Chit Chat Stocks - Walmart (WMT) | Deep Dive

Episode Date: July 8, 2021

Walmart, if you've never heard of the company, is a multinational retail corporation. Aiming to offer low price points, Walmart has grown significantly over the course of its lifetime. Listen in as Ian, Brett, and Ryan go through the history, financials, and future prospects of Walmart. Enjoy the show! Our Thursday Deep Dives are sponsored by Quartr, the new way of doing company research. Access conference calls, presentations, transcripts, and more for FREE on your mobile device. Download Quartr on the App Store here: https://apps.apple.com/us/app/quartr-investor-relations/id1552412128  Download Quartr on the Google Play Store here: https://play.google.com/store/apps/details?id=se.quartr.android  Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Interested in more of Ian’s work? Follow him on Twitter: https://twitter.com/IanGrayLive  Rather watch us on video? Subscribe to our YouTube channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ  Contact us: [e-mail]  Timestamps Company Background | (3:24) Industry | (6:17) Management & Ownership | (7:53) Valuation | (11:30) Earnings | (12:21) Balance Sheet | (14:02) Our Analysis | (17:11) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. Welcome in. This is the Thursday Deep Dive episode. We have Ian Gray back joining us this week. He has a busy schedule, but you're joining us. How are you doing? And are you ready to talk

Walmart? Yeah, I'm doing well. And yeah, excited to talk Walmart today. My Phoenix sons have been playing well in the playoffs so and uh in the finals now right yep in the finals so that's huge you called this you didn't call this a few weeks ago yeah no i uh i've been i've been watching the games with bated breath and uh just can't believe they actually made it to the finals but here we are yeah under uh underdog story it's kind of it's kind of fun uh we're gonna be talking walmart like i just said but ryan do you want to introduce excuse me i can't talk today do You want to introduce our new sponsor, Quartered. New sponsor alert.

This is a big one here. So sound the alarms. We've got Quartered now. So if you haven't heard of them, it's a really cool app. And I've been communicating with their marketing head. And I actually liked the app prior to communicating with them. So I'm glad he reached out. But go download the app.

it's basically an investor relations uh amalgamation tool i guess would be the word to say and you can access like conference calls for any of your favorite companies you can access some of the slide decks transcripts all that stuff you can listen to it at two times speed um you can skip past you can go right to the q a which is super nice my favorite feature yeah yeah there's just a lot to like about the app um i've got some key points they want me to talk about it is 100 percent free i think right now it's only uh on iphone but android is expected to release soon so sometime in july sometime in july yeah if you're on iphone go check it out and you can also recommend like new companies they include uh companies from 12 different markets today but

they're planning to add a lot more throughout the year and then they prioritize requested companies which is easily like you can just go ahead and do that right from the app pretty intuitive uh and then they have a lot more uh in store for the back half you can go follow quarter uh get it quarter like uh quarterly you know anyway i understand it's got the uh it's got no e so that's important so it's q u a r t r so it's got the uh tech lingo yep and you want to give out the twitter handle yeah so it's at quarter no uh no e underscore app go ahead check it out. It's definitely worth downloading the app to at least look at it. I've been using it for conference calls only once so far, but I like it. Earnings season is coming right around the

corner. It's free. Don't know why anyone wouldn't do it. All right. Without further ado, should we get to Walmart? Yep. Okay. So yeah, unknown company. Not a lot of people have probably heard about them, but I guess I'll just talk about sort of the mission statement that they have. And this was kind of instilled by Sam Walton. So they say their goal is to help people around the world save money and live better. And they own and operate more than 11,000 retail stores around the world. And they break the company down into three reporting segments. So it's Walmart US, Walmart International, and Sam's Club. Most of you guys probably know what Walmart does, but they obviously sell basically anything. And they try to be the low cost

provider. And they have three different types of retail stores. So there's super centers, discount stores, and then neighborhood markets. The super centers and the discount stores are both on average more than 100,000 square feet. The neighborhood supermarkets or neighborhood markets are a little smaller. But the history is actually fascinating. And it's worth reading up on it just because it's such a good case study for business as a whole. But Walmart began in, I think it's late 1940s, 1950, when Sam Walton, he was 32 years old at the time, He purchased a store from a gentleman named Luther Harrison in Bentonville, Arkansas, and he used the location to open the very first Walton's Five and Dime store. And so Sam Walton didn't actually open his first Walmart until 1962.

