What you’ll learn

  • likely reason why Buffett is selling Wal-Mart
  • Whether Wal-Mart has any chance to compete in e-commerce
  • Understanding fundamental, quality checks and Walmart’s stock value

The press likes to say that Buffett is a hold forever investor, but in his 2016 letter, Buffett specifically addresses this mis-interpretation.

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Sometimes the comments of shareholders or media imply that we will own certain stocks “forever.” It is true that we own some stocks that I have no intention of selling for as far as the eye can see (and we’re talking 20/20 vision). But we have made no commitment that Berkshire will hold any of its marketable securities forever. – Bershire 2016 letter

Confusion about this point may have resulted from a too-casual reading of Economic Principle 11 on pages 110 – 111, which has been included in our annual reports since 1983. That principle covers controlled businesses, not marketable securities. This year I’ve added a final sentence to #11 to ensure that our owners understand that we regard any marketable security as available for sale, however unlikely such a sale now seems.

You’re seeing this with Wal-Mart (WMT).

Buffett has clearly fallen out of love with Wal-Mart with his ownership now at 1.4M shares – just 0.04% of his portfolio.

You don’t allocate 0.04% of your portfolio to your best idea.

Wal-Mart

Buffett WMT Holding Size

Why is Buffett selling and are you wasting money on Wal-Mart?

Retail is Brutal

On the surface, retail is easy to understand.

  1. Buy or manufacture a product
  2. open a store
  3. sell it

Between steps 1 to 3 there are a gazillion things to be done. Then another zillion things after step 3 we don’t think about.

When you realize there are hundreds of thousands of stores doing the same thing, it a competitive nightmare for the weak, slow or inexperienced.

In 2005, Buffett was asked about Eddie Lampert, K-Mart and Sears.

A classic Buffett response (emphasis added).

Eddie is a very smart guy but putting Kmart and Sears together is a tough hand.

Turning around a retailer that has been slipping for a long time would be very difficult. Can you think of an example of a retailer that was successfully turned around? Broadcasting is easy; retailing is the other extreme. If you had a network television station 50 years ago, you didn’t really have to invent or being a good salesman. The network paid you; car dealers paid you, and you made money.

But in retail you have to be smarter than Wal-Mart. Every day retailers are constantly thinking about ways to get ahead of what they were doing the previous day.

Retailing is like shooting at a moving target.

In the past, people didn’t like to go excessive distances from the street cars to buy things. People would flock to those retailers that were near by. In 1966 we bought the Hochschild Kohn department store in Baltimore. We learned quickly that it wasn’t going to be a winner, long-term, in a very short period of time. We had an antiquated distribution system. We did everything else right. We put in escalators. We gave people more credit. We had a great guy running it, and we still couldn’t win. So we sold it around 1970. That store isn’t there anymore. It isn’t good enough that there were smart people running it.

How many retailers have really sunk, and then come back? Not many. I can’t think of any. Don’t bet against the best. Costco is working on a 10-11% gross margin that is better than the Wal-Mart’s and Sams’. In comparison, department stores have 35% gross margins. It’s tough to compete against the best deal for customers. Department stores will keep their old customers that have a habit of shopping there, but they won’t pick up new ones. Wal-Mart is also a tough competitor because others can’t compete at their margins. It’s very efficient.

In other words, investing in retail is hard.

I know.

I’ve lost plenty of money on what I considered to be good bets.

Would Warren Buffett Use Wal-Mart in this Example Today?

If Buffett is asked this question today, would he replace Wal-Mart for Amazon?

Yes.

Buffett made it clear that he admires what Bezos has done.

We haven’t seen many businessmen like him. Overwhelmingly, he’s taken things you and I’ve been buying, and he’s figured out a way to make us happier buying those products, either by fast delivery or prices or whatever it may be, and that’s remarkable. – Buffett

If you consider the retail environment as brick and mortar stores only, Wal-Mart is still on top of the list.

However, with the ubiquitous shopping experience needed to compete and grow in today’s environment, Amazon is hands down the favorite, despite Wal-Mart’s revenue of $485B.

Maybe the following charts explains why Buffett divorced Wal-Mart.

Wal-Mart

Wal-Mart

Don’t Bet Against Wal-Mart Just Yet

Wal-Mart has been left in the dust in terms of innovation (and stock price), but their core competency of low prices and efficiency is what keeps them on top of the ladder despite the falling dominoes of retail companies.

Their Q4 results show why Wal-Mart is king of retail (brick and mortar).

  • Walmart U.S. comp sales increased 1.8%, driven by a traffic increase of 1.4%. Neighborhood Market comps increased approximately 5.3%.
  • E-commerce growth at Walmart U.S. was strong as sales and GMV increased 29.0% and 36.1%, respectively, including Jet.com and online grocer
  • Net sales at Walmart International were $31.0 billion, a decrease of 5.1%. Excluding currency, net sales were $33.7 billion, an increase of 3.0%
  • Free Cash Flow increased 39.5% due to improved working capital management.

The segment that everyone will continue to monitor closely will be on e-commerce.

Will Jet.com and ShoeBuy make a dent to Amazon?

No.

Doesn’t move the needle for Wal-Mart revenues.

According to Prosper Insights & Analytics, 81% of US consumers have never heard of Jet.com.

What it does show is Wal-Mart’s willingness to make acquisitions and start to build a portfolio of e-commerce stores.

Don’t expect a huge, cash gushing portfolio overnight or within a few years.Amazon didn’t get to where they are in a few short years.

But here’s a data driven and bottoms up approach of why you shouldn’t give up on Wal-Mart.

Wal-Mart Fundamentals

One of my recent rules of thumb is to stay clear of failing retailers that are supposed to be in turnaround mode.

  • Macy’s
  • Sears Holdings
  • JC Penney

To make sure signs aren’t pointing towards a slow and painful death, here are some quality indicators I look at.

Wal-Mart’s Piotroski Score

The Piotroski F score is made up of 9 fundamental accounting checks.

Here’s the link to view the full details of how the Piotroski Score works and a Piotroski screener using the best criteria of the 9 scoring factors.

I use the Piotroski Score extensively because it has been proven. It cuts down a lot of time and makes it easy to analyze a stock.

The current Piotroski Score of 7 is good. Return on Assets and Current Ratio dropped, but other fundamentals are going strong.

Wal-Mart

WMT Piotroski F Score Trend | source: old

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