WMT: Tepid Sales Growth And Long-Term Margin Compression
Long Only, Long-Term Horizon, Growth, Growth At A Reasonable Price
Seeking Alpha Analyst Since 2018
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Summary
- Since 2014, WMT's per-share revenue growth has been tepid, operating income declined and margins compressed, likely due to pressure from online retailers.
- Margins have compressed across all divisions. As WMT retreats from major markets like the UK and Japan, international sales is unlikely to be a key source of future value creation.
- E-commerce sales has grown but is <20% of AMZN's sales and a drag on margins. It is unclear if WMT can compete with pure online retailers over the long term.
- WMT's 2020 comp store sales have jumped as a result COVID-19 lockdowns, and its valuation is reasonable, which should make for a safe holding.
- However, I do not believe these strong comp sales increases will persist. As such, WMT is unlikely to be a value driver for a long term growth oriented portfolio.
Overview
From 2014 through end-2019, the per-share revenues (based on fully diluted shares) of WMT had grown by about 4% p.a. at best. In 2020, same store sales for Walmart US and Sam's Club increased by 8.6% and 11.8% respectively, due to the COVID-19 lockdowns that drove sales to "essential" stores like Walmart.
However, WMT's per-share operating income has declined over the last 6 years. 2020 operating income remains 10% below 2014 levels, in spite of the increase in sales due to COVID-19, in part due to increased labor and pandemic-related costs.
Operating margins have been under pressure since 2014, and have dropped from about 6% of revenues to 4%. This is likely a result of intense competition from online retailers, which has not only driven prices down but also been a source of expense as WMT builds its own e-commerce capabilities.
(in the charts above, I included Target (TGT) for comparison purposes)
At the division level
Sales growth has been tepid at Walmart US, flat at Sam's until the COVID pandemic, and declined internationally. As WMT continues to retreat from international markets (in 4Q2020, it sold majority stakes in Seiyu and ASDA, its Japan and UK arms), overseas expansion is unlikely to be the broad growth driver many had hoped it would be.
Operating income at each division has also been under pressure as WMT faced pressure from online competitors... (there are currency fluctuations at play in international markets, but the long term direction appears to be down)
..and as margins compress across all divisions.
E-commerce
WMT's e-commerce sales has grown at a high rate, but with total sales of around $60 billion globally in 2020, it is still less than one-fifth of AMZN's $340 billion 2020 retail sales. WMT's eCommerce contribution (620bps at Walmart US and 280bps at Sam's Club for Q4 FY2021 continues to exert pressure on overall margins). Furthermore, it is unclear to me whether WMT can be cost competitive against a "purer" e-commerce player like Amazon over the long term.
Valuation
Compared to the low treasury yields today, WMT's valuation is reasonable and can be a safe holding for a conservative portfolio. However, it is unlikely that same store sales increases the company experienced in 2020 will persist after the pandemic subsides.
I do not expect WMT to be a key value driver for my long term, growth-oriented portfolio, and will earmark it as a source of cash for new investment ideas.
Analyst's Disclosure: I am/we are long WMT, AMZN.
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