But when he did, basically his goal was to be the low-cost provider, have great service, and then sort of the class. I mean, I would almost call this the original your margins, my opportunity, because he went and expanded fast and was able to kind of make it up in volume. But he started to replicate this low cost model with new stores, mostly throughout Arkansas until 1968, I believe. And in 1967, they already had 24 stores. But by 1970, Walmart went public and they started to use those proceeds to help finance expansion across the U.S. and then just all in all it's a good tale of entrepreneurialism it's worth studying how sam walton built the business and then also the role that culture played in it and i know a lot of people talk about that but he really instilled that from the top down and then it also shows kind

of just the grocery business as a whole what it's a retail business what it takes to scale something like that and then as far as recent developments go uh in 26 they introduced walmart pay in 2017 sorry 2016 they introduced walmart pay 2017 they launched free two-day shipping and then they also acquired flipkart in india i think that was in 2017 might have been 2018 so a lot of the recent investments have all been sort of e-commerce related but that's about it for history you want to have uh industry and landscape yeah so this was pretty easy walmart sells everything so they're really competing with almost every retailer out there. Competitors are all the large retailers in the United States. That includes Amazon, Target, Costco, even Home Depot.

I had to check that one. They do compete. I mean, they got the gardening stuff a little bit. Home Depot has a lot more within that area and Lowe's too, but Walmart even competes with them. There's Walgreens, CVS. They're big competitors with them. Best Buy, Kroger, basically anyone. but the main competitor now is Amazon. They're the two big, it's not a duopoly, but they're the two largest by far, at least in the United States. And I did get some reference for percentage of consumer spending, which is kind of an indicator of market share. In 2019, Walmart was 2.7% of consumer spending in the US and Amazon was 2.3%. Then in 2020, that flipped. Walmart was 3.1% of spending, which they grew on an absolute basis. But Amazon was 3.3% last year. So they

gained market share and they're now the leader within the US consumer's mind. Kind of an interesting flip. Might be a one-time thing due to COVID, but that's really the simple competitive advantage we have here. By revenue, is Walmart the largest company worldwide? I believe so. Amazon might be getting close. uh no amazon is you know growing quicker uh and they might be getting close but walmart what's the revenue 500 and something billion i mean i think that's the largest by far yeah all right uh management ownership ian yep as you as you mentioned this one's you know just in our typical microcap wheelhouse so um but doug mcmillan is the president and ceo

He was named CEO in 2014, but he's been a lifelong Walmart employee pretty much. He's worked at Walmart for 30 years previously. For the five years previous to 2014, he was the CEO of Walmart International. And I believe the five years prior to that, he was the CEO of Sam's Club. And so he's been in top management in the Walmart family of companies for quite a while and has kind of, I would say, a pretty holistic view of the company, having worked in both of those areas. the stock's up about 85% since he took over, which isn't anything, you know, crazy. I,

I didn't check, but I assume that may be slightly losing to the S and P 500, but for a company like Walmart that, um, you know, is, has traditionally been seen as slow growth over the last few years. I think it's been a pretty impressive run and people seem to be pretty happy with, uh, kind of the work he's done and what he's been able to accomplish while he's been there. And he's been a, I'd say he's been a fairly aggressive leader to trying to pivot towards faster growing opportunities with some of the growth opportunities that Ryan mentioned as well with Flipkart and the pivot to online and e-commerce. I think he's shown that he's willing to take some of those big steps. One thing that I'd point out too is that the Walton family

continues to own just under 50% of the company, last I checked. And so that's still a fairly major component of the ownership structure here management itself actually does not own very much of the company uh including doug mcmillan but um continues i think i just saw an article that he he got paid about 22 million dollars in stock in the past year and so um it's kind of small for a company of this size most of the times we're like that might be tough if the market caps like two three billion but with this size of a company but on the flip side it's like you don't want to pay him it once you hire a new ceo at this size it's kind of difficult to get them to have a huge ownership stake or well i mean it's more of from a person's perspective i mean huge owner i would

i would say 100 whatever you probably want 20 at least 22 million in stock i mean that's from a personal level that's a big ownership stake you know right like it doesn't have it doesn't mean that you're like completely um tied to the business that like the business is tied to you but you are tied to the business because you're the, uh, big chunk of your net worth is part of this company. Um, from what I could tell, it looks like he does, um, sell a good chunk of his stake. Um, but anyways, he's getting paid a lot as a company of this size. Generally, like you said,

