TIP850: Walmart (WMT): From Discount Retailer to eCommerce Powerhouse w/ Kyle Grieve & Shawn O'Malley

23:08The platform is super easy to use, so you can trade on the go right from your phone. You can get started with just $100 and jump into the action. See something interesting? Once your account is open, you can trade it in just a couple of clicks. And if you're not quite ready yet, you can practice with a free demo account. No risk, no pressure. With 20 years of experience, Plus 500 makes trading more accessible than ever. Check it out at plus500.com. Trading and futures involves risks of loss and is not suitable for everyone. Not all applicants will qualify. Plus 500. It's trading with a plus. Every week we analyze companies on this show and ask the same question, is management actually running this business efficiently?

23:49Here's the honest answer for most companies right now. The ones pulling ahead are the ones putting AI to work on the everyday stuff. That's exactly what NetSuite Next was built for. NetSuite Next surfaces insights exactly when you need them. It puts agents to work on routine tasks and problems, and it lets you ask complex questions in plain language, like talking to a knowledgeable colleague. But technology is only part of the story. AI is also reshaping how people and teams work together, and that shift is already underway. Expert created business guide in your hands today. It's called Aligning for the Agentic era, how AI is changing everyday work.

24:22And right now it's yours absolutely free. Inside, you'll discover how AI could reshape work across your entire organization and how to position your business to prosper from it. I use this and you should too. If your revenues are at least in the seven figures, get our free business guide aligning for the agentic era, how AI is changing everyday work at netsuite.com slash tip. The guide is free to you at netsuite.com slash tip. netsuite.com slash tip. All right, back to the show. It just goes back to the point that Walmart is much more directly exposed to in-person commerce, even if its e-commerce operations are definitely nothing to scoff at.

25:05And another part of Walmart that I found pretty surprising and impressive is its advertising segment, which has grown 38 % in the last quarter. Yeah, that's really impressive growth. But unfortunately for us, Walmart is actually pretty hush on their disclosures. So we don't actually know what the real revenue numbers are, just those growth metrics that you quoted. So it's clear that Walmart is going to make money from advertising the same way that Amazon does by just allowing their sellers to pay to be at the top of search results or maybe showing banners or branded ads. Now, I want to mention two other segments of the business in internationals and Sam's Club.

25:40So Walmart International has actually been a pretty good growth driver for Walmart over the past few years, growing faster than the US segment. Their largest presence internationally is in Mexico, China, and Canada. So unfortunately, they don't break out the unit counts for either the US or international segments, other than they currently have about 11 ,000 total units in the latest quarter. Now, as for Sam's Club, they're doing decently as well, but don't quite have the same growth as Walmart International. And both of these segments offer the same things as the US segment in terms of things like delivery, e-commerce, et cetera?

26:11I definitely see a lot to like about Walmart as a business. And I think everybody can appreciate how beautifully simple, but also incredibly complex of a company it is in terms of all the supplier relations and logistics underlying the very basic ability to just walk in and buy anything from avocados to underwear to jumbo TVs and iPhones. And we really like simple businesses where you don't need to spend hundreds of hours trying to figure out some very subtle nuance to unlock the thesis. And then you don't know what you don't know. And there might be some very small detail that you don't understand that actually crushes the thesis.

26:45And so great businesses often have, I think, a sort of elegance to them that is self-evident. And Walmart's model is, for what it's worth, pretty intuitive. They sell goods to customers that are nearly universally unrivaled in their prices. And they not only sell them in their stores, but they also do so online and they help their customers have an even better diverse experience by allowing third-party sellers to sell to them as well. And then that's just really the gist of the entire business. It's not rocket science. Yeah. I couldn't have said it better myself, Sean. And you said something there that I think is pretty vital to understanding why Walmart is able to sell so much volume, which is that they are one of the cheapest options out there.

27:25If I do a little thought experiment, if I want cheap bulk goods, like foods that I can maybe throw in the freezer or if I'm hosting a party, then chances are, yeah, I'd go to Costco. I think purely as a low-cost provider, Costco is probably still the best option. But Costco has one problem that I think Walmart really excels at. When you just want day-to-day goods in a completely normal size, Walmart is going to be arguably the best option as a low-cost provider. If I want a bag of chips to snack on, I'm just not going to go to Costco because that bag will be about four times larger as a normal-sized bag from Walmart.

