Walmart, the real retail overlord, how it makes money?

Introduction

Founded

In 1962, brothers Sam Walton and James Walton, former employees of J.C. Penney (now listed), founded Walmart (ticker: WMT), which was incorporated on October 31, 1969. .

IPO

Publicly traded on the New York Stock Exchange in 1972.

One of the largest companies in US

Walmart has been ranked at the top of the Fortune 500 list for eight consecutive years since 2014. According to the October 2022 Fortune Global 500 ranking, Walmart is the largest company in the world by total revenue.

Important history

• In 1987, the largest private satellite network system was established in the United States.
• In 1990, Walmart became the largest retailer in the United States.
• In August 1996, Walmart entered China by establishing a joint venture.
• In 1999, Walmart had 1.14 million employees, making it the world’s largest privately held company. In September, it entered the UK with the acquisition of 229 stores from ASDA Group for 6.7 billion pounds. Acquired 74 supermarket chains of Interspa in Germany.
• In May 2009, Walmart opened its first store in India.
• In 2016, Walmart acquired Jet.com and increased its stake in JD.com (ticker: JD) to 12.1%.
• In May 2018, Walmart acquired 77% of Flipkart, India’s largest online retailer.

Current operating status

Four business models

Walmart operates under 46 different names around the world. Its business can be divided into four divisions:

• Walmart US
• Walmart International
• Sam’s Club
• Global e-commerce

In the United States, Walmart stores have four business forms:

• Discount store
• Super center
• Neighborhood market
• Sam’s Club

Walmart international stores include:

• Supermarket
• Hypermarket
• Cash and carry store
• Home renovation
• Special electronic products
• Dining room
• Fashion store
• Pharmacy
• Convenience store

Global layout

Main operating countries

• Walmart operates in all 50 states and Puerto Rico. 65% of Walmart’s sales come from its U.S. business.
• Operating Walmex in Mexico.
• ASDA operates in the UK.
• Operates Seiyu Department Store (including MUJI) in Japan.
• Massmart operates in many African countries.
• It jointly operates “Best Price Modern Wholesale” with India’s Bharti Enterprises.
• Wholly owns Walmart businesses in Argentina, Brazil and Canada.

International business not all good

Walmart’s investments outside the U.S. have had mixed results:

• Successful operations and subsidiaries are located in Canada, the United Kingdom, Central America, South America and China.
• But operations in Germany, Japan and South Korea failed.

How big is the scale?

According to the latest records on Walmart’s website:

• Walmart operates in 19 countries.
• As of October 31, 2022, Walmart had more than 10,500 stores worldwide and numerous e-commerce websites.
• It has 2.1 million employees worldwide, including nearly 1.6 million in the United States alone. Walmart is also the world’s largest private employer.
• 90% of Americans live within 10 miles of a Walmart store.
• 210 distribution centers, a transportation fleet of 9,000 tractors, 80,000 trailers and more than 11,000 drivers.

Survived from e-commerce trend

Other traditional retail peers

Kmart and Sears, competitors that were much larger than Walmart thirty years ago, have long since disappeared and collapsed. Macy’s (ticker: M) has also been rumored to be delisted, bankrupt, or sold due to the rise of e-commerce in recent years.

Can compete with Amazon

Walmart is one of the few brick-and-mortar retailers that can keep up with Amazon.com (ticker: AMZN). Walmart accomplished this by upgrading its e-commerce and fulfillment capabilities, using physical stores to fulfill online orders, and closely matching Amazon’s prices.

In an effort to block Amazon Prime’s grip on customers, Walmart has also expanded its own Walmart+ subscription program, which offers free shipping, discounts and a subscription to its streaming service Paramount+. It has acquired smart TV maker Vizio, just in time to help its offensive on Amazon’s Fire set-top boxes and smart TVs.

In addition, Walmart relies on Sam’s Club to catch up with Costco (ticker: COST) in the warehouse membership market, and strengthens its overseas e-commerce business by acquiring India’s Flipkart and taking a stake in China’s JD.com. These bold moves will allow it to clearly differentiate its positioning from rival Target (ticker:TGT), which only operates in the United States and does not have a warehouse club chain.

