Walmart Is Getting Smarter; Can It Keep It Going?
- By Shudeep Chandrasekhar
Walmart's (WMT) shares finally had some momentum this year as the stock rallied from $56 in November last year to just shy of the $75 range where it is trading, thanks to increasing cash flows and higher comparable store sales. Though comparable store sales are not growing at a breakneck speed, Walmart's U.S. stores have shown some signs of revival, staying largely above the 1% growth mark.
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The intrinsic value of WMT
As is the case with any company with positive comparable store sales data, the revenue slide was arrested, and Walmart was able to hold its ground above the $115 billion quarterly sales range, even beating the revenue estimates consensus.
So there's a solid reason behind the stock rallying from the sub-$60 level to the $70-plus level over the past eight months, but it would be a huge mistake on an investor's part if the "what is next" question is not asked. Walmart is one of the largest retailers in terms of sales although Alibaba (BABA) surpassed it in terms of gross merchandise value recently. There is no other company in the world that can come close to the nearly half a trillion dollars' worth of products Walmart procures and sells. As a big box store, it is the largest direct seller in the world, and that brings its own set of troubles.
When you are No. 1 and have the largest customer list in the industry, your competitor can only grow if he is capable of stealing some of your customers - and right now, the biggest thorn in Walmart's side in the U.S. is Amazon (AMZN).
Amazon's revenue has grown tenfold in 10 years, and the company continues to push relentlessly upward. With such an agile and out-of-the-box thinking competitor, things won't get any easier for Walmart. If it does nothing more than hold its ground, Amazon will keep chipping away at Walmart's customer base.
To be fair to Walmart, it is trying to keep up with Amazon, doing its best to keep the younger company at bay. For example, to counter the bundling of benefits under Amazon Prime and the free shipping features offered by them, Walmart took the ShippingPass route, which offers free two-day shipping for $49 per year.
Of note here is that Walmart's biggest strength has long been its grocery sales - the one area where Amazon will always struggle due to the logistics and shipping problems involved where perishables are concerned. Walmart is now offering things like free curbside pickup - things that Walmart may never have done had it not been for the Amazon threat. Despite what we've been saying about Walmart over the past several months, it's good to see it can hold its own.
Walmart's international hiccups
The problem for Walmart, however, is that its near $500 billion revenues aren't going to grow if it restricts that fight to its home ground. It needs to be taking the fight outside, as it were. It needs alternate revenue streams, and international growth is one way to get it done.
But its past doesn't necessarily point in that direction. Its hurried retreat from Germany underscored the problem of why a "rinse and repeat" approach may not work in every part of the world. For some reason, the company has been extremely inflexible when it comes to opportunities overseas. However, I can see some positive changes there as well.
For example, it sold its relatively new acquisition, Chinese ecommerce platform Yihaodian, but it didn't do an outright sale: instead, it's selling it to JD.com (JD) - another strong player in China - for a 5% stake in the company, valued at approximately $1.5 billion. That might seem an insignificant amount, but it's a trade-off that represents a continued investment in the People's Republic.
As part of the deal, the retail giant will continue to provide support for Yihaodian's direct sales business, while leveraging JD.com's logistics network, supply chain and so on. Obviously, JD investors were keen on this, but the reaction from Walmart investors was lukewarm, to say the least.
After Alibaba, JD.com is China's second-largest e-tailer so it has a significant network on which Walmart can piggyback. According to Motley Fool , this could "speed up shipping and improve availability, ultimately increasing sales."
Walmart has to focus outside the U.S. for real growth
The move is especially significant for Walmart because it's never really been able to make a huge impact in the Chinese market, where e-commerce is taking off in a big way.
Source: Export Now
With this move, however, Walmart has taken possibly the best step yet on Chinese soil, positioning itself to fully synergize the partnership with knowledge and resource sharing.
The question of India comes up when you look at a partnership like this. Amazon has recently become the No. 1 ecommerce company in the subcontinent, and the government recently relaxed its rules to allow 100% foreign direct investments for marketplace operators. Although this is a clear invitation to companies like Alibaba, nothing is stopping Walmart from joining forces with any of the major local operators - or even buying them out - and bring the fight to Amazon in. But so far, nothing from Walmart on this.
For now, the U.S. only represents the act of protecting what it's built. Outside its home territory - and comfort zone - is where the real opportunity is to take this company to the next level. If it's defense at home, it's got to be offense outside the country.
From an investment perspective, you need to look for opportunities that open up - like May 18 this year, for instance, when the stock was at its recent lowest just a day before its first-quarter 2017 earnings came out. This company is going to grow but look to invest in the dips so you can keep your cost basis low as much as possible. Dollar-cost averaging might be a good way to go about this as well.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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This article first appeared on GuruFocus.
Warning! GuruFocus has detected 3 Warning Sign with WMT. Click here to check it out.
The intrinsic value of WMT
