

The Walmart U.S. business reported its sixth consecutive quarter of operating income growth, with a year-to-date increase of 5% to $13 billion. This has happened despite a headwind from mix shift toward e-commerce and continued price investments. Physical stores leveraged expenses for the 11th consecutive quarter, with the e-commerce business delivering expense leverage well. As a result, Walmart U.S. operating margins expanded by 20 basis points to 5.1%.

Continued margin expansion is leading to an improved financial model for Walmart. Guidance for the year indicates that after backing out the short-term headwind from their majority stake in Flipkart, earnings per share is expected to increase by a high single-digit percentage on a low single-digit increase in sales (inclusive of Flipkart, earnings per share is expected to “increase slightly”). As I’ve discussed previously, Walmart’s profit margins are well below what they were reporting five to 10 years ago. If this is the beginning of a trend in terms of margin expansion, we could be in the early innings of a period where the company could consistently deliver mid-to-high-single-digit earnings per share growth – something we have not seen in a long time.

The share count declined by nearly 3% year over year, with Walmart spending $4.8 billion on repurchases through the first nine months of fiscal 2020. Over the same period, adjusted earnings per share have increased by 1%, with the drop-off from the U.S. operating income growth discussed above (up 5%) primarily due to the headwinds from the inclusion of Flipkart.

Conclusion

I continue to be impressed by the progress at Walmart under CEO Doug McMillon. He was dealt a difficult hand, but he has played it masterfully. The first few years under his leadership were spent stabilizing the core (U.S. brick and mortar), which has now put the company in a position to play offense. In recent years, he has made some meaningful strategic decisions outside the U.S., most notably the Flipkart investment and the proposed Asda-Sainsbury merger. While the latter transaction was unsuccessful due to regulatory concerns, I think it suggests that McMillon wants to narrow Walmart’s focus to a handful of markets where he believes they have a good chance at winning over the long run – and that he’s willing to make material decisions when he thinks it’s justified as opposed to just nibbling around the edges.

I don’t currently own the stock. That said, I’m excited to see where McMillon can take this business over the next decade. I think Walmart shareholders should be confident that he will continue to lead the company in the right direction.

Disclosure: None.

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About the author:

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

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