Episode 25 | Walmart: Growth, Debt, and the Digital Race

In Episode 25 of "Market News with Rodney Lake," Rodney Lake dives into Walmart's financial performance and strategic outlook. Lake discusses key metrics, including Walmart's net debt, capital allocation, and recent management decisions under CEO Doug McMillon. Lake highlights Walmart’s challenges in navigating rising interest rates and tariff uncertainties while maintaining its reputation for operational discipline. As the world’s largest retailer continues its digital transformation, Lake emphasizes the importance of monitoring risks and opportunities in a rapidly evolving market. Tune in for a comprehensive analysis of Walmart's position and future prospects!

Transcript

Thank you for joining Market News with Rodney Lake. This is a regular program for the GW Investment Institute where we talk about timely market topics. I'm Rodney Lake, the director of the GW Investment Institute. Let's get started. Welcome back to Market News with Rodney Lake. I'm your host, Rodney Lake. We're right here in the GW School of Business Innovation Studios.

Duquès Hall right here in the heart of Foggy Bottom. Thanks for watching the episode. If you're watching on YouTube and thanks for listening. If you're on one of the streaming, you know Apple, Amazon, Spotify. We love when you tune in to any of the channels. Thank you very much. And if you're a first time, thanks for joining us for the first time today.

We don't have a guest. As you can probably see, there's nobody else but me here. But what we're going to be talking about is a company and I'm sure you've heard of this company. We're going to be using the GW Investment Institute framework, business management, price valuation and balance sheet. That is the bedrock of our analysis on the fundamental side, there's some quantitative tools that we use to for that.

And we also have a client fund which we'll talk about at a later date. Today, the company we're going to discuss and the company that you very well know is Walmart. Walmart is a gigantic retailer, the largest retailer really in the world. So this company has had tremendous success from a very modest start. We're not going to dive deep into the history of Walmart, but we're going to go over the framework.

But when we talk about the business of Walmart, we'll start there. The business of Walmart is a retailer, and it's also become the largest grocer in the US. And so it is a behemoth. It is everywhere in the US. And it was started in Bentonville, Arkansas long ago by Sam Walton. Prior to him to and with this concept to provide low prices to customers, on every item.

And so it's really been the ethos, of that that's lived or that's breathed life into Walmart and helped it grow. Over time, people will seek out these low prices. People will drive, to go find these low prices and people will seek out these deals, let's say, at Walmart, even if it's not necessarily the closest store to them.

And that has been transformational in the way that retailing has worked. And they've been at the core of that and they've continued to has have success. Now they build a lot of things on top of that. This core idea. But keeping costs low is super important. We talked about Costco. That is another version of getting low prices to to the consumer.

They have a different way that they organize their business, their low skew count as we talked about, and really, you know, more limited products and, and bigger discounts on those products where Walmart may have a high skew count, they're going to be different. They offer everything you can walk in and you can find all kinds of stuff in Walmart.

And that has been throughout the history of Walmart, too. Let's go and find these deals at this store. And that's worked out. And again, Sam Walton, founder, passed away a while ago, but was a pioneer in this and really took from talk from people, like Saul Price and, and what became Costco and incorporated into some of the things that they have and what we talk about.

What's the breakdown? You really have Walmart Domestic, you have Walmart International, and you have Sam's Club, which is a direct competitor to Costco. And they started that a while ago. So we're not going to break down too much to the individual components. But I want to talk about broadly as a business today. Then we'll talk about the management broadly, the price valuation and the balance sheet.

And really think about the scoring for these. This is a position, in one of our GW Investment Institute portfolios. Disclaimer up front here that this is for educational and entertainment purposes only. But this our analysts really need to look at Walmart. Should we be buying more of Walmart. And there's certainly some certainly some topical things that are happening that maybe we should be concerned about.

And absolutely, we should be paying attention to to make sure that we can make informed decisions about the portfolio. So all right, let's get into the business. So when we talk about the business of Walmart all right. What's the market cap. So it's a big company $720 billion market cap closing on on $1 trillion. And so very large company.

All right. Now let's get into some other stats. On the company side. So we talked about being a big retailer $673 billion in revenue through 1031 2024. So gigantic on the revenue side. And that's a 5% year over year growth. And Walmart actually has been doing quite well. If you've been following along at home in your playbook, they actually did well on their last earnings.

And Walmart is actually well positioned at the moment. And it's continues to do well. When you look at this, the retailer gross margins 25% approximately, for the gross margins. And then you look at these net margins, that's when you know, okay, this is a retailer and you talk about $673 billion in revenue. Well you have basically 2.93% net margins.

