Walmart's Surprising Tumble - Analysts Never Learn, Will You?

On February 20, 2018, Walmart's (NYSE:WMT) stock had its biggest price drop ever. And the second biggest percentage decline ever. Even though same-store sales improved, investors sold off the stock in droves. And after a pretty healthy recent valuation run-up.

What happened? Simply put, Walmart said its online sales slowed and its cost of operations rose, slowing growth and cramping margins. In other words, even though it bought Jet.com, Walmart is still a long, long way from coming close to matching the customer relationship and growth of Amazon.com (AMZN). And (surprise, surprise) margins in online aren't an easy thing - as Amazon's thin margins for 15 years have demonstrated.

In other words, this was completely to be expected. Walmart is a behemoth with no adaptability. For decades the company has been focused on how to operate its warehouses and stores, and beat up its suppliers. Management had to be dragged, kicking and screaming, into e-commerce. And failing regularly it finally made an acquisition. But to think that Jet.com was going to change Walmart's business model into a growing, high profit operation any time soon was foolish. Management still wants people in the store, first and foremost, and really doesn't understand how to do anything else.

All the way back in 2005, I wrote that Walmart was too big to learn, and was unwilling to create white space teams to really explore growing e-commerce (hence the belated Jet-com acquisition). In 2007, I wrote that calling Walmart a "mature" competitor with huge advantages was the wrong way to view the company already under attack by all the e-commerce players. In July, 2015 Amazon's market cap exceeded Walmart's, showing the importance of retail transformation on investor expectations. By February 2016, there were 10 telltale signs Walmart was in big trouble by a changing retail market. And by October 2017, it was clear the Waltons were cashing out of Walmart, questioning why any investor should remain holding the stock.

It really is possible to watch trends and predict future markets. And that can lead to good predictions about the fates of companies. The signs were all there that Walmart shouldn't be going up in value. Hope had too many investors thinking that Walmart was too big to stumble - or fail. But hope is not how you should invest. Not for your portfolio, and not for your business. Walmart should have dedicated huge sums to e-commerce 15 years ago, now it is playing catch up with Amazon.com, and that's a race it simply won't win. Are you making the right investment decisions for your business early enough? Or will you stumble like Walmart?

Comments

[User 48020468]

Bought a four wheel electric medical scooter for ~$800. Paid shipping on line of ~$80. It arrived with a $450 additional freight bill, phone service desk no help. Screwed royally. It’s not Amazon, that’s for sure!!

[bbbcvv]

I stopped ordering online from walmart bc they raised their online prices significantly. I guess an effort to get people in the store. I ordered every week. No more

[Yipyo1986]

I was at Walmart today and there were so many workers stocking bins for pick up orders. I think this will be huge

[user 42609976]

The author is a bit myopic. The profit margin, for on-line, will remain tough as delivery cost will be the real key to success, but if anyone is capable, it will be WMT. They enjoy one of the best business models in a required market and their management is superior.

[Mike the Elder]

Does Wal-Mart realize every super-center is a de facto warehouse from which they could pick and pack items for local overnight UPS or USPS delivery? It would cost very little to add a backroom with a selection of cartons, styro peanuts and air pillows. A few minimum wage hires running the aisles to pick & pack and boom, out the door it goes. IMO Wal-Mart doesn't need but a few Amazon style mega-warehouses and robotic pick/pack automation, the vast bulk of that work can be done in local Wal-Mart stores and done within a short time.

I love Costco for quality products and decent prices.
I like Amazon for breadth of selection and INFO INFO INFO on goods.
I like Wal-Mart more now as my "new" Amazon which is getting too big.

I don't like Amazon farming out orders to 3rd party retailers whose service has sometimes been less than I've expected.

I don't like Amazon being destructive the way Wal-Mart used to be when they were rolling up every rural mom and pop grocery and other stores.

I don't like Bezos buying up the Washington Post, one of the nation's best papers.

I don't like Wal-Mart for paying employees so poorly that many quality for SNAP.

I don't like Wal-Mart for paying suppliers poorly and off-shoring so much work.

I don't like any employer who skimps on health care for employees.

Warren Buffett has no shares of Amazon, some in WMT and COST.

I don't own stock in any of these firms; why buy COST with its 1% dividend.

[stan11]

It's not rocket science folks. WMT has been trading along the PE=15 line for the last 8 years, and then shot up to the PE=20 line for no apparent reason. WMT was extremely overvalued and although it has come down from its moon shot, WMT still has some retracement to go through (about another 5-10% before I get interested again. Sold my last batch back in January when it hit the 4 standard deviation point above to 40day MA.

[man114]

Having worked at Wal-Mart in college, they’re too undadaptable when it comes to things. There are countless new backroom programs and such that never really amount to much but the sheer volume of sales covers up all these missteps.

Their online pickup system is inferior to Sears. Try it if you don’t believe me.

Their biggest saviour is their size, so they can fumble around to come up with solutions if possible.

I think the largest looming issue is still employee turnover.

[achilleus]

it's a sort of Peter Principle of corporations. The best ones get too big and can no longer excel.

