Observations - The Walmart Story

Observations THE WALMART STORY Saturday, March 3, 2007

“We just kept that stock.” - Sam Walton in Made in America

This issue of Observations is about the best company to probably have hit the world…ever. In this issue, I go back about four decades, to trace the incredible progress of a company, from very humble beginnings to becoming one of the largest companies on earth. The US economy in the same period, has gone through several recessions, and has been witness to couple of serious stock market crashes. But Walmart chugs along, like an athlete on perennial steroids. While the Walmart story points inexorably to the genius of Sam Walton, I think it has several valuable lessons in investing and business. To me both are two sides of the same coin. As investment guru Benjamin Graham used to say, “Investing is most useful when it’s most businesslike.” It seems one Sam Walton took his word a bit too seriously. _____________________________________________________________________________________

From Small…to Big….to Huge…to

Gargantuan…

A guy named Sam Walton sees a big opportunity in small towns. He observes that people in the country side, with little access to the mainland city, were direly in need of a neighborhood place to shop for their needs. And he decides to give them just that. When he started, he had more drive and ambition than money in his bank account. He sold and sold and sold, and over the next couple of decades, built a monster of a company. In the tables below, I highlight the Walmart progress report in numbers, going back four decades. TABLE 1: The business 1960

1980 1,200 41 276

1990 26,000 1,000 1,528

2000 165,013 5,377 2,522

CAGR % 34 31 15

Sales/Store 155,556 968,750 4,347,826 Profit/Store 12,444 37,500 148,551 Profit Margin % 8.0 3.9 3.4 Source: Company filings, Made in America Note: All numbers in USD Million; except ‘store’ ratios which are in USD.

17,015,707 654,450 3.8

65,429,421 2,132,038 3.3

16 14

Sales Profits Stores

1970 1 0 9

31 1 32

Decade ending 1960 In 1960, the company managed about USD 1 million in sales. Its profit margins though were pretty healthy for a company in the retail business. Sam Walton himself couldn’t have probably projected those numbers appearing in the above table. Decade ending 1970 Another decade passes by and the company touches USD 1 million in Net Profits in 1970. The Sales/Store and profit/Store metrics improve significantly. The profit margins, however, drops to 4% levels. This is typical of a business cycle, where a company starts off as a small and fast grower. The fast growth attracts competition, leading to a drop in margins over time. After a period, growth slows down and ultimately tracks Hemant Sreeraman ([email protected])

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Observations THE WALMART STORY Saturday, March 3, 2007

“We just kept that stock.” - Sam Walton in Made in America the overall growth rate of the economy. Decade ending 1980 The 70s witnessed a bear market in equities. But Walmart was well on its way to another stellar decade. At the end of 1980, it had crossed USD 1 billion in sales and profits had gone up by about 40 times compared to 1970. Decade ending 1990 Wall Street started taking notice of the company and the intellects started voicing their opinions about the fortunes of this company which had, by now, demonstrated two decades of super growth. When Walmart acquired a chain of stores – Kuhn’s Big K in 1981 – several analysts felt that the company had got ahead of itself and started predicting doomsday. The stock price went up and down in response to big institutional investors acting on these esteemed recommendations. Meanwhile the company continued on its odyssey, adding a little more to sales and profits and stores. Result: Another decade of super performance. The significant thing over the past two decades was the profit margins – which stayed at the 3.5-4% levels consistently. The stock market crash of 1987 pulled the stock price down by more than 50%...but the underlying business continued its uptrend. After a while the markets realized their mistake, and ensured that Walmart, the stock, ended 1990 with a gain of more than 100% from the 1987 low. Decade ending 2000 Walmart ended year 2000 with a Sales/Store of approximately USD 65.4 Million. By now the story starts sounding repetitive. Another stellar decade of growth, analysts rant and rave along the way, sometimes focusing too much on the micro details than the larger picture. It didn’t matter that Sam Walton – the founder – died along the way. The company continued growing… Walmart had managed to grow its Sales and Profits at a CAGR of 34% and 31% respectively, over four decades. I repeat, over four long decades! If that doesn’t qualify for a superlative performance I don’t know what will. The table below shows the decade-over-decade growth rates of key business parameters. TABLE 2: Business growth rates (per decade in %) CAGR %