And so that's where you're thinking well okay now I understand that this is a retailer. You look at that low margin but really high volume on that top line right. Low net margins. But then we talk about okay well what's the free cash flow. 17 billion of free cash flow and 22 billion in CapEx. Now they own all these centers.

Right. So they have to invest in these in these stores which are basically distribution centers. If you think of them in comparison to Walmart, they already have all these distribution centers that are called stores, that people actually go to. And Walmart has definitely made progress on the digital side. So. Well, now when we talk about, okay, well, what's the format, of the setup here.

So the traditional supercenters is really what's dominant now. So we can go in, find anything. Plus you have groceries. So it's kind of the one stop shop. If you go there once a week. As a consumer, you try to find all the things that you need. You can get your groceries, you can get your tires, you can get whatever you want.

There. That is a fabulous concept that's worked out super well for them and has continued to work. Now along comes Amazon. You know, next day delivery. They have been fighting back against that. A while ago they bought Jet.com the Walmart Plus which is in response to the Amazon Prime subscription that has been gaining traction. The click and pickup, you know, you pick it up at the store, but you order everything online that has also been growing.

And and I think Walmart is definitely for an old line company. When you compare it to Amazon has definitely made a lot of significant progress on the digital side. Now the jet probably help with that. Jet.com acquisition probably helped with that. And it's really something interesting now Flipkart is something that is a, you know, not going to talk about necessarily today, but that's the operations in India that is a big operation.

We're not just going to completely, not mention it. But we're not going to tackle that mostly for the US in the overall business. But that is a significant, investment and something that we will revisit at a later date. But just so you know, we know about it, it is a big deal and something that we should be paying close attention to, but we're not necessarily going to spend a lot of time on that today.

So remember Flipkart and we'll come back to that at a later episode. But back to the business. So right now you'd have to, you know, rate the overall business, the brand very highly. Really recognizable historic lineage. Excuse me. Sam Walton has been doing such a great job for a long time. You know, again, he had passed away, and, you know, but left the business in great shape for the people that had continued on.

They have built great people internally. And we'll get to the see what we'll talk about that. But when you look at the numbers, you're talking massive amounts of revenue. You're talking, decent, you know, gross margins at 25%. But when you look at the net margins, then you really remember, okay, yeah, this is a retailer 3%, net margin.

So that makes a lot of sense. And so it's hard to really rate this as high as a tech company with very high gross margins and high net margins. You think of visa, you think of Nvidia, you think of Microsoft. They're they're not having these type of margins. And so it's hard to rate it ahead of them. Even though you have the iconic brand, you have people that are regular shoppers.

They're doing quite well right now. They're definitely transforming and have done over time into the digital age so that all those things are important, all those things matter. And again, all those things are necessary for to recoup its position. And again, it's it's putting $22 billion in CapEx back into the business. And still generating 17 billion in free cash flow.

So all those things are good. But that 3% gross margin we don't have to own Walmart. Right. So it's not something that we have to own. But if we're going to own a retailer, well I think this is a good one to own. But that said, you have to compare it to other companies that we might own in the portfolio.

As a tech company, we don't have to own Walmart, but we can. So I think on the business side, you're talking really about a seven or an eight, right? I don't think you're talking 9 or 10 for a business. I think you're talking about a seven, six or 7 or 8 somewhere in there, or 6 or 7 parts to get to really to an eight or 9 or 10.

But really, you know, I think kind of six, seven, eight somewhere in there. So let's maybe we can settle on seven for today for the business, because again, you take the ding on the, you know, you know, the business basically high volume, low margin, overall. But they have continue to have that really high volume, 670 billion in revenue.

All right. And growing at 5%. So growing modestly ahead of the economy. Right. So if you're not growing ahead of the economy, let's say around 3%, you know, that's a problem mostly had the economy, at five, 5.5%. Let's look at that scale. It's going to be tough to really grow. The enterprise projected consensus numbers at 5%, for 25 and 4% for 26.

So again, these are not huge numbers. But at this volume and delivering this type of, free cash flow and being disciplined about cost is fantastic. All right. Let's move on to the management team. All right. So the current CEO, is Doug McMillon. He has been there just over ten years. Appointed back in 2014, started as an hourly associate.

It you know, brought up through the ranks. This is the type of CEO that you want to see at a company like Walmart. Knows the culture has lived. The culture started, at the bottom and now we're here. We made it all the way up. All right. So now, as CEO for a decade, things are going well again.