[Cranios]

I view WMT as a Soviet-style store in regard to customer service. As an example, compare CVS or Walgreens with WMT, in the area of Rx. Drive-up window for WAG and CVS. WMT? First, find a parking spot far away from the store. Walk in, past many slow-moving people. Stand in line at the Rx counter. If you're in line while their lunch break occurs, they close the Rx window for half an hour. Eventually, get your Rx. Have the person at the door make sure you paid for it.
You get the idea - Soviet style vs. everyone else. Totally cost driven and not customer service driven.
WMT is doomed.

[GeneralUrsus]

All these complex reasons, everyone had for selling Walmart. Its simple, someone with a lot of resources shorted the stock and wanted to make money.

[Quest21]

I have to say when the market opens tomorrow I’ll be very tempted to purchase WalMart at 87 and some change. One thing I can count on is 10 years from now WalMart will be doing the same thing it’s always done and possibly more. Not to mention it’s recession proof.

[Cranios]

Yes, it will be doing the same thing it's always done - and other competitors will be doing things better than they've always done. Connect the dots on that and you'll understand why it won't be such a great investment.

[user 42609976]

The author presents a shallow review. WMT is one of the best, if not the best, managed businesses in the world. They have a solid business model and were 1 st. grocery provider to take early action to position for Amazon. This is an excellent time to accumulate.

[thinkalways]

Walmart - $486 Billion in Sales, gross margin - 26%
Amazon - $178 Billion in Sales, gross margin - 37%

Neither one is a slouch. My 2 cent observation: Walmart can move into on-line sales becuase there is plenty of "room" on the internet. The reverse is not true for Amazon - they would have to spend $100's of billions to have the same physical presence as Walmart - it is not going to happen. Let's check back in 10 years and see what's going on. I wouldn't count out Jeff Bezos, or the culture left by Sam Walton...

[JeanD44]

"All that glitters is not gold"

When has Lore (Jet.com) won vs Amazon? Today Walmart opted for an upside down strategy. Results?! Walmart has also badly copied one other "thing" they don't understand well. So Walmart uses only 20% of that powerful weapon and only on its own battlefield. Missing so all targets!

To go faster Walmart mixes too many strategic axises. It looks like a puzzle without a guideline. Walmart stacks technologies for different markets, targets. Yet attack by techno had not given anything tangible (WalmartLabs). Today really Walmart has only one winning axis, poorly exploited...

[Cashflow Curator]

I think the recent drop had more to do with valuation and related unreasonable performance expectations. The stock was priced for perfection, and when perfection fell short, well you know what happened ... doesn't mean that WMT is a bad company (it isn't IMO), just goes to show that valuation discipline must be maintained no matter the stock or quality of the company.

[GameChanger_E3E]

have you bothered to see WMT adjustments to they application and online platform... WMT is getting better, placed an order early this morning and this time it was a breeze to transact. WMT go long!

[American_Bull]

I like going to WMT when it is rainy and cold outside...to look at stuff

[PACKER man]

Seems to me that you really really don’t like WMT? I have never used AMZN PRIME and go to WMT daily so I guess I am a “dodo bird”! I’ll take WMT (bought first shares in 1982) with its dividend and local stores any and everyday; thank you!

[manfredthree]

Also, many get to drop by ALDI on their way through the WMT parking lot and pick up some instant bargains on tier 2 and 3 brands as well as commodity items. Demographics give WMT major security, where cramped urban areas help AMZN. But these are very early days, and the multi-faceted WMT makes a quite decent place to take Grandma and the kids for a cheap three-birds-with-one-s... outing. We expect WMT to correct quality deficiencies and mis-leading labelling on some canned goods , not WMT's fault.

[Williams Bay Analytics]

Yet another article that essentially slams WMT while either explicitly or implicitly praising AMZN. The stock price of AMZN has emboldened it's owners to feel the company can do no wrong. Meanwhile after 20 years of online selling that part of their business still makes no money. And yes, I understand the retort....Bezos is building for the future, so the company continues to get a pass. I recently read AMZN's 1997 investor letter. That's exactly the strategy he laid out back then. Maybe that's justified and will eventually play out as a profitable long term strategy. I have no idea if that is true or if it will prove incorrect. But it's certainly safe to say that the market believes it.......WMT is worth ~$260 billion while it values AMZN at ~$740 billion. Those numbers are what they are. The former had a down year and made almost $10 billion in GAAP earnings (previously had been + or - $15 billion)) last year. The latter made $3 billion. Time will tell.

[cu-trader]

The spread between those who can afford to buy in AMZN, pay its membership fees and those who live paycheck to paycheck is greater every day. There's a place for both AMZN and WMT, where they overlap its clearly in favor of AMZN at the time... the rest is a story to be unfold in the coming years. WMT is still strong and I strongly believe they're learning fast from their mistakes and late investment on those areas where AMZN poured more $$.

[2009]

I subscribed to deliver my Moisturizer from Amazon that costs $4.50. AMAZON spends another $4.00 to ship it to me. I am happy as long as AMAZON share holders are happy with it.