Investors with a long-term horizon can accumulate the stock of global retail giant Walmart (WMT) on dips. Founded by Sam Walton in 1962 as a single store in Rogers, Arkansas (US), it has since traversed decades successfully to become and remain the world’s largest company in terms of revenue for some time (FY21 revenue at $559 billion).

With the company successfully gaining ground in the omnichannel (physical retail and eCommerce) retail strategy, given its size and scale, geographic diversification, and deep-rooted expertise in the retail business, it remains well-positioned to continue to profitably tap consumerisation trends across the world.

Business

While anyone in general would define the business of WMT as a large omni channel retailer, the company defines itself as being in the business of ‘helping people around the world save money and live better’. Hence, what differentiates WMT from many other multi-format retailers is its staunch commitment to price leadership. Its pricing philosophy is built around a concept termed everyday low prices (EDLP) where low pricing is not a temporary promotional activity but a permanent way of running the business. This is supported by another concept known as everyday low costs (EDLC) under which the company commits to a razor focus on controlling costs and passing on the cost savings to customers.

In terms of business segments, the company has three reportable segments — Walmart US (67 per cent of revenue), Walmart International (22 per cent), and Sam’s Club (membership only warehouse club; 11 per cent). It retails products across segments encompassing groceries, general merchandise, and Health & Wellness. In the recently concluded FY21 (ending January 2021), physical retail accounted for 88 per cent of revenue and the high-growth eCommerce business (which includes India’s Flipkart) accounted for the balance 12 per cent.

Apart from the US, it has major operations in Canada, Mexico, China, India and Africa (across different countries). It had major operations in the UK and Japan but is in the process of withdrawing from these markets and direct its focus and capital investments into markets where it sees better long-term opportunity.

According to its recent filing, each week it serves a staggering 240 million customers who visit approximately 11,400 stores and numerous eCommerce websites in 26 countries.

Prospects

Walmart offers a judicious combination of resilience in the form of its physical retail business and growth opportunities in the form of its digital/eCommerce business. Its physical retail business has largely proven to be recession proof, thanks to its reputation and customer loyalty built over decades as a discount store that people flock to during times of recession to save on costs.

For example, during the Great Recession of 2008 when it was mainly a physical retail company, its revenues for the year were up 7 per cent and the stock remained flat or made some gains during the course of the year when the broader markets had crashed. It repeated the same performance in 2020 as well, with the company reporting revenue growth of 7 per cent for the recently concluded Covid- impacted FY. Its physical retail business grew by 2.5 per cent and eCommerce grew by around 60 per cent. Growth in physical retail business amid periods of lockdown further validates the resilience of this business. The stock was up by around 20 per cent from its pre-Covid levels in the one-year period till January 31 this year. While this may be below the returns provided by many high-growth stocks, WMT offers low volatility and steady return prospects for low-risk equity investors.

While over a period of time its eCommerce business will impact some of its physical retail business, at an omni channel level it will be a net gainer, given its dominant position. It has deep-rooted expertise in managing retail business, understanding customer preferences, managing inventory and supply chains efficiently across the world that will keep it in fore in both physical retail and eCommerce. While it is way behind Amazon in eCommerce, it has been gaining share consistently and is in second position in the US in eCommerce market share.

This apart, as we enter an era of big data and analytics, WMT is uniquely positioned to capitalise on and profit from massive swathes of historical data relating to customer transaction patterns and also all the new data that it gathers from around 240 million visits/week to its stores and websites. Some of the new opportunities it is expected to tap from these data troves are in the areas of fintech and online advertising. These provide optionality in value creation beyond current businesses.

Valuation

At its current price of $136, WMT trades at a forward PE of around 24 times and EV/Sales of around 0.7 times (FY22 ending January, as per Bloomberg consensus estimates). While the PE might look optically expensive for a company that grew revenues by 7 per cent in FY21 and reported flattish EPS, it needs to be noted that earnings have been negatively impacted by investments in its high-growth eCommerce business that is yet to reach profitability. If one were to assign a multiple of 3 times to its trailing twelve months (ttm) eCommerce revenue of $65 billion, its traditional business is available at a reasonable forward PE of 12 to 13 times. Its eCommerce business grew around 60 per cent in FY21 and is expected to grow at 25 per cent CAGR over the next two years. Flipkart acquisition multiple was at around 4.5 times ttm revenue; Avenue Supermarts (DMART) trades at around 7.5 times FY20 revenue(revenue growth of 24 per cent in FY20); Reliance Retail stake sale last year was at a valuation of around 2.6 times FY20 revenue (revenue growth of 24 per cent in FY20). Given these, there may be more upside to its eCommerce business, which includes India’s Flipkart and PhonePe.

However, there is no certainty that global markets would take any cues from Indian comparables. Catalysts in the form of listing Flipkart in US exchanges may be required to trigger an upside. Also, in its most recent quarter, WMT announced higher than expected capex ($14 billion vs usual runrate of $11 billion) for current FY, creating some negative sentiment in the stock. Given these factors, investors can look to accumulate the stock on dips at 10-15 per cent below current levels — when the margin of safety will be higher from a long-term investor point of view — traditional business at PE of 11 and eCommerce at 2.5x forward revenue.

Purchasing US equities

Investors can buy US equities directly through investment platforms such as Vested Finance, Stockal, Winvesta and Globalise. Indian brokerages such as ICICI Direct, Axis Securities and Motilal Oswal Financial Services also facilitate overseas investments through tie-ups with US brokers. To know more visit: https://tinyurl.com/globalstocks

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