Keeper of the culture is always, at the top. And he has been doing that. And I think he has kept that culture and has worked at Walmart and really understands what it means to keep those costs low, because that's what you can deliver back to the customer. And that's what customers are expecting when they get the Walmart, those low prices.

So look, he's, a pretty young guy. Relative ease at 58 years old. He's been there a little over ten years. Can he do another ten years? Probably. And so I would be quite optimistic about him in this management team right now. Again, they have been delivering more recently. They have been trying to, I think, very hard to stay relevant in this digital age.

And for again, for a company that their it's their size and with their lineage coming from where they came from, you know, as old as they were compared to again and Amazon, they have made great strides against Amazon as a competitor. When you talk about Walmart, plus when you talk about the click and pick up in the stores, when you talk about using their distribution channels efficiently, I think they've done an excellent job there.

And there's look, there's more work to do, but I think the CEO is aware of that. Again, what's the core value back to the customer is are these low prices and keeping costs under control. So that's a that's a challenge that, you know, they will have to continue, to think about and to address. But they have been doing it.

And Doug McMillon has been on task and on point doing these things. So I would give management a nine. Right now, I think management has been doing a fabulous job. So you could say 8 or 9, but let's go with nine right now. All right. Now let's move on to the valuation. We're going to talk about some risks here as well.

Not on the valuation in particular, but we'll mention those. But some risks outside of you know, the things that we'll talk about specifically on the framework. So when you talk about the valuation, you know, people know that it's a strong company, right? So the PE right now, you know, 37 times, that that is something that is quite expensive.

And so when you, when you look at okay, well, where, you know, are we relative to a history, you know, what's the last ten years look like? You know, right now you're talking about 37 times. You know, the median is 22. So right now you're talking about a valuation that's quite high. And so that's a little scary, for a retailer to be trading at that high.

So you're really going to have to justify some growth. And if you look at sort of the median over the last ten years, you're trading at 22 times. Right. And so that would be just under, let's say an S&P number. And they're well over, well over at nearly 37 times an S&P number. Right. So if you think 25 times approximately here for the for the S&P 500.

So it is changing trading at a pretty significant premium right now. Now is that justified. That's the challenge here. As analyst can we figure out whether that's justified. Well the business is doing well. As we said it's growing modestly 5.5%. Again those really small margins tough to say if you just looked at the net margins and you looked at the price earnings ratio and you just looked at those two things, and the growth, let's say at 5.5%, you would probably scratch your head and say, well, this doesn't really square.

I don't understand why a company would trade at nearly 37 times. And, you know, you would have a 3% net margin, and 5.5% growth. Well, I think that is a challenge as the analyst. But Walmart is a behemoth. They're definitely making strides on the digital side. And I think it looks like right now that the market's giving them credit for making strides.

For that and for making strides to growing the business. Maybe in addition to the domestic market, with flip card, with the international business and maybe with Sam's Club. And so where is that going to come from? I think that is a big challenge. So as an analyst on the valuation side, I think some of the things that we really need to pay attention to is where is the growth going to come from, and how are they going to continue to execute on this digital strategy.

Can they grow the Walmart Plus, you know, relative, let's say to the Amazon Prime. We'll see. I think again, this management team led by Doug McMillon has been doing a fabulous job. But does it deserve a 37 times multiple. That's tougher to say. It's a pretty high multiple for a 3% net margin company, which is a gigantic retailer.

But they own a lot of that customer share. People go back to Walmart, and if you look at the recent earnings, they have done well and they have demonstrated that the management team, the CEO, has been in place for ten years and has come up through the ranks, knows the culture has been executing, can continue to do this in the future.

I think time will tell. So I think on the valuation side, I think you're looking really at a 5 or 6 right now because I, you know, think that this is a hard valuation to justify. It's not a high tech company. And so when you talk about growth and you talk about 3% net earnings, you know, it's hard to get to that.

These numbers to make sense. Right. If you're looking at traditional metrics. And so I think that's something that is worth paying attention to is on this valuation side, I think we have to pause here and make sure that we're comfortable with that. As analyst, it is a position in the portfolio, not a not a large position, at the investment institute.

But so our analysts will need to look at this. Is it the right time to add to this position? Is it a right time to hold. Is it a time to trim? We'll have to wait and see what analysts come up with for this. But I think that piece of it is something that we'll have to be paying close attention to.

All right. So now let's move on, to the balance sheet. So when we talk about the balance sheet here, cash and cash equivalents here, 10,000,000,060 billion, in net, in debt. And so net debt of 50. So that doesn't make me super excited, generating 17 billion, in free cash flow. That helps. And when we talk about the interest coverage ratio, also important for us to think about, but at the same time, look, that's 12 times.

