Can Walmart Fight off Amazon?

short on the company on 9/18. Patel has been following the company for years as a hedge fund analyst, and we sat down with him to hear his thoughts.

Walmart Store / Random Retail

Luke Schiefelbein: What about Walmart initially caught your eye as a value investor?  How long have you been following the stock? 

Ritin Patel: What initially caught my eye on Wal-Mart was its seeming immunity from the battering experienced by its competitors such as Target and Kroger’s. I’ve covered the broader consumer sector for a number of years and with the market’s infatuation with Amazon and the entrance of the German deep discounters and oncoming price wars in grocery, I have an inclination that this may be the first point in Wal-Mart’s history where its core competency of offering “the best brands at the lowest prices” was under threat. Furthermore looking at the company’s ROE, it had fallen from 21% in 2012 to 16% in 2017 and yet the market rewarded the company with a higher multiple. Based on this point and the fact that there was a high chance of margin erosion in the next few years, the opportunity for a short seems quite evident.

Schiefelbein: What is the market missing here?  Could you run us through your thoughts on conventional competitors (i.e. Sam’s Club, Costco)?  

Patel: When thinking about what the market is missing, I like to first think about what are they banking on. The story for the Wal-Mart bulls is built on two drivers: 1) positive comp store sales growth and more specifically positive traffic growth and 2) large growth numbers in the online business headlined by the likes of jet.com. The market is essentially pre-occupied with the top-line and is willing to give the company the benefit of the doubt that over time the dilution to the bottom line will reverse trend and become accretive. With lower cost and even lower margin players such as Aldi, Lidl, and Trader Joe’s on the physical front and behemoths like Amazon on the online front, I take an anti-consensus view that sub 7% EBITDA and sub 4% EBIT will be the trend and revert closer to more global averages in the low 5% EBITDA range for the sector as a whole, resulting in a lower multiple and hence lower stock price.

Schiefelbein: Would the entry of an activist help or hurt long term shareholder value?  Why? 

Walmart's stock has risen over 25% in the last 6 months. This has been hugely surprising to analysts, with the company surging past most sell-side estimates. The retail giant has recently been facing several well-publicized headwinds, which seem to be having to bearing on its stock price. These are wide ranging, and have dogged the rest of the sector, with the stocks of comparable firms like Costco and Kroger underperforming dramatically.

This starts with competition, both online and conventional. Several cutthroat European chains have begun making aggressive inroads into US markets. Grocery chains Lidl and Aldi are household names in Europe, and have demonstrated that they're willing to loss-lead to build their presences in the US. Existential fears from the spread of Amazon and its cannibalization of consumer retail have also severely impacted the sector. Amazon's recent acquisition of Whole Foods sent many of Walmart's competitors's stock into tailspins, but had no long-term impact on Wal-Mart stock. Can Walmart continue to outperform its peers? Or is this a short term blip before it reverts to the mean?

SumZero member Ritin Patel published a short on the company on 9/18. Patel has been following the company for years as a hedge fund analyst, and we sat down with him to hear his thoughts.

Walmart Store / Random Retail

Luke Schiefelbein: What about Walmart initially caught your eye as a value investor? How long have you been following the stock?

Schiefelbein: What is the market missing here? Could you run us through your thoughts on conventional competitors (i.e. Sam’s Club, Costco)?

Schiefelbein: Would the entry of an activist help or hurt long term shareholder value? Why?

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