Entering text into the input field will update the search result below

Walmart V. Amazon Or Sears/Kmart: Questions I Think Should Be Asked

Oct. 16, 2015 8:07 PM ETWMT, AMZN, SHLDQ
mgking profile picture
mgking's Blog
12 Followers
Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

I was reading Adam Hartung's article How Telltales Told You Not To Own Wal-Mart, And Continue To Do So. In the article, his overall thesis is that investors should look at persistent issues Walmart has had instead of earnings and he posits that the company's business model is obsolete. While I disagree with his overall thesis, his article did get me thinking about why I shop at Walmart and continue to buy shares in the company.

First and foremost, this is not a direct comparison between Walmart and Amazon. In the article mentioned above, Amazon and Sears/Kmart were mentioned, so some of the questions I pose make cursory comparisons between Walmart and the other companies, but are by no means a deep-dive analysis. This all said, I asked myself, when do I shop at Walmart and when do I buy from Amazon? Note that I use two different verbs to describe my buying patterns for each store. I shop at Walmart weekly. It's mostly for groceries. Why? Walmart is cheap and they offer most of the items I need. I buy mostly organic and for items that they do not have, I will go to HEB's specialty store Central Market (private), Kroger (KR), or Sprouts (SFM). For non-grocery items, it depends. Walmart (WMT) is usually where I go, but it really depends. For example, if I need hardware, I go to Lowe's (LOW) or Home Depot (HD). I'm not a clothing person, so that's a rare buy. For shoes I go the Academy (acquired by KKR) or the Nike outlet store (NKE). When do I buy anything from Amazon (AMZN) it's because I need a special item I cannot find locally or because the item is insanely cheap and I do not need it immediately. With respect to Sears/Kmart (SHLD), do I even buy anything from them? Honestly, I haven't been in a Sears in over 3 years and I haven't seen a Kmart in my area in over 10 years. The only things I will buy from them (meaning Sears) are appliances and the maintenance plan because I think hand's down it is worth the money. So after reading the article and posting my comment, it led me to ask the following questions...

Question: how much of a threat to Walmart's grocery business will Amazon be? IMO, not much. Until Amazon can provide cheap groceries same-day (like within an hour or two) to customers on a VERY large scale, then I see little to no threat to Walmart's grocery business. I'm more worried about other real grocers like Kroger, HEB, Albertsons/Safeway, Fiesta, etc being a threat to Walmart than Amazon.

Question: Is foot traffic declining or is sales and growth declining? As of this past conference call, 3-4% projected growth doesn't sound like a serious decline. It may not be enough for growth seekers, but Walmart isn't a high growth company. It's one of those boring large-cap companies that just cranks out cash YoY.

Question: Is Walmart still profitable or is their FCF declining? Umm.... profitable? yes, yes, and YES! declining FCF? NO! (emphatically NO) On the other hand, Amazon IS growing their business, but if you're pumping money back into your business, that's great. However at some point, turn a profit and start building a serious war chest then return some of that money to your shareholders. Which brings me to this question...

Question: What is the dividend? Amazon = zilch. Walmart = $1.96 (or ~3.3%YLD). I love me some dividends. While stock price appreciation is a good thing, it's fickle and dependent on investor opinion. On the other hand, dividends are real money. I'm willing to let a business find its way out of the woods and get itself in order especially if they have a dividend and that dividend is VERY safe. Walmart's dividend is rock solid. If you don't believe me, look at their FCF (~8.6B) and dividend payout ratio (40%). Easily covered.

Question: How best to determine if a company is dead money and should be avoided? I have a problem with this question because hindsight is always 50-50. The author of the above article set the timeline for 5 years. Over that time Walmart's net income and EPS are higher, but this is not enough to make investors happy. The stock price is ~10% higher than the $54 price from 2010. It's not like the price has gone into free fall or is losing 5-6% daily. With the $20B buy backs over the next 2 years, that "should" stabilize the share price and I placed that in quotes because nothing is guaranteed. What will be interesting to see is how a rate increase and inflation (if any) affect Walmart's revenue.