1960-70

1970-80

1980-90

1990-2000

Sales

36

44

36

20

Profits

27

42

38

18

Stores

14

24

19

5

By far, the 1970-80 decade was Walmart’s best in terms of growth rates. Ironically, that same decade was the worst for Walmart, the stock! The early 70s recession took its toll on ‘investor sentiment’ and for long the stock wasn’t accorded its due. Both sales and profits grew over 40% over the decade, but the stock price grew only 20%. Hemant Sreeraman ([email protected])

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Observations THE WALMART STORY Saturday, March 3, 2007

“We just kept that stock.” - Sam Walton in Made in America TABLE 3: Walmart stock price performance (per decade in %)

CAGR % Stock Price

1970-80 20

1980-90 44

1990-2000 29

Note: Walmart became a public company on October 1, 1970. Stock Price for the decade 1970-80 represents the price change since listing.

But over time, the markets have a good habit of reversing their short term mistakes. The markets recognized that Walmart was a gold mine and upped the price by over 40% over the next decade. The stock price grew faster in 1990-2000 compared to the sales and profits. Although I have been looking macro till this point, let me take that forward a little more. I will look at the business and the stock price over the three decades of Walmart’s listed existence. I have heard expert after expert speaking about how stock prices track profits over long term. TABLE 4: Walmart – the business and Walmart – the stock (over approximately three decades) CAGR % Profits

31

Price

31

Well…

CHART: Walmart stock

Source: BigCharts

Hemant Sreeraman ([email protected])

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Observations THE WALMART STORY Saturday, March 3, 2007

“We just kept that stock.” - Sam Walton in Made in America Conclusion Walmart is about the genius of Sam Walton – and some more. The Walmart story is about vision, action, a sound sustainable business and strong management. It’s that rare example of a stupendous business being run by stupendous people. That combination is a very difficult one to find, and if one is lucky enough to find one somewhere, then the wisest thing that one could do is to make a life-long commitment and buy the stock. And keep it…As Sam Walton so succinctly put it, “We just kept that stock.” In fact, he has vowed to haunt his grandchildren, should they even as much as contemplate selling Walmart stock! This is the kind of thinking that I strongly believe should govern an investor’s philosophy. A businessman never thinks about selling and cashing out of his business at the first instance of trouble. I wonder why investors in stock markets should think otherwise. While the numbers ultimately have a way of taking care of themselves in the long run, it’s in the shorter time frames that investor behavior can be chaotic. Near term aberrations temporarily cause investors to dump something they shouldn’t be dumping – and loading up on something they shouldn’t be loading up on! The power of compounding is an investor’s best friend. I tend to believe that macro factors should mostly drive an investor’s behavior. The stock market’s excessive focus on quarterly earnings readily gives an advantage to a macro-focus investor. The importance of the ability to ‘see’ the big picture, rather than worrying excessively about what discount rate to use in an excel discounted-cash-flow model, maketh a super investor in the long run, in my opinion. When Warren Buffet talks about thinking ten years out, one begins to appreciate his wisdom. The analyst community seems to have mastered the art of conducting businesses by sitting comfortably in plush offices! Isn’t it strange that retail sector analysts – with probably not more than couple of years of lip-service ‘experience’ in the retail business – were ‘advising’ Sam Walton, who probably had spent more time in the retail business than the analysts spent on earth, on how to conduct his business, on whether he should be expanding here or there?

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http://www.esnips.com/web/Observations *************************************************************************************************************************** Disclaimer: This article is meant for information purposes only. The author has no opinion on Walmart, the stock, currently, nor does he hold the stock in his personal portfolio.

Hemant Sreeraman ([email protected])

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