27:56If I want to gain weight, okay, maybe I go that route. But for shopping for things where I don't need a forklift or a ton of storage space, Walmart is the best option out there if you're price sensitive or even budget conscious. You also know that Walmart is physically there for you in a certain way, right? At almost all hours of the day, I can drive down the street and pop in to get what I need. And for as much as I do love ordering on Amazon, you very much need to use it for things that you don't imminently need in the next 24 to 48 hours. And so that's probably when I find myself going to Walmart most often is if I need something day of, or maybe at some odd hour of the day.

28:32And that's sort of how I think about it. But let's get to the nitty gritty here. Maybe you can paint some more color around how Walmart, for example, is able to sell things at such massive discounts compared to other stores like Safeway and Kroger and Target. Preston Pyshko, Jr.: Scale. Scale is the answer to that question. So written all over Walmart's disclosures is that they're very, very committed to helping their customers save money supported by things like everyday low prices and everyday low costs. They even have an acronym for both of these terms. So everyday low pricing is our pricing philosophy that develops trust between Walmart and its customers.

29:05So I'm sure you've noticed this before, Sean, but sometimes you go into a grocery store and maybe you're walking through the breakfast aisle, maybe you see a box of Cheerios that says it's on sale for, I don't know, six bucks down from a regular price of, let's call it nine bucks. But as you walk along, you remember seeing that exact same box of cereal a few weeks ago, not on sale for basically the exact same price as a supposed sales price. This is what Walmart means by building trust with its customers. Many places just change their pricing based on promos and are frankly just completely dishonest about what the normal price is.

29:36The second part about the equation is everyday low cost. So if Walmart were run in a way that caused cost to rise, well, then there's just no way they could pass those savings on to their customers and they wouldn't be able to take advantage of the same scale efficiencies. Yeah, those scale efficiencies are definitely the most obvious advantage. And the part about trust too, I think that also weaves in an element of brand power. Although I would say this is an advantage that's much weaker for Walmart given its incredibly high levels of scale. Of course, the Walmart brand is very strong, but that's really more to say about the level of scale that they operate at.

30:13And I think the interesting thing though about Walmart's scale is that this hasn't really led to them being able to improve margins at all over the last nearly two decades or so. And I think this is a little strange when thinking of scale, because you would expect scale benefits to continue to accrue to a company over time, and that there might be some more operating leverage for them to unlock. And in theory, as they scale, they could unlock growing margins while still relaying lower prices to consumers. That would be sort of the benefit. And yet the margin profile for Walmart doesn't really support that thesis at all.

30:48And gross margins are up a percentage point since 2005. And operating margins are actually down from 6 % to 4 % today. And when you're talking about hundreds of billions of dollars in sales, these small percentage differences are still worth billions of dollars in earnings. So I don't think we should underestimate the significance in that and write off of basically what is a one-third decline in operating margins. And my guess would be that there are hard limits on just how profitable a major retailer and e-commerce operation can be sort of firstly, but then also that intense competition has probably constantly weighed on them in this time, namely from Amazon.

31:27But still over this same 20-year period, if we look at Costco, Costco has seen its operating margins increase by two-thirds. So this is somewhat of a Walmart unique phenomenon. And at the same time, I would say the margins at Costco though are not so massive, right? They're still operating at low single digit percentages. And to me, that just shows how both of these companies are really operating on a razor's edge and they make plenty of money overall, but in percentage terms, the margins are nothing like, well, really almost any company that we've covered on this show. Most of the companies we talk about don't singularly draw their moat from economies of scale and scaled economies shared correspondingly, which is this idea of recycling almost all of your margin gains from scale back into lower prices for customers, which makes it almost impossible for anyone besides Amazon and Costco, and maybe to a lesser extent, a place like Target to compete with them.

32:23So I guess what I'm wondering is whether Walmart has basically recycled all of its margin gains that it would have accrued from scale and maybe more into lower prices for customers, which would in theory support revenue growth or in light of really intense competition, perhaps be necessary for them just to defend their market share. Right. And I think I'd agree with you that Walmart, specifically from a financial standpoint, hasn't directly benefited from their ability to scale explicitly, but I think it has absolutely benefited implicitly. Now, I recently revisited a really good article by Josh Tarasoff in which he discussed the concept of explicit and implicit conviction.

33:02So explicit conviction in investing is generally seen through numbers, you know, metrics and KPIs. So Walmart, for instance, has a return on invested capital of 16%, according to my calculations. And that is explicit conviction because that number exists. But implicit conviction is more subtle and hard to identify without a higher degree of maybe thinking and understanding. So Tarasoft gives the example that implicit conviction is evident when a company goes through maybe some headwinds, and you have to ask yourself whether you think they can come out well on the other side. That's implicit conviction.