Question: Will brick and mortar stores go the way of the dinosaur? I laugh when anyone tries to answer yes. Let me ask another question. Where on Earth do you go get groceries or non-groceries on a holiday? If you're like me, I am at my friendly neighborhood Walmart picking up last minute items because it's cheaper than my local grocery stores. I'm not sure Amazon is ready to tackle a problem like this. They may have their drones, but on a grand scale (like in the millions), I am hard pressed to believe they can rise to the occasion.

Final question (2-parts): What large cap company has not had scandal or issues with their business? and does it make sense to compare Walmart to Sears/Kmart? For the first part, I am sure there are companies that are completely scandal free, but a company the size and scale of Walmart is ripe for trouble, so while we expect companies to be altruistic, they are run by people and people are fallible. As to the Sears/Kmart comparison, there may be some overlap, but once Walmart got into the grocery business, that change to their business model put Wally-world on a different level from Kmart. Second, Sears primarily sales discretionary goods. If a buyer doesn't have the money or does not need something immediately, they wait or buy online (and not necessarily from Amazon). So IMO, that and poor business execution is what is killing/has killed(?) Sears. I cannot really comment on Kmart because I've not seen one in my area for over 10 years.

All this said, I commented that I felt the author's thesis about Walmart was wrong and short-sighted. I do believe brick and mortar stores are Walmart's core business and should be their focus. Is online important? Yes. I do not disagree with that; however, when consumers need to physically drive to a store to buy goods, they are turned off when a store is nasty and disorganized and will go elsewhere. So it IS important that a company invest money in the areas that generate the lion's share of its revenue. Does that mean that Walmart should ignore its online business? Absolutely not! In fact this past conference call highlights the fact that in addition to improving their physical locations, they are working towards improving their online presence. While 1.1B is a drop in the bucket, it is something. If Walmart were to completely ignore online (one of their three "legs"), I'd be very worried as that means they do not/did not consider it worth working on. But given that online is not an end-all, be-all, making improvements (small albeit) is a start. Second, I stated that investors should not ignore the facts that global economic growth has been tepid and this year (especially in last 3-6 months) have seen negative growth from the fallout of a Greek drama, China's sluggish growth, and the precipitous drop in commodities. IMO, Walmart's stock behaves like an old tech company's stock. When the market is in a place of uncertainty, investors have a bad habit of over-reacting and selling everything that isn't nailed to the floor. The article mentioned that investors tend to react to a stock based on "herd" mentality. I completely agreed with this point and added that herds tend to over/under-react. I further added that since February, I was of the opinion that every negative market event helped chip away at Walmart's stock price.

In my reply, I further added that after Walmart issued lower guidance, I was of the mind that the herd was over-reacting. Why? Because Walmart had not traveled into negative growth-land. While slowing growth is one thing, negative is on a whole different plane. Added is the fact that Walmart is still trying to get a handle on the additional expenses from the minimum wage increases. It's been roughly five months since implemented. The guidance states that the impact will be significant, but as an investor, I feel we should give them 6-12 more months (2-4 quarters) to make the necessary adjustments and get a firm understanding of the impact to their bottom line. Finally, I commented that I was more interested in what Walmart has to say by 1Q16 AND I think of even more interest is where the economy is by then. If Walmart's store traffic doesn't increase and growth continues to decline, then I think investors should re-evaluate the company. Until then, I still think Walmart's falling stock price is noise from nervous investors and presents a buying opportunity for real buy and hold/dividend investors. Of course this last sentence assumes the stock price is within an investor's strike zone. I personally have been nibbling on shares and will continue to do so because I am a dividend hound and am not worried about fluctuations in the stock price. I am able to buy more shares for my money. Additionally, I am lowering my cost basis. I think these last two points makes Walmart a very good long entry point/add-on point for long term investors.

Analyst's Disclosure: I am/we are long WMT.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You