there's generally a lot of some big payment packages, but something to be aware of it's different than some of these smaller companies we look at where people are making, you know, 500,000 to a million dollars a year. This is, this is a little bit of a step up from that, but he's been, And I think everybody's been pretty happy with his run as CEO so far. Yeah, one of the largest companies in the world. And yeah, with his run as CEO, after it looks like they kind of peaked in 2000, the stock

flatlined for almost a decade, a little longer. And then when he took over, they got, and the business, I assume, was growing during that time. But for whatever reason, when he took over, the stock started to grow again. And actually, from an all-time standpoint, it's, as people might expect, one of the greatest performing stocks of all time. I think this probably doesn't include dividends, but it's 465,000% returns since the IPO, which that's not bad. I'll get into the valuation. Market cap, $395 billion, ticker WMT. Enterprise value of $442 billion, so quite a bit higher than the

market cap. You're probably going to want to use enterprise value here. You need a sales of 0.78, not really relevant here, but just a reference of how low margin your business is. EV to adjusted EBIT, they had a sale of some assets in the international group, which hurt their gap earnings. And it really is a one-time thing. So I'm going to use the adjusted number here. So EV to adjusted EBIT of 16.7, EV to free cashflow of 20.9, dividend yield of 1.58%. And then over the past 20 years, shares outstanding have gone from 4.5 billion to 2.8 billion. So strong overall shareholder yield. They continue to buy back stock. That's a big part of the story here. We give a lot of crap to like adjusted EBITDA. But if for a company like this, adjusted EBIT

tends to be a relatively good indicator of profitability, especially if they're paying out the dividend as a portion of it. And if they're adjusting for things that should be adjusted right as long as they're keeping the adjustments consistent uh but i'll get into the earnings total revenue for the first quarter was 138.3 billion that was up 2.7 percent uh it would have been higher if it weren't for the diet they had a divestiture uh of a walmart international business but comp sales at walmart us which makes up about 70 percent of the overall sales of the company grew by 6.1%. And e-commerce sales for Walmart US increased 37%. So they're seeing a lot of strong growth in their online initiatives. And then operating income was $6.9

billion for the quarter, up 32%. They see operating margins or they have operating margins of about 5%. It is retail. So the margins are slim. That's just part of being in the industry. uh and they bought back 2.8 billion dollars in shares i might be getting that wrong i don't know if that was for the quarter um or it might have been trailing for a month you don't know yeah it might have been trailing 12 months and then they also raised guidance but you can you're i think you're going to talk about it on the back half they have reduced or you just said they've reduced share counts almost by 50 over the last 20 years pretty damn consistent reducing share count it's very steady chart it's pretty too i love i love those just continually goes down yeah uh and what

do you have for balance sheet so balance sheet and liquidity this is a different type of balance sheet than we typically look at just because it's a big balance sheet um which it's also a big company but it's a capital intensive company as well um they've got about 23 billion dollars in cash which helps support um that buyback program and also the investments that they're making um they've also got 46 billion dollars in inventory that fluctuates a little bit it gets higher in Q4 as people, you know, as they ramp up for the holiday season and stuff like that. But currently they've got about $46 billion in inventory. And then they have $63 billion in debt. And a lot of the businesses we tend to look at don't have a lot of debt. A lot of this debt

is real estate based because Walmart owns approximately 80% of its stores. That's one of its kind of one of the ways that it, the actual, the real estate of its stores. So that's one of ways it kind of creates some value and find some return potential in just buying and holding their real estate. So like I said, a little bit of a different balance sheet. If you're looking to invest in Walmart, it's probably worth diving into that debt and really understanding how the interest rates are going to change in effect and what the real estate ownership really means. But suffice it to say, they have plenty of cash. They have a good cash flowing business that should and uh should generally be able to to service debt like that so um not a not a big concern

yeah and for reference last year uh let me pull it up real quick they did 36 billion in operating cash flow so this isn't a company that's like uh neck deep in debt or anything like that it's not an at&t and it's obviously a little easier to lever up when you have that reliable of cash flow Yeah. And the one thing to note there, too, is that the inventory can impact operating cash flow positively or negatively in the short run. So I'd really look at that over a longer term time period or see how that's getting affected just by inventory dynamics. But for sure, there's no liquidity concerns here. You really want to look at how the interest expense is going to impact earnings and cash flow going forward. Ian, do you have one more thing?