Walmart e-commerce

Walmart.com is the e-commerce arm of Walmart and provides the following diverse features:

• Walmart App: From Walmart Pay to grocery orders for mobile express returns, prescription refills, and same-day pickup, we help you get more done at the touch of a button.
• Mobile Scan & Go: Shop and check out in-store using your mobile phone.
• Curbside Pickup: Order online and pick up in store.
• Next Day Shipping: In many markets, customers can enjoy fast, free shipping on qualifying orders over $35.
• Walmart+: A membership program that brings together in-store and online deals.
• Walmart GoLocal: Walmart’s delivery-as-a-service business that provides delivery services to customers at businesses of all sizes.

Sam’s Club

The company opened its first Sam’s Club in 1983 to help small and medium-sized business owners save money when buying goods in bulk. It is a membership-based division of Walmart that operates independently, similar to Costco.

Since then, Sam’s Club has grown rapidly, serving families and entrepreneurs through nearly 600 clubs in the U.S., more than 200 clubs internationally, SamsClub.com and mobile apps.

Buffett and Walmart

Buffett also invested in Walmart, but Buffett made a big mistake in Walmart, resulting in a loss of billions of dollars. For details, see my two previous posts:

• “Investment mistakes Buffett made in his first 25 years“
• “Mistakes of omission and mistakes of commission“

Competitors

Retailer is not easy

Walmart is located in the most difficult retail industry to operate. This industry has low profit margins, huge labor costs, and high inventory pressure. All of WalmMart’s competing manufacturers are not ordinary people, because none of the peers that can survive at present are simple.

Profit is very low

In its fiscal second quarter of 2024, the most recent quarter ended February 18, Costco’s gross margin on merchandise sales was below 11%. By comparison, Walmart and Target have gross margins of 24% and 28%, respectively.

Customer base comparison

A typical Walmart user usually owns his or her own home, has an annual income of between US$40,000 and US$80,000, and is a middle-income earner. The number of high-income customers with an annual income of more than $100,000 also continues to increase.

Walmart has the highest customer loyalty. In 2023, more than 95% of shoppers have visited Walmart twice or more. The typical customer shops at Walmart at least once a week, about 67 times a year, spending about $54 each time, and annual spending of $3,578, and the website and app account for an increasing proportion of these transactions.

Discount stores

Among stores such as dollar discount stores, Dollar General and Dollar Tree are typical representatives. For details, see my post of: “”Dollar General vs. Dollar Tree“

Costco

Costco’s biggest fans are Asians, who are nearly twice as likely to shop at Costco as the average U.S. consumer. And Costco members are more likely to be homeowners who love organic food and actively manage their health.

Home Depot

Home Depot (ticker: HD) mainly serves two core customer groups, DIY customer group and professional customer group. After DIY customers purchase the goods, they will go home and do their own handicrafts. Professionals are usually electricians, plumbers, painters and other people with professional needs. The typical user of Home Depot earns more than $80,000 per year.

Lowe’s

Lowe’s Company (ticker: LOW) mainly serves the DIY customer base, but Home Depot’s users are closer to the city. Lowe’s Company’s users are mostly in rural areas, with incomes between US$40,000 and US$80,000.

In terms of shopping behavior, the typical Costco user visits Costco about once every two weeks, about 30 times per year, spending about $100 each time, for an annual expenditure of $3,018.

Amazon.com

But Amazon’s typical users shop more online, with about one-fifth of their purchases occurring online. The typical Amazon customer places 72 orders on Amazon per year, spends an average of about $37, and has an annual spend of $2,662.

In comparison, typical customer spending at Home Depot and Lowe’s is much lower. A typical Home Depot user purchases about 10 times a year, spending about $85 each time, and the annual expenditure is $856. A typical Lowe’s customer purchases at Lowe’s nine times a year, spending about $90 each time, for a total of $809.

Walmart family

The Walmart family has the most successful wealth management method for heirs of wealthy American families, and can be said to be the most successful example of family financial management. Not only do they still control Walmart, but the descendants of the founder are also working hard to accumulate wealth and run businesses.

In fact, Walmart is still a family business to this day. The actual controlling shareholder is the Walton family, which owns 48% of Walmart’s shares.

But this part is beyond the scope of this article. If I have the chance, I will find time to write a special introduction.