33:32So building on top of this, I think we can kind of look at their economies of scales implicitly. For instance, yes, they're not improving their margins as a business scales, but what are they doing with the cost savings they get from buying larger volumes, which I think gets back to the question that you just posed. Instead of taking more of that margin for themselves, they're passing along to their customers and allowing them to buy their goods at a lower price, which is why they can run the whole everyday low pricing angle to begin with. And it just makes them, again, such a formidable competitor where we're not seeing that necessarily translate into massive margin gains, but also we can probably attribute to why they haven't had massive margin losses either as competitors take market share from them and there's sort of a deleveraging effect.

34:16And this is a concept I know we both have learned from Nick Sleep's letters. And so he was a really incredible investor for anyone not familiar. and he wrote about this idea of scale economies shared that we've sort of been alluding to. And instead of a company reaping the benefits of scaling and returning those benefits just simply to the owners of the business, they share them with its customers. And so Sleep evangelized that concept in his letters, but he didn't write about Walmart. He picked one of their competitors, Costco. And on price, I do think Costco is a final authority as long as you're okay with bulk sizing.

34:51It's about as good as it gets in per unit costs as a customer that you're going to find out there. But I do think the same idea could very much be applied to Walmart as well as Amazon. Yeah, I think that's right. Now, I'm going to go off on a bit of a tangent here, but I'll bring it back. So there's another advantage that Walmart has that's a little weirder to try and explain, but I'll give it my best shot. So imagine you're running a lemonade stand. Now, to make lemonade, you need supplies. You need lemon, you need sugar, ice, water, etc. Lucky for you, your supplier who supplies all those inputs is very, very generous.

35:23So they send you all the supplies you need, but only require that you pay for them, let's say 60 days after you get them. In the meantime, takes you about 30 days to run out of all of your supplies. So for a full month, you've already got the cash from all the lemonade that you sold, and you still haven't paid your supplier a dime. Now that's basically what Walmart does, but at a scale that's pretty hard to really grasp. So they sell stuff on the shelves and collect the cash before they paid the companies that supplied it to them. So in finance terms, this is referred to as negative working capital.

35:53And as of the latest quarter, it sits at about negative$27 billion, a figure that has been steadily growing over the years. And this is a very large advantage. So it basically means that suppliers finance much of Walmart's inventory on Walmart's behalf. And that means that they don't need to take on debt to finance this part of the business. Now, that's not to say that Walmart is free of any risk. So having that much leverage over your supplier means that Walmart has a ton of power in that relationship, which yes, is great for the most part. But it also means that you need to make sure that that relationship is very well cultivated as you most definitely do not want to blow it up.

36:28Yeah. It's an area I know Walmart is sort of notorious for because, well, their suppliers are not exactly thrilled about getting squeezed. So customers can have lower prices, but you can't really push back if you're a supplier because there's no other client out there like Walmart for you to sell to and for you to be able to sell the kind of volumes that you might be able to. And so negative working capital too is also really a pillar of a lot of great retail businesses from Amazon and Walmart to AutoZone as well. And we recently spoke about Alphabet, which is another company with a very wide moat.

37:02And one of the points we discussed was how wide moat businesses often spend a lot of time in court trying to tell lawyers and judges in the public that they're not a monopoly. That's sort of an idea that we learned from Peter Thiel in his book, Zero to One. And I do believe that there's some recent news from Pepsi that maybe we can use as a case study on Walmart's bargaining and oligopolistic power. Yeah. The PepsiCo case is a really good case study to show the kinds of advantages that I think Walmart has given its scale. So last year, the Federal Trade Commission opened a case against PepsiCo alleging price rigging.

37:36So specifically, they gave Walmart preferential pricing, which

37:51Now, to be fair, the case was eventually dismissed, but I do think it goes to show you just how powerful Walmart is with its suppliers. Because of just the sheer volume of goods that it can buy and sell, they can demand concessions from suppliers that smaller competitors simply just can't do and are never really going to be capable of doing. Or, you know, take Germany as an example. So Germany is a country that doesn't even have a Walmart today, but it did once have one. Now, Walmart's prices were so cheap that it was basically destroying smaller competitors who just couldn't compete with Walmart because of its cheap prices in Germany.

38:23So German regulators stepped in. They demanded that Walmart literally increase their prices so as to allow other businesses to remain competitive. And it worked from the regulators angle as Walmart ended up exiting Germany entirely. Wow. Well, that speaks to one of the potential downsides of Walmart. And as much as I'm thankful to have a Walmart nearby, my perspective would probably be different if I was a mom and pop retailer, right? I mean, I've seen plenty of small towns across the US where Walmart came in and pretty much immediately put maybe dozens of local stores at a business. And again, that's just capitalism.