i was just going to say one last thing one more thing to kind of dive into if you're looking to invest in walmart is just how how they're it's changing the models changing a little bit as they move more to e-commerce we're going to talk about that but just seeing how efficient they're able to be with their inventory and whether they're good at inventory management is a big piece of the story going forward because the more efficient they can be with inventory uh the more cash flow they can generate as you were alluding to to brett so um You know, and as they become more focused on e-commerce, there's a potential for them to become a little bit less capital intensive, which should should improve margins and be good for the for the business going forward. Yeah. One of the key reasons Amazon's been so successful is because of those working capital dynamics.

I don't have the numbers in front of me, but I know that it's way better than either like Costco or Walmart. So hopefully if Walmart goes more into e-commerce, that can improve. All right. Let's hit an ad break. We'll get back to the second half of the show and do all those topics. this episode is brought to you by kpmg as a business leader how can you innovate build trust and move forward in a digital era kpmg can help by bringing together the right talent and technologies generating insights that spark opportunities to explore their thinking visit read.kpmg.us opportunities this episode is brought to you by lakinta by windham here you are miles from home and ready to start your vacation. Good thing you're staying at La Quinta by Wyndham.

They have free high-speed Wi-Fi to stream all your favorite movies. And in the morning, get fresh waffles with their free bright side breakfast or squeeze in a workout at their fitness center. Either way, you're ready to conquer the day. Tonight, La Quinta. Tomorrow, you triumph. Book your stay at LQ.com. Welcome back. Next up, we have anecdotal evidence. this is an easy one but i don't think anyone's gonna need anything here uh everyone really knows anecdotally because they i bet everyone has been to a walmart uh but ian do you have anything uh not really i'll let you guys cover it uh ryan didn't yeah obviously like you said everyone's been to a walmart but i do think the store quality has gotten a bit better over the years

uh i don't know if they embarked on sort of like a remodel mission or journey the way target did but they used to have at least this is the way i remember there used to be sort of a stigma that they're like a lower tier sort of uh poor grocery chain and like you're gonna there's like the p there were videos on youtube that kind of went viral of like people or things you see in walmart and it was all kind of like yeah you might still see that but maybe they've improved yeah it just feel it feels like that's gone away a little bit yeah and maybe that's just and i agree with that too. Maybe that's just in our minds, but that's a good thing for people, you know, for consumers. And grocery, I guess this is testament to Jack Sinclair, who is the,

one of the heads of grocery or fresh grocery. He was the VP of grocery from 2007 to 2015. That part feels like it's improved as well. I have no problem getting groceries there. Yeah, that for sure. I think their grocery has been a big, over the last decade, the improvement of that has been huge for them. I got nothing to add here. You know what you're going to get at Walmart. It's pretty consistent. That's got to be a big thing for people where you know you're going to get cheap stuff that is hopefully decent quality, but no need to harp on this. We'll hit the future growth opportunities. Ian, what are your thoughts here?

I want to point out Walmart Plus. That's something that launched recently. It's an Amazon Prime competitor, or at least that's how it's being billed. I saw a number back in February or March, they had about 8 million members so far. For reference, Amazon has about 150 million members. A couple of things to note on Walmart Plus. So a few of the benefits that they cite are unlimited free delivery. Customers receive fast free delivery on more than 160,000 items. Delivery will occur as fast as same day with one hour delivery windows. So they're really trying to target that quick logistics um uh piece of it so it's it's it is an amazon prime competitor in a sense but it's it's also different because it doesn't come with all the kind of ancillary

things that amazon prime comes with such as like the video or things like that but i do like that move that they're making i think it plays well into their omni-channel retail strategy um which i'll dive into a little bit more later but it do i think it's ever going to reach 150 million numbers like amazon prime has probably not right that's just amazon has such an advantage there and i think there's some more benefits to amazon prime at the moment but for people who are looking for fast quick delivery especially on grocery type items i think uh walmart plus provides a pretty good option for that yeah and do you know when that was launched what year uh it was launched at the end of last year i believe yeah really recently yeah and eight million is not a small

number of them no it's not it's interesting though amazon kind of you know they have the big presence in the cities because that's where you have the advantage with e-commerce and walmart has a huge presence in rural areas so that could leave an opportunity for them versus someone like target who has more of a presence in cities um but we'll see uh tracking that number will be important though. Yeah, for sure. And just for reference, it was launched in, uh, on September 15th of 2020. So, uh, we've been, I guess we're, we're about nine months, nine months through the launch so far. Um, and it's for $98 per year or $13 per month, which is about $20 cheaper than the cost of Amazon prime. So getting a slight discount on, on Walmart plus, which makes sense.