Operating performance

Financial report of Q4 2023

Revenue in the fourth quarter of 2023 was US$173.4 billion, an increase of 6% from the previous year. Its full-year sales also reached US$648.1 billion, an annual increase of 6%.

The company expects revenue to continue to grow in 2024, with net sales increasing by at least 3% over the previous year. Walmart’s net sales in 2023 (excluding some revenue such as Sam’s Club membership fees) totaled US$642.6 billion.

Other highlights in the financial report

E-commerce revenue increased by 23% year-on-year, exceeding US$100 billion for the whole year. Its advertising business is booming, with fourth-quarter sales rising 33% annually and fiscal 2024 sales reaching $3.4 billion, up nearly 30% from the same period last year.

Walmart also has a booming international business. This part of the business generated $114.6 billion in revenue in 2023, up more than 13% from 2022.

In addition to revenue growth, Walmart’s free cash flow also grew, increasing $3.1 billion from fiscal 2023 to $15.1 billion. FCF provides insight into the cash Walmart has available to invest in its business, pay debt, buy back stock, and fund dividends. Walmart’s healthy growth in free cash flow allowed it to raise its dividend for the 51st consecutive year and its largest increase in more than a decade.

The company is also well-positioned to invest in its business, as part of which it acquired TV maker Vizio for about $2.3 billion. Walmart’s Vizio deal isn’t just about selling more TVs in its stores. MacMillan said: This acquisition accelerates the expansion of our advertising platform into connected TV business.

Connected TV (CTV) is one of the fastest-growing areas in advertising, with global revenue expected to grow from $25.9 billion in 2023 to $42.5 billion in 2028. Vizio TVs are built with technology that powers CTV advertising. In fact, Vizio’s advertising revenue increased 36% year over year in the fourth quarter. Additionally, its advertising revenue has accounted for the majority of Vizio’s sales growth over the past five years, according to Walmart.

Outlook

The company ranks second in U.S. e-commerce sales, behind Amazon. Walmart is rapidly expanding its advertising business, and acquiring Vizio could help further strengthen that revenue stream.

From fiscal 2024 to fiscal 2026, analysts expect Walmart’s revenue to grow at a compound annual growth rate of 4%, while its earnings per share will grow at a compound annual growth rate of 35%.

Capital market performance

Stock split

On February 26, 2024, Walmart executed its first stock split in more than 20 years, and as of February 26, shares were trading following the split. The company’s decision to pursue a 3-for-1 split was motivated in part by a desire to ensure the stock was affordable for employees.

Performance over the past five years

From 2019 to 2023, Walmart’s annual revenue will grow at a compound annual growth rate of 5%, while earnings per share will grow at a compound annual growth rate of 21%.

Walmart’s stock price is up 85% over the past five years, resulting in a total return of 101% after dividends are reinvested.

Dividend

Its stock trades at 26 times forward earnings, the dividend offers a decent forward yield of 1.4%, and management has raised the dividend annually for 51 consecutive years. A long history of dividends is the icing on the cake, providing a source of passive income.

Stock buyback

Over the past two decades, the company has repurchased nearly 40% of its outstanding shares.

Risks

Share price at all-time highs

Walmart’s stock is now at all-time highs — for much of the 2010s, it traded at less than 20 times earnings and was more expensive than most of its peers. Target, for example, trades at a price-to-earnings ratio of just 18 times.

Walmart insiders actually sold 86 times more shares than they bought in the last 12 months. In the past three months, they sold 64 times more shares than they bought. This cold internal sentiment is a strong indication that its valuation is outpacing its growth rate.

Geopolitics

Walmart operates nearly 400 physical stores and multiple e-commerce platforms in China, and its stores in the United States and other markets rely heavily on Chinese suppliers to provide cheap products. As a result, new trade restrictions and tariffs against China could disrupt its overseas operations and squeeze its gross margins.

Capital spending squeezes profits

Walmart’s expansion of its e-commerce, delivery and digital media ecosystem to counter Amazon could further squeeze its operating profits. Amazon can rely on its high-margin cloud platform Amazon Web Services to subsidize its low-margin retail and digital media businesses. Walmart doesn’t have a similar profit engine.

Related articles

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