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How Safe Is the Walmart Dividend?

Timeline 

1962- Sam Walton opens the first Walmart Store in Rogers, Arkansas

1970- Walmart goes national as Sam Walton carries out his ambition of providing the lowest prices to their customers

1970- Walmart goes public with an IPO price of $16.50 per share

1980- First Walmart Supercenter and Sam’s Club Open 

1991- Walmart establishes itself in Mexico 

1993- Walmart records $1 billion in sales per week

1996- Walmart opens the first store in China

2006- Introduced $4 generic-drug prescription program

Business Model 

Walmart is an all-in-one stop for your shopping needs. This is exemplified best by the motto that Sam Walton stood by, and tried to implement at every single location: “Every Day Low Prices”. To this day, Walmart has kept this promise to their customers. There are three sectors that make up the Walmart corporation: the Walmart variety stores, Walmart international and Sam’s Club. Catering to different consumers and geographical regions, there are Walmart Supercenters, Walmart Discount Stores and Walmart Neighborhood Markets. Walmart Supercenters on average are around 182,000 square feet and employ 300 associates. Within the halls of these stores, you can even find many specialty shops, as wide ranging as  nail salons to eye care providers. The discount store branches of Walmart are typically around 106,000 square feet and tend to employ around 200 associates. The smallest operational stores are the neighborhood markets - around 38,000 square feet employing 95 associates. These cater to local communities and incorporate all the necessities a community might need - such as pharmacies. Besides the United States, Walmart is a dominant global force. You can find Walmart locations in 26 countries, in total employing over 700,00 associates and serving 100 million plus customer a week. Sam’s Club is another branch of the Walmart enterprise that caters to entrepreneurs and small businesses as they sell bulk quantities. There are over 600 Sam’s Clubs spread throughout the United States, each with an average size of 134,000 square feet.  

Strengths 

Brand Name Recognition 

Brand recognition within your niche is one of the most vital aspects of your business. When a customer associates your name with a specific sector of business, you are well ahead of the competition. In the early stages of Walmart Sam Walton experienced a growth dilemma. He saw competitors, such as Kroger, doing over $2 million in revenue per store in cities with an average population of over 20,000. His fifteen stores at that time generated a measly $1.4 million in combined revenue. Exploring the discount market in the United States, Sam Walton set out to see how Walmart could overcome the growth hiccup. He visited many towns around him and realized the potential markets in towns with a population of fewer than 6000. Big box stores would only cater to cities that had a significant population, but neglected towns with smaller populations. This was the beginning of creating a strong brand name image with the American consumer. Growing its base in small towns by offering low prices and a huge selection of products, Walmart was able to expand and dominate many markets that it entered. The United States, the strongest customer base for Walmart, has approximately 324 million people. Around 140 million people visit Walmart in person or online.  Their backwards expansion strategy proved worthwhile in the long run. As Walmart expanded, stores located in low population areas became a barrier of entry to competitors. Capturing these small-town customers first allowed Walmart to solidify their business model as an essential outlet for many Americans that did not live in metropolitan areas. After this market segment was secured, Walmart was able to expand in metropolitan areas, where they were able to quickly set their vision and corporate statement. As demand for Walmart’s products grew, these small chains were able to be strategically placed in their overall supply chain. Currently, no Walmart store is more than 134 miles away from one of their distribution centers. 

Economies of Scale 

Walmart’s famous slogan “Save Money - Live Better” is achieved by the theory of “economies of scale.” Economies of scale is a concept that explains  why cost per unit decreases as production increases. In order to provide the lowest prices possible, Walmart has perfected their supply chain and business relationships to achieve the lowest price possible per unit while maintaining its enormous sales volumes.  It is estimated that 90% of Americans live within 15 miles of a Walmart; this gives them a huge advantage over their competitors in attaining and keeping their customers. 

However, it hasn’t always been perfect. In order to perfect their operations, Walmart underwent a series of operations overhauls to improve all their processes. In the early stages of inventory management, they implemented electronic product information and RFID tracking for a majority of their stores to reduce the incidence of an item being out of stock. In order to gain a holistic view of the needs of a store, every product detail was recorded online. This helped them to understand the shopping habits on a store-by-store basis. Once they implemented their RFID technology in a majority of their stores, in 2005 they were able to drop their incidence of out of stock items by 16%. In addition to implementing technology to increase efficiency in all their operations, Walmart made the suppliers responsible for managing their inventory in Walmart’s warehouses. This shift in responsibility reduced cost for Walmart; less labor and man hours were spent tracking inventory and the responsibility of inventory management was placed onto the suppliers. Fewer irregularities in their operations ensured that items would rarely be out of stock due to an error on Walmart’s part. 

