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Summary

  • Wal-Mart is acknowledging a shift in consumer purchase habits and has been trying to mimic some of Amazon's strategies such as dynamic pricing.
  • Although Amazon's business has multiple parts, it's very streamlined for the consumer which has been the reason for its success. Wal-Mart's online and physical presence are not streamlined yet.
  • Wal-Mart's share buybacks, not its large profits, is a possible reason for its five-year rise.

"We believe that offering low prices to our customers is fundamental to our future success." What company does this appear to be from? You would think Wal-Mart (NYSE:WMT), but it's actually from Amazon (NASDAQ:AMZN).

Amazon vs. Wal-Mart
According to the recent 10-Q, Amazon's expenses increased as product purchases increased. Its business is thriving due to low-price products, which has been Wal-Mart's staple strategy for years. Amazon's aggressive strategy bolsters the philosophy of market share now, profit later. Also, an important point to be stressed is this is an indication of continued soaring consumer demand for the company's business.

However, the traditional retailer, Wal-Mart, saw its expenses grow at a faster rate than sales primarily due to the winter storms and healthcare costs. I think the real reason is Wal-Mart's existing stores are not selling enough products to grow revenues. In addition, the size of Wal-Mart's physical presence poses a problem. For a one percent increase in growth, Wal-Mart has to generate approximately five billion dollars in sales.

Wal-Mart has been experimenting in the e-commerce space and seems to be trying to copy Amazon's model. In fact, Wal-Mart's CEO told company executives to read the "The Everything Store," which is the book about Amazon's founder. This is an indication that they feel the change coming. In order to stay relevant with consumers, they are trying to adapt.

On its online platform, Wal-Mart is adopting Amazon's dynamic pricing system and offering high-end products such as $146 Nike sunglasses. Amazon's daily deals have been mimicked as well. These characteristics are very odd when you think of the Wal-Mart brand. These changes alone would make one think that Wal-Mart believes its business model is outdated, but it is not.

Wal-Mart is in a very unique situation. Because it has a physical presence, it can experiment with how to integrate its fulfillment centers, e-commerce and physical locations. The key for Wal-Mart to stay relevant is for it to merge these three businesses rather than have them be disjointed, which currently appears to be the case.

Amazon has multiple businesses and relationships, but the key to Amazon's success is that it feels very streamlined, making life very easy for its customers. To paraphrase Jeff Bezos: "Be afraid of the customer, not the competition. The customer has the money." It is this dedicated focus that continues to bring in customers to Amazon.

Performance
For consistency, the five-year performance, using the adjusted close price, for Wal-Mart and Amazon starts at Jan. 2, 2009, and ends at Jan. 2, 2014. As you can clearly see, Amazon returned over 11x what Wal-Mart gave in the five-year period in spite of having limited to no profitability.

With Wal-Mart's large consistent profits, I would expect a much better performance. In the past five years, Wal-Mart's stock has not really moved much. How is this possible? I believe share buybacks may give a clue.

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Shares Outstanding
Share buybacks have been in the news lately, with the increase in stock prices being attributed to companies removing shares from the market and not truly growing their revenues. In the past five years, Amazon showed an increase in basic shares outstanding while Wal-Mart showed a decrease in basic shares outstanding. Why would Wal-Mart want to buy back shares if its earnings are good? For me, this is the disconnect.

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It seems as though Wal-Mart is trying to boost its stock price, or it could be a sign that Wal-Mart wants to let its shareholders know that it still believes in the company's future growth prospects. This is yet another reason why profitability is not the sole reason to justify whether a stock should be appreciating or depreciating.

These are some of the many reasons why I believe Amazon is still a strong buy. Had consumers found online shopping to be inconvenient, the roles would have been reversed and I would be thinking quite differently.

Source: Wal-Mart Takes A Page From Amazon's Playbook