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Observations - The Walmart Story

Observations - The Walmart Story



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Published by abhimails

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Published by: abhimails on Oct 08, 2008
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Saturday, March 3, 2007
“We just kept that stock.”
- Sam Walton in 
Made in America
Hemant Sreeraman 1(hemant.sreeraman@gmail.com)
his issue of Observations is about the best company to probably have hit the world…ever. In this issue, I goback about four decades, to trace the incredible progress of a company, from very humble beginnings tobecoming one of the largest companies on earth. The US economy in the same period, has gone throughseveral recessions, and has been witness to couple of serious stock market crashes. But
chugsalong, like an athlete on perennial steroids.While the Walmart story points inexorably to the genius of Sam Walton, I think it has several valuable lessonsin investing and business. To me both are two sides of the same coin. As investment guru Benjamin Grahamused to say, “Investing is most useful when it’s most businesslike.” It seems one Sam Walton took his word abit too seriously. _____________________________________________________________________________________ 
 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. Andhe decides to give them just that. When he started, he had more drive and ambition than money in his bankaccount. 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 1970 1980 1990 2000 CAGR %
Sales1311,20026,000165,013 34  Profits01411,0005,377 31  Stores9322761,5282,522 15  Sales/Store155,556968,7504,347,82617,015,70765,429,42116  Profit/Store12,44437,500148,551654,4502,132,03814  Profit Margin % 
Source: Company filings,
Made in America
 Note: All numbers in USD Million; except ‘store’ ratios which are in USD.
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 numbersappearing 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/Storeand profit/Store metrics improve significantly. The profit margins, however, drops to 4% levels. This is typicalof a business cycle, where a company starts off as a small and fast grower. The fast growth attractscompetition, leading to a drop in margins over time. After a period, growth slows down and ultimately tracks
Saturday, March 3, 2007
“We just kept that stock.”
- Sam Walton in 
Made in America
Hemant Sreeraman 2(hemant.sreeraman@gmail.com)
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 theend of 1980, it had crossed USD 1 billion in sales and profits had gone up by about 40 times compared to1970.
Decade ending 1990
Wall Street started taking notice of the company and the intellects started voicing their opinions about thefortunes of this company which had, by now, demonstrated two decades of super growth. When Walmartacquired 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 institutionalinvestors acting on these esteemed recommendations. Meanwhile the company continued on its odyssey,adding a little more to sales and profits and stores. Result:
decade of super performance. Thesignificant thing over the past two decades was the profit margins – which stayed at the 3.5-4% levelsconsistently. The stock market crash of 1987 pulled the stock price down by more than 50%...but theunderlying business continued its uptrend. After a while the markets realized their mistake, and ensured thatWalmart, 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 startssounding repetitive. Another stellar decade of growth, analysts rant and rave along the way, sometimesfocusing 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 knowwhat 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
Sales36443620  Profits27423818  Stores1424195 
By far, the 1970-80 decade was Walmart’s best in terms of growth rates. Ironically, that same decade was theworst for Walmart, the stock! The early 70s recession took its toll on ‘investor sentiment’ and for long the stockwasn’t accorded its due. Both sales and profits grew over 40% over the decade, but the stock price grew only20%.
Saturday, March 3, 2007
“We just kept that stock.”
- Sam Walton in 
Made in America
Hemant Sreeraman 3(hemant.sreeraman@gmail.com)
TABLE 3: Walmart stock price performance (per decade in %)
CAGR % 1970-80 1980-90 1990-2000
Stock Price204429 
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 recognizedthat Walmart was a gold mine and upped the price by over 40% over the next decade. The stock price grewfaster 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 thebusiness 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)
CHART: Walmart stock
Source: BigCharts
Profits31 Price31 

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