Leveraging their market power, Walmart has the ability to force suppliers to lower their prices. Walmart’s buying power can even sway how a supplier operates. Many well known brands rely on Walmart for more than 20% of their revenue. A great example of this is General Electric lightbulbs. In a span of 5 years, due to the aggressive demand from Walmart, some of the General Electric light bulbs decreased in price from $2.19 to .88 cents.  Another example of the extreme pressure that Walmart puts on its suppliers is the Lakewood Engineering Company that produced fans for Walmart in the 1990s. The cost of a fan was around $20 which Walmart did not consider fair to the consumer. As a result they demanded Lakewood reduce the cost. This resulted in Lakewood outsourcing their manufacturing to China, laying off their Chicago plant, and only then being able to reduce the price of a fan to $10. 

Variety of Products

Walmart sells over 75 million products from over 100,000 suppliers. One of Sam Walton’s main goals was to provide the ideal all-in-one superstore. Walmart carries a huge array of products, ranging from outdoor furniture to food. In order to compete with other big-name brands, Walmart introduced their store-brand “Great Value” products to rival those of competitors. The private label products have been steady on the rise as Target, one of the main Walmart competitors, introduced their own products. The focal point of introducing a private label product in their business model is to reduce cost and increase profit margins. This theory is proven true by the fact that Great Value brand products bring in more than $27 billion a year globally. Not only does this expand the selection of products offered by the retailer, but it captures the brand loyalty of consumers. Rigorous tests are put in place in order to guarantee that the products that Walmart offers are on par with the competitions. These products are closely tested to mimic their competitors from taste to texture. Private label strategy has paid off: a Walmart survey noted that 77% of participants had a very positive view on private label products, with many agreeing that Great Value products are on par or even better than their name-brand competitors.  

Walmart U.S.-Quarterly Merchandise Highlights
Walmart U.S.-Quarterly Merchandise Highlights

Weakness 

Employee Dissatisfaction 

Employing over 1.3 million people in the United States, labor is the biggest liability for Walmart. Low wages have always been a staple of their company, as they rarely distribute pay increases for the retail workers. Work conditions throughout all their retail storefronts is well below accepted standards. Many employees complain about unpaid overtime, favoritism, lack of benefits and lack support from the corporate side of the business. The low wages and poor working conditions lead to high turnover rates. As corporate aimed to keep the minimum wage as low as possible, they saw an extremely high turnover rate all across the board at 44%. It is estimated that in order to train an employee it costs approximately 16% of their wage. A 44% turnover rate means that approximately 29,000 employees have to be trained annually. Going by the standard rate in 2015, where most of the workers earned $9, it means that each employee had an initial $3,400 invested in them for training. As time has progressed, there has been social pressure on Walmart to increase their minimum wage which, in 2019, was close to $15 for full time employees. This wage is exclusive for full-time employees. In recent testimonials some members of Walmart have noted that their stores had astronomically high turnover rates - in some cases higher than 90%. Walmart’s business model is based on large volumes with low margins products, so in order to reduce costs they need to keep the bottom line of their operations as low as possible. Although it is needed for Walmart to keep wages as low as possible, their approach in doing so creates an unpleasant atmosphere within their workplace. Low worker morale within the workplace has been shown to impact productivity and customers’ shopping experience.

Walmart’s business model 

Walmart’s business model is centered around mass volume with low products. This model is not hard to replicate and does not give significant economic advantage to Walmart. There exist several competitors that are in the exact same niche as Walmart. The biggest advantage that Walmart has over most of them is the scale it operates on,  and the influence it has with shoppers worldwide.  Let’s compare Target and Walmart. Both similar stores with relatively similar business models. In 2019 Walmart’s market capitalization was $319.67 billion, 6.5 times higher than Target’s $44.1 billion market capitalization. Although it may seem like Walmart is a titan, it's necessary to look at the granular numbers to see how Walmart’s business is vulnerable to its competition. Gross margin and net profit margin are extremely important ratios to understand the wholesale business. The discount retail sector boasts an average gross margin of 23.53% and a net profit margin of 6.65.  Target’s gross margin is 31.15% and its net profit margin is 4.49, compared to Walmart’s gross margin of 25.35% and its net profit margin of -.67. The 10 year net profit margin average is significantly higher for Target at 4.19, while Walmart is an abysmal 1.02. These numbers might seem out of the ordinary, but Walmart’s business model is low margins. As stated previously, the advantage that Walmart has is its size, and its influence not only on suppliers but on its customers. Replicating the business model is not an impossible task. With the right scale and resources we could see competitors gaining an advantage on Walmart. This is exacerbated by the advent of the e-commerce age, as brick and mortar stores seem to lose their appeal to the younger generation. 

