Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Grocery Wars

Walmart is Growing but is it Making Money?

Walmart (NYSE: WMT) is having a really great month with revenues rapidly approaching $500 billion, and a stock price nearing $100. Yet the retail giant is still struggling with falling income, and doubts about its future.

The good news at Walmart abounds, first there’s its payment app Walmart Pay; that product’s level of use rivals that of the better known Apple Pay. Around 5.1% of Walmart customers use Walmart Pay while 5.5% of iPhone users use Apple Pay, Fortune reported.

Then there are online sales at Walmart which the company claims grew by 50% during the third quarter of 2017, The Washington Post reported. Such figures justify Walmart’s online brand buying which encompasses everything from the courier service Parcel to ModCloth.

Part of the growth is driven by variety; now carries 70 million items including high-end merchandise from Bose and Lord & Taylor. A more important factor might be the prices at which are often lower than Amazon.

Walmart even figured out how to cash in on Elon Musk’s latest media circus by announcing the purchase of 15 of his electric powered Tesla big rigs. Since Elon Musk claims the Tesla will be 20% cheaper to operate than a diesel semi investigating them is a smart move for Walmart which has a fleet of several thousand semi tractors.

Musk claimed the Tesla Semi will cost 85¢ a mile to operate, standard big rig costs between $1.26 and $1.51 a mile to run, USA Today reported. If that’s true it would save Walmart a lot of money and increase its profits.

 Walmart Approaching $500 Billion in Revenue

Now for the astounding news, Walmart’s revenues will clear a half a trillion dollars sometime next year if the current growth rate continues. Walmart reported $495.10 billion in revenues for October 31, 2017, up from $490.01 billion in July 2017.

If that performance is repeated in the next quarter; Walmart will report around $500 billion or half a trillion dollars in revenue early in 2018. History seems to support this conclusion; Walmart’s revenue has been growing for the past seven quarters. It has posted growth for every quarter since January 2016.

Mr. Market certainly noticed that growth, Walmart’s stock price shot up from $90.26 on November 8 to $96.40 on November 22, 2017. If Walmart has a good Black Friday that price will exceed $100 a share by December 1.

The Incredibly Shrinking Income

The great revenue and publicity at Walmart are tempered by some bad news about income. Walmart’s income has been shrinking for every quarter since July 2016.

Walmart reported an income of $14.73 billion in January 2016 that fell to $11.44 billion in October 2017. That means its income has fallen by $3.29 billion over the course of the last two years.

More bothersome is the way that income loss is accelerating, Walmart reported an income of $12.73 billion in July 2017 and $11.44 billion three months later. That means its income fell by $1.29 billion in three months.

That’s disturbing because it means the greater the revenue growth at Walmart, the faster the income shrinkage. A truly disturbing scenario is that Walmart is spending more money to sell more goods at lower prices at a higher cost, to make less money.

One wonders how long that kind of business will be sustainable. Will the company reach a stage of little or no income and ever-growing revenues? One of its most visible competitors; Kroger (NYSE: KR) already seems to be in that predicament with a net income of $1.553 billion and revenues of $118.5 billion on 31 July 2017.

Is Walmart Making Money?

Value investors will ask if Walmart is generating enough cash elsewhere to be a good investment. The answer to that question is a definite yes.

Walmart reported a free cash flow of $3.215 billion, cash and short-term investments of $7.026 billion, and $28.95 billion in cash from operations on Halloween Day, 2017. The cash is certainly there, but like the income, it is shrinking, Walmart reported $32.03 billion in cash from operations in October 2016.

All this tells us that Walmart’s business model is generating less cash. The reason for that seems to be obvious, its’ operations are becoming more expensive and less lucrative. Expanding online requires massive investments in costly technology and infrastructure.

That comes at a time when labor costs are increasing, Walmart raised wages last year, and shoppers are expecting and demanding higher levels of customer service. Beyond that, the new technology focus requires hiring more expensive workers computer technicians and engineers demand higher salaries than cashiers.

Therefore, Walmart is going to have to start cutting expenses soon. Two obvious it can do this would be selling off money-losing foreign divisions such as Brazil; or by reducing its footprint. New technologies such as Musk’s semi might help, but they too cost money.

Is Walmart a Good Investment?

Even though Walmart is making less money it is still a good investment. The price is still a little low at $96.40 a share on November 22, 2017, but that gives plenty of room for an increased payout.

The stock is still paying off for investors right now, with a 14.99% return on equity on 31 October 2017. Beyond that, there is a 51¢ a share dividend scheduled for December 7, 2017, a 1¢ increase over 50¢ a share a year earlier.

Even with the shrinking income, Walmart is still a good investment right now. If you want to make a bet against Amazon (NASDAQ: AMZN) Walmart is still the stock to buy. You will make money, even though its’ income is likely to keep shrinking for the foreseeable future.