Um, you also get some discounts on gas, uh, some quick, like they talk about like scan and go purchasing its physical stores. So there's, there's some kind of benefits for people who are using Walmart a lot. Um, but anyways, that's the, that's the growth opportunity I wanted to point out. Yeah. It seems almost like a Costco membership. Really? It's kind of like that membership with some like delivery benefits. Yeah. Delivery benefits too. Yeah. Um, as well, but yeah. Yeah. Ryan, what do you have? Uh, so this was just recently announced as the ribbit capital partnership um so in january walmart announced that it was creating a new fintech startup uh which i know maybe you roll your eyes at but from the press release that

it says uh the venture will bring together walmart's retail knowledge and scale with ribbit's fintech expertise to deliver tech-driven financial experiences tailored to walmart's customers and associates so part of that mission is to sort of lower the cost of living for everyone um and the details on this are really limited i really couldn't find anything but i figure pairing some sort of finance app with uh the shopping experience and then maybe also pairing that with like the walmart plus uh seems like a logical thing to do it gives some sort of optionality they already have the walmart pay and they're going to continue those services um and then there's something called the money card which is done through green dot i figure

just bringing that all into sort of one place is the right thing to do also maybe acquiring uh it might be worth acquiring a buy now pay later provider uh i don't know something like that or just partnering i mean that's just kind of a product anyone can do it so it's weird it's interesting it seems like they've announced a few things it'll see if they can be a needle mover form yeah i kind of have some doubts i wonder sometimes they just announce stuff which which everyone does, but I wonder if buy now, pay later is something that would apply well to sort of the grocery industry or retail in that regard. I wouldn't say not grocery.

No. You don't think so? I don't. I mean, how much are people really spending? It seems like it's more for big splurges, you know? Yeah, I suppose. But who knows? I don't know.

It could definitely work. I'll hit mine. It's Flipkart. like ryan mentioned they bought them or no they own what is it 80 something like that but the company is based in india uh they did not break out the financials for them but it was a big stake and it is one of the huge indian e-commerce companies they're competing fiercely with amazon over there i don't if anyone follows amazon you know that india is probably outside the u.s their second most important market for some reason bezos said we have to tackle india

whatever he chose that for whatever reason yeah he likes the bezos video he loves the picture yes he loves the video taking videos and pictures there in the garb uh meeting with all the politicians it's quite a scene uh but flipkart walmart went a different way and they basically just bought flipkart and the one interesting asset flipkart owns that i didn't know about is phone pay it's uh spelled p-h-o-n-e so there's phone and p-e and it is a payments app payment volume was up over 150% year-over-year in Q1. They didn't break out the exact number. And then the last report I saw, it has 250 million registered users. I believe it's one of these. I bet it's slightly different than either Cash App or whatever other app you want to choose,

but it's got to be similar to that. And if it has 250 million registered users, I think you could spin this off in the US and it'd be worth $100 billion, dollars but you know might not actually be worth that either way though i think that's a really promising asset under walmart's umbrella think about what cash apps worth at 250 million registered users i think it's in it's india that's not as rich of a country it might not have the same capabilities uh i don't know any of the you know i think they had a lemonade competitor in there they were doing insurance insurance tech it could be worth a lot but i i would not expect this to be a tech giant. This might not be a value. Yeah, I would not expect this to be a value driver for