Opportunities 

Increasing Energy Efficiency 

In order to service all of their stores across the globe, Walmart operates a fleet that would make Menelaus himself jealous - over 6,100 tractors, 61,000 trailers and 7,800 drivers. Walmart shipping vehicles average more than 700 million miles a year. Walmart recognizes the importance of precise routes and timing, something they’ve continually analyzed. Through this analysis they’ve managed to improve their efficiency in the truck fleet by 87.4% in 2014 compared to 2005. Although route optimization has been a major goal for Walmart there are sunken costs to transportation. Maintenance, salaries and fuel costs are all variables that can change due to global economic outcomes. As more corporations turn to green energy, Walmart has taken the opportunity to invest in green energy products that will reduce cost and increase efficiency across their whole supply chain. Walmart Canada is a prime example of “going green.” Tesla made headlines across the globe when they revealed their electric semi-truck, and Walmart certainly took notice - Walmart Canada has tripled their order of electric trucks to 130 units, and aims to electrify 20% of their fleet by 2022. One of the corporate goals of Walmart is to reduce their global emission to zero by 2040, which is an undoubtedly ambitious goal for a global company that operates in many sectors. Electrifying their fleet will drastically reduce their operational cost, which in turn can combat rising prices from staple products further allowing Walmart to keep their low price guarantee to their customer base.  

Ecommerce 

Amazon has become a dominant force for online shopping. It is estimated that Amazon’s platform captures 38% of online U.S. commerce, while Walmart accounts for only 4.7%. There is a common misconception that online shopping is extremely profitable. For big name stores, the profit margins are minimal, and oftentimes lose them money. Amazon’s is extremely profitable due to their Amazon Web Service platform, which can cover the losses from their online marketplace. Walmart on the other hand does not have a business segment that is extremely profitable and, thus, its ecommerce platform is suffering. The rivalry between Amazon and Walmart started in 2016 when Jet.com was acquired by Walmart. Recognizing the importance of an online consumer-facing presence and its value to consumers, Walmart has been aggressively attempting to grow its ecommerce business. There are a few roadblocks that Walmart is experiencing while attempting this feat. For example, thanks to Amazon’s incredibly popular Prime service, two-day shipping has become the norm for online shopping, this is very costly to any business, as stores can experience losses up to $120 for a two-day shipping order. While Walmart was able to grow its ecommerce revenue to $21 billion, it is projected to have a loss of more than $1 billion. Pessimism from the board of directors and CEO has led to a slow rise in the infrastructure needed to develop its ecommerce - infrastructure that is desperately needed to compete with Amazon. Warehouses are a major factor in the fight to succeed against Amazon. Because Amazon has had about a twenty year head-start in its infrastructure plan, Walmart will need to invest heavily in new infrastructure that can support an array of products to be delivered throughout the United States. Despite these challenges, Walmart is actively growing its services. Next day delivery is available to 75% of the U.S. population. They have launched InHome Delivery in three major U.S. cities, and launched NextDay Delivery from Walmart.com. 

To reduce its losses and encourage shoppers to embrace the Walmart brand, they launched the Walmart + subscription for $98/year, rivaling Amazon prime at $119/year. This allows shoppers to receive one day shipping on orders over $35, checkout products on their phone and get exclusive deals. The battle for online commerce supremacy will be a tough one. This is a battle of winner-takes-all. Amazon’s head start and its influence among online shoppers will be a barrier for Walmart, but heavy investment in infrastructure and modeling its ecommerce platform to cater to Walmart’s demographic will be far easier said than done.  As long as it ignores near term losses, Amazon can have a very promising view of the future as they continue to seize more of the market share in online shopping. 

Threats

Unions

Walmart is one of the most staunchly anti-union corporations in America. They take union organizing very seriously, and have several videos against union as part of their onboarding experience. Sam Walton was adamant about unions not intruding on his corporation. One extreme example of their efforts to prevent unions was in 2000. A Texas store was able to unionize its butcher department. Two weeks later Walmart announced that all meat would come prepacked. Not only did they shut down the butcher section of that particular store but fired all 179 butchers throughout its chain. As labor laws become more strict and there is a push for fair wages and working conditions throughout the United States, Walmart will have to strategize in order to avoid significant rises in its operation cost. As stated previously, labor is the biggest liability that Walmart faces. In order to keep its prices down, they will need to find a middle ground where worker satisfaction increases while being able to keep the prices of their products low. 

