Market Mad House

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

Grocery Wars

Walmart keeps Growing and What’s Wrong at Amazon

There might be something wrong at Amazon (NASDAQ: AMZN) because it had not officially published its numbers for second quarter 2017 as of August 21, 2017. Those numbers should have been available in July but they were still not available a month later, which is bothersome.

This might be fallout from the proposed Whole Foods (NASDAQ: WFM) acquisition, but I have a hunch there’s more to it. There’s no evidence but I have a suspicion that something be wrong at the Everything Store.

Walmart (NYSE: WMT) is lending credence to those suspicions by publishing its Second Quarter numbers quickly and promptly. Currently only first quarter numbers for Amazon are available at ycharts, but July 31 numbers for Walmart just turned up at that website. Those numbers are a mixed bag but at least we have them – which is more than we can say for Amazon.

The Good, the Bad and the Ugly in Walmart’s Financial Numbers

Not surprisingly the current Walmart numbers are a mix of the good, the bad and the ugly.

The good is Walmart’s revenues which grew by $2.50 billion over the course of the last quarter. That’s small change to the growth at Amazon, but impressive in today’s super-challenging retail environment. For the record Walmart report revenues of $487.15 billion in April 2017 and $490.01 billion three months later.

More importantly Walmart recorded revenue growth of $6.18 billion in the year between July 31, 2015 and the same date in 2017. Walmart reported $483.83 billion at the end of July 2016 and $490.01 billion at the end of last quarter.

The growth is limited but it is real, unfortunately that growth might be coming at the expense of Walmart’s ability to make money. There is strong evidence that this company is sacrificing its’ income for future growth.

Walmart’s Shrinking Income

The bad number at Walmart is the income which is shrinking dramatically. Walmart reported a net income of $14.73 billion in July 2016; that fell to $13.60 billion in April 2017, and $12.73 billion in the summer.

It looks as if all the spending on technology, ecommerce and expansion is eating into Walmart’s ability to make money. A related problem is the deep discounting driven by deflation that is necessary for keeping pace with companies like Kroger (NYSE: KR).

The ugly number at Walmart is cash from operations, which has taken a big drop in recent months. Last year Walmart reported making $32.22 billion in cash from operations that number dropped to $30.72 billion in April 2017 and $27.96 billion in July 2017.

What is ugly here is that Walmart’s cash from operations dropped by $2.76 billion in just three months. That indicates Walmart is making less money from its operations even as its expenses are increasing.

The most likely cause of this is deflation in the form of falling food and fuel prices. Walmart is making less money from its core business; groceries, at a time expenses are growing. It is not the death spiral but this trend is certainly a threat to Walmart’s long term profitability.

Is Walmart Making Money?

All of this brings us to the extremely odd but very relevant question: “is Walmart making money?” The answer to that provided by the good numbers for July 31, 2017, is yes.

The numbers that prove Walmart is still making money include:

  • A quarterly profit margin of 2.35%.


  • A free cash flow of $3.542 billion.

  • Cash and short-term investments of $6.469 billion on July 31, 2017.


  • Assets of $201.57 billion on the same day.


  • A market capitalization of $239.02 billion on August 21, 2017.


  • An enterprise value of $275.49 billion on August 21, 2017.


Is Walmart Still a Value Investment?

All this makes Walmart a value investment because it still generates a lot of cash and I think it was undervalued at the $79.29 a share reported on 21 August.

Walmart is a good long-term buy because it is one of the few retail giants where the management seems to have a grasp of new technology and its implications. It is the only major US retailer to deploy its’ own digital wallet Walmart Pay, and to experiment with blockchain.

Like Jeff Bezos the team in Bentonville has been willing to invest heavily in online retail and to experiment with delivery solutions. Walmart is actually ahead of Amazon in such areas as store pickup of online orders and same-day delivery. It was one of the major retailers willing to take part in Uber and Lyft’s delivery experiments for example.

There are some problems at Walmart, beyond deflation there’s rising labor costs. The growing labor shortage in the US has forced Walmart to raise wages. Future expensive concessions might include unionization and increased benefits. That might destroy the profits Walmart makes because it will probably be forced to engage in ever deeper discounting in the near future.

Several competitors including Aldi, Kroger and Amazon have demonstrated a capacity for matching or undercutting Walmart’s prices. That might threaten future revenues and incomes at Walmart.

Is Kroger’s Present Walmart’s Future

A possible glimpse of Walmart’s future is provided by America’s second largest grocer Kroger. The situation at Kroger should certainly give WMT investors pause.

Kroger reported revenues of $117.02 billion on April 30, 2017, but a share price of $22.76 on August 21, 2017. It also reported a market capitalization of $20.42 billion on August 21; assets of $35.80 billion on April 30, 2017, and an enterprise value of $33.59 billion on 21 August 2017.

The disturbing figures at Kroger that Walmart investors need to take notice of are: a free cash flow of $1.492 billion and $356 million in cash and short-term investments on April 30, 2017. Despite its vast footprint Kroger is not making much money, possibly because of a fatal combination of deflation and a high paid union workforce.

This is a good deal for Kroger workers but a lousy situation for investors. Walmart shareholders should attention because it might happen to them, particularly if unions succeed in penetrating the nation’s largest retailer.

Despite these risks I think Walmart is a pretty good investment because it offered a 16.66% return on equity on July 31, 2017. Investors are also scheduled to receive a 51¢ dividend on December 7, 2017.

The bottom line is that Walmart will survive, but this stock is not the guaranteed moneymaker or safe value investment it once was. Investors need to be real careful with Walmart right now, because the risks there are greater than many people realize.