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THE WALMART STORY
Saturday, March 3, 2007
“We just kept that stock.”
- Sam Walton in
Made in America
Hemant Sreeraman 1(firstname.lastname@example.org)
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 %
Profit Margin %8.03.93.43.83.3
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