Shopping Experience 

A customer’s view on their shopping experience is very important for any retail sector. Experiences drive sales and customer retention for a brand. In a study done by surveying 7,000 people, it was noted that Walmart ranked worst for their shopping experience. Brands like Target, Kohls and Amazon ranked far higher in a shopper’s preference list. As brands have access to more customers than ever before due to the widespread use of social media, shopping experiences and image become increasingly important metrics in the retail industry. In order to retain customers, the shopping experience has to be flawless from the moment they walk in, to the moment they walk out. In order to circumvent this problem, Walmart announced an overhaul of their omni-shopping experience. One of the main areas of focus for Walmart was the store layouts. Inspired by the way people navigate in an airport, Walmart redesigned their stores in order to increase navigation efficiency and highlight key products during a shopping trip. In addition to increasing a customer’s buying efficiency, Walmart improved their iconography, and focused on their mobile app. Utilizing the mobile app, customers are now able to experience contactless checkout and reduce the time they spend in store. In order to retain as many customers as possible, Walmart will need to revamp not only their in-store experience but their mobile shopping platform as well. Big box competitors have set very high expectations when it comes to shopping experiences, Walmart will need to analyze all their in-person and online traffic flow to reduce bottlenecks within the shopping experience and cater to everyone. Giving a flawless shopping experience is a must in order to retain customers that are on the brink of choosing Target or Amazon for their shopping experience. 

WMT New Store Layout
WMT New Store Layout

Acquisitions or Organic Growth

Acquisitions of companies has been a major driving force for Walmart’s growth. Since the inception, Walmart has acquired more than 15 companies in order to adapt to the changing habits and attitudes of consumers. As early as 2007, Walmart has been adopting internet trends to its platform. Focusing on e-commerce driven growth. The majority of their international presence was established by investing heavily in companies that already had a loyal customer base in foreign countries. For example, in 1994 Walmart expanded to Canada with the purchase of 122 Woolco stores. Following the same strategy, Walmart was able to enter the United Kingdom market by acquiring Asda, a popular supermarket company. Brick and mortar acquisitions created a very successful blueprint on international growth. 

In the beginning of 2016, e-commerce was the next sector that Walmart would experiment with. From August 2016 to March 2017, Walmart made four major acquisitions: Jet.com (e-commerce platform), shoebuy.com (shoes & apparel), Moosejaw (outdoor products) and Flipkart (India’s wholesaler).

In the early days of the internet, Walmart relied on organic growth and internal development to drive e-commerce growth. The acquisition of Jet.com shifted the direction that Walmart was willing to move. In order to narrow the gap between Walmart and Amazon, Walmart acquired Jet.com for $3.3 billion in August of 2016.  At the time of acquisition Jet.com was not profitable, but they had an above average gross merchandise volume and plenty of room for growth. The CEO of Jet.com was another major selling point for the acquisition. Mark Lore was regarded as an e-commerce expert that joined Walmart’s executive board to run their e-commerce expansion. Shortly after the acquisition, Walmart’s online sales growth outpaced Amazon in late 2016. 

Amazon vs Walmart Sales Growth
Amazon vs Walmart Sales Growth

The addition of Mark Lore to their board sprung a big shift in the direction of their e-commerce business goals. At the time of acquisition, Jet.com was adding 400,000 monthly shoppers to their platform and offered products from more than 2,400 retailers. Jet.com also boasted a large millennial following. Walmart’s acquisition of Jet.com propelled them in the right direction by allowing them to corner some of the best e-commerce talent, and introduce themselves to a new generation of shoppers. 

The next big sector that Walmart focused on in order to close the e-commerce gap with Amazon was apparel. After the Jet.com acquisition Walmart acquired the online platform shoebuy.com. The deal closed in December 30,2016 for $70 million dollars. Shoebuy.com was coveted by Walmart for its most valuable asset - the large selection of shoes and clothing. The website featured over 800 products from different retailers. Once the acquisition was completed, shoebuy.com products were available on Jet.com. Appealing to younger generation of online shoppers and making up ground for its apparel business, Walmart diversified its product offerings and was able to reach a new base of customers. In recent months, however, Walmart has divested from shoebuy.com (currently known as shoes.com) which is now in the process of being acquired by CriticalPoint Capital.