Walmart going forward. Do not make that into your estimates, but it's kind of cool. All right, highlights and lowlights. Ian, what do you like about Walmart? For me, the highlights start with its existing store footprint. I think it has a really good opportunity to be a leader in omni-channel retail that Amazon's been trying to build out its warehouse base and distribution centers and all that type of thing. And we see that happening for a lot of e-commerce players trying to build out distribution centers. Walmart already has distribution centers that they can also sell out of, right? They're just their stores. And so they've done a really good job of creating fast pickup options, short delivery times. And I think that's an advantage for them

going forward against Amazon is that they already have this huge footprint of stores. And so they can get things to people really quickly. And that last mile deliveries becomes a little less expensive for them than some of, um, than Amazon because Amazon just has to continue to build out, build out their distribution centers. But, um, I'd say one other highlight is, uh, the online sales are up from seven and a half percent of sales last year to about 12 and a half percent of sales, which is probably COVID related to some extent, but I don't really see that going back down. Like I, I think people have gotten comfortable buying, especially groceries online and picking them up. Um, I think that that's going to be a trend that continues for

them. And I think the more they can transition to online sales, the better it as they try to compete with Amazon, uh, a couple of low lights. Um, and I think you guys have probably touched on this too, but the core business just doesn't have a ton of growth potential, right? They're selling, they're already selling more than anybody in the world. Um, and it's hard to imagine like this isn't this isn't growing at like you know triple digits much much less double digits likely for the next for the next few years so um triple digits would be impossibility we're not doing a trillion dollars in uh in revenue but i mean they're probably well stimmy well stimmy right but like it's you know especially for a lot of growth investors

out there you start you start looking for these these high you know 50 60 70 growth rates that's not the story here, right? It's a, it's a smaller grower and they do have growth opportunities and they're going to try and find segments of the business that we've mentioned today that can provide that growth potential. But even if some of these smaller bets that we've talked about start growing at huge rates, um, it doesn't have a big impact just because of how big the business is. It doesn't have a huge impact on the overall sales number. And so that's just something to keep in mind, even as you look at some of these exciting growth opportunities is the impact on business still remains fairly um small in comparison right yeah yeah it's going to be

gdp growth that's for the core business and the old i mean the old template of just replicating these storefronts or super centers i i think it's kind of saturated they have to be more creative now that doesn't mean they can't grow revenue or grow uh operating profits uh they have some new markets they could go into they're not they're like 20 something countries just takes a little more creativity. Yeah. Right. It doesn't have the clear path. Like we've seen with some of the other things we've talked about, like five below or scratch farmers markets or, you know, things like that, that you say, yeah, we're going to grow store count by 10 or 15% every single year. Right. That's not the, it's, it's a different story with Walmart than something like that.

For sure. For sure. Ryan? Highlights for me, uh, it's well run. It seems like it is good corporate culture. Uh, and then there are obvious scale advantages. I think we're all going to probably highlight that um so the geographic footprint that they have it makes them more agile when it comes to like new omni-channel solutions so or e-commerce initiatives so they have pickup they have delivery they have ship from store there's the digital farm there's a pharmacy near i guess everyone um and then the the shopify plus uh or not sorry walmart plus stuff there's just so much they can do because they're so close to everyone so that is obviously a huge advantage and then i guess low lights there aren't a ton because it's the downside's really limited here

they own so much the real estate they have so many assets under on their balance sheet uh that i mean even if the real estate just appreciates like that's growth for them if they own whatever it is 80 of the stores um and then yeah i mean is it though because the only way you're realizing that value is in bankruptcy yeah or you could sell specific centers so they don't sell specific distribution centers to amazon or something it gives a margin of safety on i guess the best the things they divested and gave him like eight billion dollars um i guess that is a margin of safety there um i guess maybe a short-term issue could be comps covid comps that's not really an issue for the business um that's more i guess maybe for the stock any low light here i'm kind

of reaching for i would say target's turnaround has been pretty remarkable and they've outpaced walmart uh that's just with growth obviously that's from a smaller base but as far as like low-cost retailers go as a consumer i would choose target um that's but yeah that's really reaching for a low light that hasn't affected walmart comp store sales are up six percent in the us yeah they're serving different markets so it's and it's it's a big tan so yeah huge tan yeah what's the easy to tap we gotta evaluate that uh highlights for me great moat one of the best competitive advantages of all time very i mean it's very easy for people to understand that i like the flip card asset a lot just because of the growth potential it brings it might be a bit

riskier just because it's tough to see or there's more variables of how the indian um retail economy is going to move or sorry, the industry is going to evolve. I like the moves into pharmacy and healthcare with their customers. So they have these core customers that are coming to them once a week. It seems very advantageous for them to really try to push these healthcare and pharmacy things. They've released a lot of news on it. Don't need to harp on it here because they're doing so many different things. But just for example, they just launched, it was either in partnership or with themselves, a really low cost insulin that can, I don't know, just lowering the cost of healthcare can be a big thing for them going forward. And we all know the issues with