Right. A lot of debt on the balance sheet. Not super excited about that. So on this one I think, you know, you're really talking about a score that you know again net debt of 51 billion on the balance sheet. You know 12 times interest coverage ratio and generating 17 billion of free cash flow. And that's through August 31st okay.

Not super excited about that. And I think, again, net cash is something that we prefer. A company like this is probably not going to have net cash as a retailer. But in any case, these metrics, I think could be a little bit better. Now. Is it a huge concern? Is it something that we're going to really lose sleep over?

Not really. Walmart has been responsible, with its debt over time. But, you know, it's crept up and it's crept down. If you look at a couple of years ago, you're talking 57 billion. And they had more net, more net cash than a lot less less net debt at the time. And so that number has really crept up.

And so that's something that we need to keep an eye on. It's something that as analysts we need to watch. This is something that I would draw a line to and be concerned. Now if interest rates come down and they can refinance some of this, maybe it becomes less of an issue and that interest coverage goes up a little bit over time.

Not a huge concern. Again, at the moment, but I definitely think it is something to watch. We should definitely be paying close attention to how management is actively, you know, understanding the risk associated with the net debt on the balance sheet and how they're, you know, allocating that capital. When we talk about capital allocation, what can management do, with earnings, you know, they can grow the business that's, you know, opening new stores or doing an acquisition.

Growth can be organic or M&A. They can have dividends. They can, buyback shares or they can pay down debt, as we talked about. And so that's something that again, we're going to have to watch and just just so you know, dividends 0.92% right now for Walmart. So all right. So balance sheet again not super excited about that I would call that you know a six right.

So overall when you put all the numbers together here it really getting an average average kind of scores all around except for management. And we you're talking about a nine. And so overall you call this a 6 or 7. When you when you put it all together. All right. So it's a 6 or 7, again. But you get the great brand name, you talk about the business, you get this great brand name, you get largest sort of, retailer in the world.

You get really high revenue numbers that, you know, six, $670 billion, decent gross margins, you know, retailer net margins of 3%. But being disciplined about getting that cost, out of the equation, getting those savings to the consumer has been a hallmark at Walmart. And they continue to do that on the management side. So that's kind of the six right now, 6 or 7.

Doug McMillon at the CEO position, doing a great job. I think that's an 8 or 9 right now, came up through the ranks, has been there ten years. Recent earnings have been good, I think, leading them into the digital world. You know Flipkart we'll see what they do with that. So let's say 8 or 9 then you're talking about the the valuation 37 times in that super exciting very high.

On the last ten years, historically an above average for sure over the S&P 500, you know, significant premium. So that's kind of like a six. And then you look at the balance sheet, you know, interest coverage at 12 times. You know net debt of 50 billion plus. Not super excited about that. That's maybe 5 or 6. And so overall you're talking about maybe a 6 or 7 depending on how you score each one of those individually if you push one up or down a little bit.

And so that's decent right? Not fabulous. But even call let's say overall we give it a seven. We make the numbers work out the way we want to. You call that a seven overall. So I think Walmart here is a seven. Some of the things that we need to pay attention to. We talked about some of the risk that we need to watch again.

What are they going to do moving forward in this digital world. Continue to do. They've been moving really important. Their management team looks pretty consistent. Flipkart you know what's happening there? I got to keep an eye on that. One of the big things that is out now is what's going to happen in the new administration on tariffs.

How's that going to impact some of these consumers. Are those going to you know people go to Walmart for these lower prices. Is that going to have a significant impact on their a lot of their items that are coming from places that might have high tariffs? I think that is a wait and see. You know, some of these you know, some arguments are that the tariffs are really about putting people to the negotiating table and maybe they won't materialize as much as people might think.

But if they do materialize in a big way, let's say for, Walmart customers, what's the impact going to be on that revenue side? So then that growth really comes into question, that at 5.5%. And then that valuation becomes even more important to pay attention to at 37 time. So I think there are some, some things that we really have to pay attention to here as analysts and make sure that we're aware of.

And again, we don't know, but none of us know the future. We don't have a crystal ball, but we have to pay close attention to. I think some of these risks. So overall, again, I think you're looking at a seven. Again, not a huge position right now, but something that we need to closely watch at the Investment Institute.

Super excited to do that. We're coming up on stock pitch days at the end of the semester. So we'll see what happens here. At the Investment Institute again, coming to you from the GW School of Business right here in Duquès Hall. That's a wrap for this episode. We'll see you back on Market News with Rodney like on the next episode.

Thank you.

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