🏬Walmart Inc.

($WMT) - A Valuation On 26th

February 2021🏬
One of the largest retailers in the world. The company is synonymous with low
prices and has been expanding online to try and keep up with Amazon.

Edmund

11 hr ago 1

⏳Read Time = 9.5 minutes

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One of the largest retailers in the world. The company is synonymous with low
prices and has been expanding online to try and keep up with Amazon. Will this
add-value for shareholders, or should the company stick to hypermarkets?

🏬The Company - Walmart Inc. $WMT🏬

Business Description
Walmart is an American multinational retailer that operates chains of discount
department and grocery stores as well as a burgeoning e-commerce business
line. Each week, the company serves c.265m customers across c.11.5k stores
and numerous websites, under 56 brands across 27 countries.
Product/Service Segments
The company operates three segments: Walmart U.S. (stores and e-commerce),
Walmart International (stores and e-commerce), and Sam’s Club (U.S.
membership-only warehouses and e-commerce). But, we have divided the
firm’s revenues up as follows:

— 37.7% of Revenue
• Retail
• E-Commerce — 6.4% of Revenue
• Grocery — 55.9% of Revenue

Geographic Segments
Despite a number of forays abroad, the company is still predominantly a U.S.
retailer with 77% of revenues coming from there. Mexico (6.4%) and the U.K.
(5.6%) are its second and third largest markets respectively.

Historic Financials
The core of the company’s strategy is its everyday low prices (EDLP). By
always leading on price, Walmart aims to earn the trust of its customers by
providing a broad assortment of quality products at the lowest price in the
market. The complement to this is the firm's everyday low cost (EDLC)
commitment to control expenses and pass the savings through to customers.

The history of the company and its founding by Sam Walton (I recommend the
book “Sam Walton: Made in America”) is well known. Sam opened a franchise
Ben Franklin variety store in 1945. From those humble beginnings, the
company grew into the retail behemoth it is today. The firm expanded
internationally in 1991 through a joint venture in Mexico, then in 2000, the
company launched its e-commerce business and launched walmart.com.
Walmart has made a number of acquisitions in the e-commerce space since
2016, the largest of which was taking the majority stake in Flipkart, an Indian e-
commerce marketplace.
Since 2011, the company has been growing at a modest CAGR of c.2.4%. In
order to compete with the rise of Amazon and the structural shift to online
retailing, Walmart has been reinvesting greater amounts into e-commerce and
since 2016 growth has picked up again. This structural shift and the increased
competition from Amazon (and the like) has put pressure on margins, which
have been in continuous decline. The upside is that as the COVID-19 pandemic
hit, the company, despite having to close large numbers of stores, has fared well
because of their now substantial pure online and click-and-collect divisions. In
the TTM to 31 October 2020, revenues were up an annualised 6.35% and
margins were stable at 4.08%. Walmart is a mature, highly competent and
competitive multi-channel retailer trying to reinvigorate growth and compete
online.

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📖The Story - How Do You Solve A Problem Like

Amazon?📖
Market Size
The physical retail and grocery markets in the U.S. are forecast to grow at
c.4.2%, and c.4.8%, CAGRs respectively over the next 5 years as they bounce
back from COVID lockdowns. In contrast, the global online retail market,
driven by structural shifts online and increased online penetration, is forecast to
grow at a c.15.6% CAGR over the same time period. We think that Walmart
will continue expanding the physical operation as well as acquiring other online
retailers and expanding the current setup into other markets.
x Market Share
We think that Walmart’s EDLP strategy will help them continue to be a
dominant force in the physical retail space, while their increasing online
presence, especially when mixed with click-and-collect will help them grow the
online business at the expected market rate.
= Revenue
We think that medium-term revenue growth of c.5.26% is likely given the
weighted-average growth expected in each market across business segments and
the firm’s fundamental growth rate (based on current reinvestment and capital
returns). We then expect this growth rate to trend towards our estimate of the
risk-free rate for the markets in which the firm operates as the reinvestment and
expansion plans stabilise.
- Operating Expenses
The firm’s operating expenses have been increasing faster than revenues
because of the steady transition to lower-margin grocery and online businesses.
Given the firm’s commitment to EDLC, we expect these expenses to stay in line
with the 2018-2020 average and see no reason for any significant changes to the
cost base.
= Operating Income
We think that the company’s EDLP/EDLC policy will ensure that prices and
costs remain industry-leading and margins remain in line with the market and
their current levels.
- Taxes
The company currently pays under an effective tax rate of 25.00%, and we
expect this will transition to 25.07% based on the marginal tax rates across the
countries in which the firm operates. Not a big movement.
- Nett Reinvestment
The company is reinvesting much more aggressively. We think that in order to
achieve the growth we have projected, Walmart will need to continue
reinvesting significantly. We reckon that about $72.6b of net-capital will need
to be reinvested and that roughly 58% will go into PP&E, 37% will go into
acquisitions and the remainder will need to be reinvested into additional
working capital.
= After-Tax Free Cash Flows
We expect the company to remain highly FCF generative and won’t need to
raise any outside capital.
Adjust For: Time-Value & Operational Risk
The company is a physical retail, grocery and e-commerce mixed business with
an optimal amount of leverage operating mainly in the U.S., but in a number of
other countries. The firm is optimally capitalised with an almost 15% Debt/EV
ratio and a AA credit rating.
Adjust For: Failure Risk
Based on Walmart’s credit-rating, we have imputed a 0.25% chance of
significant financial distress.
+ Nett Non-Operating Assets - Debts
The company has an investment in JD.com carried on the books at fair-value
and worth $5.4b. Minority interests consolidated into the company’s financials
(mostly the unowned part of Flipkartare) are worth roughly $16.5b.

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📝The Valuation Model📝
Links To Story
(1) Growth: E-commerce and new markets.
(2) Margins: EDLP/EDLC commitment.
(3) Reinvestment: Substantial to fund growth.
(4) Capital costs: Multi-channel retailer with optimal leverage.
Valuation Model Summary
Valuation Model Output:
Estimated Intrinsic Value/Share = $137.66

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📊Sensitivity Analysis📊
Monte-Carlo Input Distributions For The Valuation Model
(1) Growth Rate -> Pert Distribution
(2) Operating Margin -> Uniform Distribution
(3) Reinvestment -> Triangle Distribution
(4) Cost of Capital -> Triangle Distribution
Likelihood Distribution Of Intrinsic Value/Share
 Estimated Intrinsic Value/Share = $137.66

Buy Below = $110.37

Accumulate Below = $123.98
Hold Around = $134.55
Reduce Above = $147.25
Sell Above = $167.09

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📈Market Price & Rating📉

Monte-Carlo Simulation Rating
Current Market Price/Share = $145.24
Estimated Intrinsic Value/Share = $137.66
Price/Value (%) = 105.51%
Monte-Carlo Price Percentile = 67th
Likelihood Overvalued = 67%
Likelihood Undervalued = 33%
Rating At Current Price = HOLD