that. I think the insulin will cost upwards of 75% less than what it is somewhere else. So to start with that, I think it'd be huge. They're doing like a good RX copycat as well. It's a little, we don't know how that will turn out. And then they finally struck back in e-commerce. It took them way too long i mean i don't know 2017 2016 that was a decade too late but they had the scale to you know kind of match amazon and they're kind of going neck and neck now well let's go business maturity and then i don't think the competitive positioning versus amazon is great because amazon's core competency is e-commerce they struggle in fiscal retail but walmart's core competency is fiscal retail i don't know i vote on amazon to win in e-commerce but like you

guys said it's hard to find low lights the business is of really really high quality uh all right bull case and what what has to go right here for or what do you think could go right for walmart going forward yeah for me the bull case starts with this omni-channel retail and like i mentioned in my highlights i think the footprint that they have just with all the stores around the country provides them a good advantage and a good starting place to really take advantage of that and, and interact with a lot of consumers and be able to deliver, deliver quickly without having to add a whole lot of expenses, um, to their income statement currently. Like I think they're in a good position to continue to capitalize on that. And I think what they did in COVID

was good. And so going forward, if they can continue to build out and kind of get better and build the brand, um, make buying stuff from Walmart online, a normal thing to do. And one more thing that we haven't mentioned today, but that is a growing piece of the business, and I think is important to the bull case, is the third-party sellers on Walmart.com. Just like Amazon has been so successful with third-party sellers, Walmart.com also has third-party sellers. And the extent that that can ramp up and become a bigger piece of the business, I think, creates a good opportunity for a bull scenario going forward. Yeah, finally take advantage of those super centers. that could that yeah i mean just that's just conceptual uh time will tell if i can actually but that should have some problems um ryan uh bull case is a lot of these initiatives that

ian just talked about we've been talking about the whole time um help maintain double-digit returns on invested capital um to think there's like a ton of upside here it just doesn't seem real like i don't think this is going to double or triple market performance over the next 10 years but if they can get sort of low to mid single digit comp store sales and then couple that with the omni channel growth stuff we never know what market performance is going to be i guess that's true maybe it could double or triple um but yeah the bull case is steady performance i guess that's my bull case yeah i mean i'll try to maybe narrow down of of what people might want to think about because this isn't one where, like we said, you can open

up just a ton of stores. It's got to come from multiple sources. So the way I like to think about it is kind of the bull case of what Starbucks was, and it probably still is, but was kind of back in like 2015, 2010, where you're going to get mid-single digit or maybe lower compound sales growth. You geek out a little bit of margin expansion, and then you get some return from the dividend that adds to your total return. And then you can reduce share count steadily if you think the stock will trade at the same sort of earnings or cash flow multiple back it all out up to solid returns over the long term and there's probably a really low floor here but you know i don't know what that equates to maybe eight nine ten percent something like that that

seems like the bull case if you're someone who you know this feels like a perfect stock for someone who's like i don't know 50 55 60 heading towards retirement since we're a little younger it doesn't excite us that much, but it seems incredibly safe. Now, last segment, bear case. Any thoughts here, guys? Ian, we'll go first with you. Yeah, I think, and you just kind of laid out some of the bear cases. If the brand's really not strong enough to capture more of this e-commerce market, and especially with the younger generation as we move forward, this stock could stall out, just not have

the growth to really drive any sort of meaningful returns. valuation has gone up a little bit in the last five years um and so like uh their valuation metrics it's become a little bit more of an expensive stock and so if they don't continue these growth initiatives um it's going to be you know i think that the stock could act like the 2000 stock price if things like that would occur right if they if their growth opportunities aren't as successful if india isn't as successful um basically as you mentioned earlier the stock price did nothing from 2000 to 2010. And, um, I think you're always at risk with a business like this, not of losing a whole lot of your capital, but of not growing it very much. Right. It just,

if, if the underlying business isn't growing, your capital is not going to grow. Yeah. I mean, you could get, yeah. Buybacks and dividends that can give you some small returns. Like we said, high floor, high floor for sure. Yeah. What are your thoughts? It is a really high floor. And because the cash flow is so reliable and they have whatever it is, I forget how much cash on the balance sheet, and I think only $5 billion in short-term debt. If the stock price deviates too far from their estimate of intrinsic value, they can really hammer the buyback machine. That helps with the floor as well, yeah. So that kind of helps limit the bear case.