38:59And as a customer, I am thankful to be able to benefit from that. But you can see why it rubs some communities the wrong way and why they get pushback in some places or in entire markets. Yeah, I can totally see it too. And it actually really reminds me of the small town in BC that I've been through multiple times called Merit. So if you pass through there and you need to shop for something, chances are basically you're going to head straight to Walmart. If you're looking for other shops and perhaps I haven't spent enough time there, they're actually really sparse. And I think that's because Walmart just is able to meet the town's demand on its own.

39:30So, you know, I do think Walmart is one of those businesses that you can argue isn't a win-win because the way they function is to just basically remove competition from the equation entirely. And since they can buy such large volumes from suppliers and secure these favorable terms, they basically create this ecosystem where it's nearly impossible to compete with them on price. And since they have so much scale, they can basically just pick and choose to make essentially zero margin or even a loss on specific items if they feel like that's going to choke out competition and bringing customers who are going to still end up buying other high margin products from Walmart.

40:03Now, I want to get off my high horse here, though, because I'm sure a lot of listeners are familiar with Munger's thoughts on Costco. And to be honest, Costco does things very similarly. So this problem of a large corporation stomping out the little guy most definitely is not just a Walmart problem. So I will say that Walmart clearly has some incredible economies of scale, but as long as they are going to continue to try to reduce prices, chances are pretty good that they're going to continue running into these antitrust issues in the future. So when I was doing my homework for today's episode, I went through the Walmart IR deck, and I had to admit that I liked what I saw when they featured two different capital efficiency metrics in their slide deck.

40:44And these aren't metrics that we traditionally focus as much on. I think the fact that they're in there at all is a great thing and shows that the management team is pretty devoted to allocating capital efficiently. And that's very promising. And Those two KPIs are return on assets and return on investments. And so the ROA, the return on assets is 8%, while the ROI, return on investments is over 15%. And I would give the return on investment number a bit more weight personally, but I do see why they look at return on assets because that is a business that has accumulated quite a few assets over the years with the majority of that figure coming from property and equipment as well as inventory.

41:26So it's a good measure of the efficiency of the internal operations of the company. Right. And I agree with your point there on the return on investment, but I think the important part is that they're just prioritizing capital allocation, right? Which I think is a pretty rare thing to see in businesses. So I ran my own calculations on the returns on invested capital for this business. And over the last three years, they have slightly exceeded 16 % each year. So I kind of think this validates that Walmart is a really high quality business. And while it's not a rapidly growing company, it's definitely the type of company that's clearly very well protected from competitors and probably will continue to generate shareholder value into the future.

42:03Now, in its former glory, Walmart was a business that could reinvest profits to expand its store count. So all stores are run by Walmart and they're a mix of completely owned and leased locations. But over the past four years or so, they've returned about 82 % of their earnings to shareholders through things like dividends and share purchases. So as you can probably guess, with Walmart only reinvesting about 18 % of their profits back into the business, reinvestment opportunities are limited. And since 2022, they've expanded their store count by 369, or a very modest kegger, which is below 1%.

42:35Now, they're still expanding on CapEx, with fiscal 2027 coming in at around$26 billion. But just to give you a picture of how much of this is going into new stores, in fiscal year 2026, they spent less than 10 % of CapEx on new stores and clubs, with the bulk of those investments going into things like supply chain, e-commerce, and store remodels. I'm not under any illusion that the Walmart growth story is fully saturated. I think over the past year, they've added nine units in the US, which is actually fairly solid. And the international story though, is where all the growth is. And they've added 192 locations outside of the US year over year.

43:13But more than anything, I think Walmart is primarily more focused on generating more revenue from existing customers than new ones, hence the rise of their membership program, Walmart Plus. Yeah. And that sounds right to me. I think continuing investments will be in things that just keep customers coming back. So the KPI that you can look at that deals with this is called same source sales. So I'd like to touch on the buybacks here though, as they've been very well done over the last few years. So yes, you can argue that Walmart has been lucky. And since they currently trade at just 20 % below their all-time high, any buybacks would have ended up being value accretive, assuming that they had done it at an earlier time.

43:51But the numbers are very, very good. So over the last three years, they repurchased shares at an average price of $95,$73, and$51 versus the current price of$107. The reality is that retail can only take you so far. And believe me, it's taken Walmart very, very far. But Amazon got into streaming and cloud computing and then MercadoLibre, which people refer to as the Amazon of Latin America. They got into FinTech. And so the big question for me about whether Walmart can be maybe an incredible compounder for decades to come, I think that to some extent boils down to their ability to redeploy their profits from the retail business into new higher margin businesses.