As variation within their e-commerce business was ramping up, Walmart targeted another major apparel company that had appealed to the younger generation and had a meaningful online presence. Moosejaw became the next acquisition target for Walmart. Up to this point Walmart had only been offering budget friendly apparel. Moosejaw, on the other hand, specialized in outdoor apparel and carried many famous names such as The North Face and Patagonia. Moosejaw was acquired in February 2017 for $51 million dollars. Although they only had 10 brick and mortar stores, the majority of their evaluation came from their strong online presence and their millennial customer base. Under Walmart’s umbrella, Moosejaw is able to expand their influence nationally. Although Moosejaw was a stepping stone in bringing the Walmart values to the young, internet savvy population there was some backlash. Some of the suppliers pulled their inventory from Moosejaw’s shelves as they did not want to be associated with the Walmart image.

 

India, one of the fastest growing economies in the world became the next area of interest for Walmart. In 2018, Walmart acquired a 77% controlling stake in Flipkart for $16 billion, a company founded in 2007 that quickly became the Amazon of India. Flipkart’s co-founders previously worked for Amazon before leaving the company in 2007. They followed a very similar business model, in which they started by selling books. Through private funding they managed to expand their services throughout India. Flipkart aimed to capture the growth market of Indian e-commerce. Combined with many of its subsidiaries, Flipkart had a very strong foothold within the Indian community, something that Amazon was battling to gain in 2018. To reach the growth that Flipkart experienced in India organically, Walmart would have taken a tremendous risk in losing ground to Amazon in its battle for customers. Walmart’s vision to acquire a majority stake in Flipkart allows it to align its corporate vision in a drastically different cultural environment. Organic growth in India would have been a losing battle, and in order to get a head start the acquisition of Flipkart was a fantastic strategic maneuver. 

Revenue Growth 

WMT Revenue Growth
WMT Revenue Growth

Walmart’s revenue growth has been steadily rising. With the novel COVID-19 virus, Walmart saw a significant boost in sales as customers rushed to stock up on essentials. Their global expansion goals have also added onto the growing revenue. As Walmart becomes a household name and sticks to their motto, shoppers around the world will be more willing to shop there than at a local convenience store.  

Long-Term Debt 

WMT Long-Term Debt
WMT Long-Term Debt

Long-Term Debt has been on the rise for Walmart due to the massive acquisitions and investments they are partaking in to compete with Amazon. Although a jump in long term debt may seem like a red flag, Walmart has the customer loyalty and abundance of assets to cover their debts for the foreseeable future. 

Debt-To-Equity

Walmart's Debt-To-Equity
Walmart's Debt-To-Equity

A typical debt to equity ratio is deemed safe around 1-1.5. Some industries that are capital intensive, such as manufacturing, may have higher debt to equity ratios. In Walmart’s case they are using more equity than debt to finance their activities, which is a safe sign that Walmart’s financials are solid for the future. 

Free Cash Flow

Walmart's Annual Free Cash Flow
Walmart's Annual Free Cash Flow

Free cash flow refers to the amount of cash that is available for distribution to support ongoing operations or that could be given to stakeholders in the forms of dividends. Walmart’s free cash flow has been pretty steady in the past five years. Without huge drops in the cash flow Walmart is poised to not only pay their dividends, but invest in infrastructure and any other acquisitions they might look into. We have seen several acquisitions that Walmart has made in order to compete with Amazon, and in the future we will probably see more as the race to be the biggest marketplace online intensifies.   

Dividend Growth

Walmart's Dividend Growth
Walmart's Dividend Growth

Walmart is one of the most well-known dividend aristocrats. It’s an American household name that has penetrated the home of many shoppers. Dominating a large market share of the discount retail sector, Walmart has been able to keep their low-price promise to its shoppers throughout the years. As a result, they’ve been able to steadily increase their dividends. Looking at their financials, there does not seem to be a risk of a dividend cut in the foreseeable future based on their history. 

Payout Ratio 

Walmart boasts a 33.90% payout ratio which is in line with most other dividend aristocrats. Typically, a payout of 30%-50% is considered safe. 

Final Thoughts 

Since the beginning, Walmart has set itself to be one of the most dominant big box stores in the United States, and it has achieved that status by being part of many communities across the nation. Their history of success proves that, time and time again, they can maintain their dividend and grow it annually. One of the biggest hurdles in the upcoming future is their fight against Amazon, a fight which so far has cost them billions in necessary acquisitions. In the future, as Walmart expands on its e-commerce platform, they should see more customer acquisitions and higher returns from the platform. Looking at the financials and its strategic business positions, the Walmart dividend is safe for the near future. 

Written by: Armand Bogdan
Published on: Sunday, October 11, 2020 11:00 AM

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