I guess the worst thing that would happen, in my opinion, is it gets mismanaged somehow. You get sort of like an AT&T type scenario where they have poor acquisitions. They start adding unnecessary debt or bad debt. They somehow tarnish the brand. And then all the difficulties of being that big or the bureaucracy that comes with it starts to hamper them. that's the word that kind of turns into a downward spiral that has negative momentum but i mean the floor is so high they have so much in assets and they just there's so much cash there's no way you lose your whole principle here your whole yeah well we used to say yeah

maybe not no way but it seems seems very likely it seems unlikely it's hard to it's hard to foresee that happening yeah for sure for sure um i'll just add here maybe part of the bear case is that the banner year they had in 2020 where with COVID, huge tailwind for a lot of these businesses and especially Walmart and Amazon. Maybe that's not replicable. Maybe the gain in market share and e-commerce is not actually going to continue going forward. It was really just some macro factors that aren't sustainable. I think another thing that could contribute to the bear case is if India doesn't become profitable at all ever. I know that they have this extremely profitable US, Mexico and Canada business that can bolster that. But those are some things that are going

to hurt the business over the long term. But like I said, you know, huge margin of safety here. The bear case is more of stagnation. But I guess one thing we should mention too, if people think, I don't know, inflation is never really something. It seems like all the smart investors have said in the past and i think it's important to listen to is that you shouldn't focus on inflation but this is a stock that would likely do well you know in an inflationary if inflation goes three four or five percent for sure um all right let's wrap things up this is going along more or less interested in uh i'll say i'm slightly more interested actually so i meant i should have led the show with this but walmart was the first stock first individual stock ever

bought, I bought some ETFs before this, but Walmart was kind of played into my, when I first started investing, I was trying to look for, for good, um, solid businesses that had like in large caps and oftentimes mega caps that had growth opportunities and growth initiatives. And so I looked at Walmart back in January of 2017 and said, you know, I think they're getting more into e-commerce. I like the omni-channel stuff. And I bought a few shares and it's been, um, actually today it's up just about a hundred percent, um, just, just over a hundred percent from where I first bought it back in 2017. And I think that goes to show, and this, this may not be more or less interested today, but I think that goes to show that there are these companies out

there that just will execute well. And, um, even if the value, even if the growth potential isn't hitting those growth numbers that, you know, we think about with a lot of these high growth SaaS names or things like that, that there's some potential, I guess, some pretty good returns and meaningful returns from just buying a great business at a good price um and so i think as we've mentioned today i think there's potentially walmart's still in that position where it has some growth potential and um and is a you know just a good business at a reasonable price yeah ryan i'm less interested uh it just doesn't i'm yeah ian's right it is a good business uh and it seems like a fair price but it doesn't hit my i guess hopeful hurdle for an ir on an investment like

i i hope to achieve better returns than what i think i can get with walmart yeah i'm in the same boat i i mean it's weird i was looking at target like in 2018 i was in love with that company i don't know why i didn't buy walmart too because it seems like they were in the same boat that kind of anti-amazon thing but and it's a little bit short-term thinking here but you know 2017 2018 everyone thought amazon was going to take over the world and walmart and target had super depressed multiples that isn't the case now and if you're really going on business growth uh yeah i mean like we said i don't need to repeat it things things should go fine here and if i was a retiree this might be something i would take a strong look at but i don't know which one we're

We're all under 25 here, so we might, you know, we're looking for the next Walmart, and there's very few of those, but we would rather find something that's more in a position of where Walmart was at in the 80s and 90s. It's tougher to do, but yeah. What's our stock for next week? Yeah, so we're going to do a recommendation. Thank you to at Cole the Muse guy. I don't know if I'm saying that correctly, but we're going to be doing Constellation Software. thank you for recommending this um one of the best performers of the last decade and they're basically the software of the canadian software berkshire hathaway uh so it should be fun to take

a look at that all right all right that's going to do it for this episode thank you all for listening remember none of us are financial advisors anything we say on this show is not formal advice or recommendation ryan and i are general partners at arch capital arch capital clients may hold securities discussed in this podcast thank you all for listening we'll see See you next time.