What can we learn from Walmart’s Financial Numbers?

The fourth quarter financial numbers are in and they prove Walmart (NYSE: WMT) had a pretty good year in 2016. The latest earnings report shows the world’s largest retailer is having some problems but it is proving the naysayers wrong.

Some of the main lessons we can learn from WMT’s latest set of financial numbers include:

• Walmart’s revenues are growing. The revenues reached the highest level yet on January 31, 2017 – $485.87 billion.

 

• Walmart’s revenues grew by $3.74 billion in 2016, rising from $482.13 billion to $485.87 billion.

 

• Walmart had a respectable holiday season in 2016. Revenues increased by $1.27 billion during the fourth quarter rising from $484.6 to $485.67 billion.

• Walmart is generating a lot of cash, its free cash flow was $8.726 billion on January 31, 2017.

 

• Walmart’s free cash flow is lower than last year. It reported $9.13 billion in free cash flow on January 31, 2017.

 

• Walmart’s cash flow is growing. Its cash from operations grew from $27.93 billion in January 2016 to $31.53 billion a year later. That was an increase of $3.6 billion.

 

• Walmart is making less money from its business. Its’ net income in January 2017 was $1.05 billion lower than in January 2016. Walmart reported a net income of $14.69 billion in January 2016 and $13.64 billion a year later. This is probably the figure that prompted Warrant Buffett to sell his WMT shares.

• Walmart still has a lot of float left: it reported $198.82 in assets and $6.867 billion in cash and short-term investments on January 31, 2017.

 

• Walmart investors still made money they received a return on equity of 17.59% on January 31, 2017. They also collected a 50¢ dividend on December 7, 2016.

 

All this shows us that Walmart is still a pretty good value investment but it does not answer the question: why did Buffett sell. My guess is that Buffett’s move was based on instinct  – but his instincts are often right.

What is Warren Buffett Afraid of at Walmart?

Uncle Warren has a number of good reasons to be afraid for Walmart. The biggest risk is in its international business.

The retailer is heavily exposed to currency fluctuations, its international business lost 5.1% because of the exchange rate created by the strong dollar. There are also some very weak foreign markets such as Brazil and the United Kingdom.

Another problem is geographic, Walmart’s business in the United States is heavy exposure the areas most affected by wage stagnation and income inequality. A disproportionate number of its stores are located in the South, the plains and the Rust Belt of the Midwest.

One trend not in Walmart’s favor is the declining buying power of middle and working class Americans. Between 1970 and 2014 the share of the U.S. income in the hands of the middle class fell from 62% to 43% according to the Pew Research Center. Meanwhile the share of the wealth in the hands of upper class Americans grew from 29% to 49%.

If that was not bad enough the median income of the average middle class household was 4% lower in 2014 than it was in 2000, according to Pew. Another bothersome figure is that the number of Americans in the lowest-income bracket grew from 16% in 1971 to 20% in 2015.

Walmart has fewer potential customers and those customers have less money to spend if Pew is right. This brings us to another potential problem at Walmart that few are talking about its questionable assets.

Walmart’s Questionable Assets

Another risk at Walmart that Buffett might have noticed is the company’s questionable assets. Much of the $198.82 billion in assets is tied up in real estate, over 4,000 stores in the United States alone.

A lot of that real estate might not be worth much because of its location, in decaying middle and working class neighborhoods and towns. Supercenters in particular are a questionable asset in an age of growing ecommerce and wage stagnation.

If Walmart were to start selling off large amounts of real estate would it find a buyer for all those Supercenter and Sam’s Club locations? It’s a fair question because experts already think America has too many retail stores.

An even greater dilemma is created by Amazon (NASDAQ: AMZN) a massive retailer that has no footprint. Amazon needs no supercenters but it can go head to head with Walmart in some categories.

Will Ecommerce Save Walmart

To its credit Walmart’s management team understands these risks and is trying to counter them. Its’ push into ecommerce which was highlighted by the Jet.com purchase is a result of these concerns.

Walmart has had some success online, in July 2016, Walmart.com was the third most popular online retailer in America. It attracted 101 unique million viewers, a number exceeded only by eBay’s 107 million visitors and Amazon’s 183 million, Statista data indicates.

U.S. ecommerce sales at Walmart grew by 36% between fourth quarter 2015 and the same period in 2015, Business Insider reported. Global ecommerce increased by 15% during the same period.

That indicates Walmart’s business model of deep discounting can work online. Some of Walmart’s other experiments are working sales volume at its Pickup Today service grew by 27% between 2015 and 2016. Pickup Today is a Click and pull option in which customer orders from Walmart.com and picks up at a brick and mortar store. One sure sign of Pickup Today’s success is that Amazon is trying to imitate it with brick and mortar stores of its own.

The problem is the small volume of Walmart’s online sales, they made up only $13.7 billion or 3% percent of its business in 2015. Far more growth will be necessary just to keep up with Amazon.

Walmart is Still a Value Investment

All this indicates that ecommerce is currently a profitable sideline for Walmart but not a major focus. Although it should be pointed out that Walmart does not need to compete directly with Amazon to make money online. It can generate revenue and drive business by offering a low cost frills alternative.

My prediction is that Walmart’s ecommerce business will slowly grow while its brick and mortar foot print contracts but still make a lot of money. Barring a Black Swan event of some sort, Walmart will struggle online but be profitable in store for a long time to come.

The main thing we can learn from the numbers is that Walmart is still a value investment. The giant discounter may not be the sure-fire money machine it once was but Walmart will continue to be a profitable company and a good stock for years to come.