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Walmart Earnings Preview: Running To Stand Still

Doug McMillon has done a great job focusing on Walmart (NYSE:WMT) on the e-commerce threat and opportunity, but over the long run–regardless of how fiscal 2020 or the next few years turn out–Walmart is basically running to try and stand still.

Tuesday morning, February 18th, 2020, before the opening bell, Walmart (NYSE:WMT) is expected to report Q4 ’20 financial results, with Street consensus expecting $1.48 in earnings per share (EPS) on $142.5 billion in revenue, for expected year-over-year growth of 2% and 3% respectively.

For full-year fiscal 2020, if consensus for Q4 ’20 is met, Walmart (NYSE:WMT) will have generated $524 billion in annual sales. That’s a lot of dollars. I think only Exxon-Mobil was the other S&P 500 component to have greater annual revenue than Walmart.

A lot of investors don’t realize that WalMart is so big, its 2.2-2.3 million employees made the retail giant the largest private-sector employer in America. However–and it’s no secret–but the giant is under attack, as e-commerce and 2-hour delivery have kept bricks-and-mortar retail under pressure.

Grocery is now 52%-53% of Walmart’s total revenue, which Walmart (NYSE:WMT) didn’t begin until around the year 2000, and it’s a good strategy for Walmart since it brings foot traffic into the stores and the consumer can leave with more than just groceries.

Want to see some interesting revenue and EPS stats, going back to 1992?

WMT Historical revenue growth: (averages)

1-year: +2%
3-year: +3%
5-year: +2%
15-year: +4%
20-year: +6%
23-year: +7%

The revenue history on the spreadsheet only goes back to 1998, so over 23 years, Walmart (NYSE:WMT) has averaged 7% revenue growth. In 2000 at the top of the equity bull market and when residential real estate was doing equally well, Walmart grew revenue 21% y/y in fiscal 2000. Think about that. Walmart’s market cap in January, 2000 around the time of Q4 ’00 earnings was $260 million. It’s revenue is 4 – 5 times that today, while the market cap is just 1/3rd higher.

WMT Historical EPS growth (averages):

5-year: 0%
20-year: +7%
28-year: +11%

(The spreadsheet’s EPS data starts in 1992. )

For one period from fiscal 2015 – 2017, Walmart (NYSE:WMT) had three consecutive years of negative EPS growth, and i suspect it was at that point that the Board made the change to promote Doug McMillon and move the company significantly towards faster pick-up and delivery and an easier consumer experience.

The problem is Walmart (NYSE:WMT) gave Amazon (NASDAQ:AMZN) a 20-year head start.

Summary / conclusion: The real tragedy around Walmart (NYSE:WMT) and Amazon (NASDAQ:AMZN) is that if Amazon ever used the US footprint of Walmart’s stores as distribution centers for Amazon orders around the country, covering 90% of the US population (per one source which I can’t recall), the US consumer would have the perfect symbiotic relationship between e-commerce and bricks-and-mortar. You’d have to think that the US Justice Department would never allow it.

Walmart’s annual square footage growth has slowed to 0% – 1%, while Amazon (NASDAQ:AMZN) continues to add US distribution centers.

The other interesting metric between the two giants is that Amazon (NASDAQ:AMZN) is still roughly half of Walmart’s annual revenue, ending 2019 with $280.5 billion in revenue versus Walmart’s expected $525 billion if the Q4 ’20 consensus revenue estimate is met. You would think that that stat alone gives Doug McMillon time to further lower Walmart’s cost structure and improve margins and delivery, but Walmart (NYSE:WMT) has to add expenses and capex to transform the business, and bring it closer to Amazon.

That’s what worries me about Walmart (NYSE:WMT): Doug McMillon is forever Sisyphus, pushing the rock up that retail hill, only to see a lower-cost, faster delivery competitor continue to take share.

Walmart (NYSE:WMT) is being forced to move towards Amazon (NASDAQ:AMZN), as Amazon puts further distance from bricks-and-mortar.

If Walmart (NYSE:WMT) could ever move closer to 2-hour home delivery, would they ever consider using the emerging army of Amazon (NASDAQ:AMZN) trucks for the delivery of those groceries or goods ? is there an opportunity there for FedEx (NYSE:FDX) or UPS, both of which – so far anyway – seem ill-suited for that kind of delivery?

The reason for the constraint on Walmart’s valuation is that for the last 9 quarters, gross margin has averaged a y/y decline of 36 bp’s a quarter, while operating margin has declined 27 bp’s per quarter for the last 7 quarters.

Walmart’s $525 billion in annual revenue with a 3% – 4% operating margin, continues to be pressured.

Walmart’s cash-flow and free-cash-flow remain in good shape, with the dividend and the share repurchases getting closer to a 50% / 50% split for the consumer giant.

Sam Walton and Walmart (NYSE:WMT) were thought to be the “original disruptor” during the ’70s, ’80s and ’90s but Schumpeter’s “creative destruction” has ended that. Joe Nocera, the famed New York Times business journalist once wrote an article in the early 1990’s saying that the reason core CPI inflation remained subdued, was probably in large part due to Walmart and their EDLP (everyday low price) with Walmart at that time accounting for roughly 10% of total retail sales.

Walmart (NYSE:WMT) stock could be up 10% on Tuesday morning given the very strong US consumer and low gas prices. However – at least today anyway – it still seems a substantial challenge for Walmart to grow revenue again mid-single-digits and fatten margins and to do it without losing out on price to Amazon (NASDAQ:AMZN) and e-commerce.

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