44:29And I'm completely speculating about whether they will try and do that. But the advertising is sort of adjacent to their existing e-commerce operations and they've had some success there. But really, I'm wondering if they can prove that they're able to reinvent themselves in the future in ways that companies like Meta and Amazon and Microsoft have done. And so the returns of capital to shareholders is nice for generating returns in the intermediate term. But again, they need to do something more bold, longer term with the cash they're generating, which fortunately, they do generate a lot of cash.

45:02And with all the cash they spit off, they also don't need much leverage to be able to operate. And given Walmart's conservative business model that really relies on cutting costs everywhere possible, I assume that they tend to stay away from debt and they don't want to pay that interest financing. Yeah, this is interesting because my gut reaction would be that this business would carry very little debt. And while I wouldn't consider this to be an overleveraged company by any means, they do carry some debt. So currently total debt is around$40 billion. Now, while this is a large absolute number, you have to remember just how large of a business Walmart is and how much cash it generates.

45:39If you look at it from a net debt to EBITDA basis, their leverage ratio is less than one. So not really any issues there. And if you look at it from a pure free cashflow perspective, which I think is probably even better than using EBITDA for this business because it accounts for working capital and capex, it's still within reason at just 2.6 times. One interesting factoid I learned when reading their covenants is that things are quite flexible for them. And they don't really have any covenants that restrict their ability to pay distributions to shareholders, for example. And so basically, they have very shareholder-friendly debt terms.

46:11Yeah. And this kind of pales in comparison with Domino's Pizza, which we covered a short while back. I remember you telling me that you thought it was very concerning just how much recourse debt they had over things like royalty payments. Well, Walmart doesn't have the same issue simply because they just have so many assets and its ability to cover its debt payments really isn't in question at all. Now, another bonus for Walmart in general is that since it doesn't have these overly aggressive growth plans, there's a very low probability of any new financing deals being announced that could further dilute shareholders.

46:41And given their history of buybacks, well, this shouldn't really come as a surprise. They've reduced the share count by 18 % in the last two decades, and it doesn't really look like it's going to stop reducing that count anytime soon. This is another really good boost from high family ownership as the Walton family just continues to see its own ownership stake increase with time. Let's take a quick break and hear from today's sponsors. Curious about online trading, but haven't taken the first step yet. You're not alone. And Plus 500 Futures is a great place to start. The futures markets are moving fast.

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47:48Trading and futures involves risks of loss and is not suitable for everyone. Not all applicants will qualify. Plus 500. It's trading with a plus. Every week we analyze companies on this show and ask the same question, is management actually running this business efficiently? Here's the honest answer for most companies right now. The ones pulling ahead are the ones putting AI to work on the everyday stuff. That's exactly what NetSuite Next was built for. NetSuite Next surfaces insights exactly when you need them. It puts agents to work on routine tasks and problems, and it lets you ask complex questions in plain language, like talking to a knowledgeable colleague.

48:22But technology is only part of the story. AI is also reshaping how people and teams work together, and that shift is already underway. Expert created business guide in your hands today. It's called Aligning for the Agentic Era, How AI is Changing Everyday Work. And right now, it's yours absolutely free. Inside, you'll discover how AI could reshape work across your entire organization and how to position your business to prosper from it. I use this and you should too. If your revenues are at least in the seven figures, get our free business guide aligning for the agentic era, how AI is changing everyday work at netsuite.com slash TIP.

49:01The guide is free to you at netsuite.com slash TIP.

49:08This September, I was in New York for the Intrinsic Value Conference. The talks were great, but what I kept thinking about is what happened around them. On Friday night, about 20 of us crowded around a long table at a family-style Italian spot near Times Square. Saturday, we did it again. And Sunday morning, a group of us were still debating Socrates over breakfast before everyone headed home. Many of the people at those tables had only known each other from our calls in the Mastermind community. That is the community I host with Kyle Grieve and Daniel Monka. Each week, we get together on live calls to dig into markets and individual businesses.

49:46We bring in fund managers, operators, and authors as guest speakers. And a few times a year, like New York this fall and Omaha every spring, we meet in person. If you want to think in decades alongside people who do the same. Apply for free at theinvestorspodcast.com slash mastermind. If your application stands out, I'll be the one to reach out to you personally. All right, back to the show. What effectively happens when you shrink the share count is that you increase the size of everyone's slice of the pie. So if you're a shareholder and the share count reduces, well, congratulations, your percentage ownership of the company has increased.

50:23And so compared to some of the most potent share cannibals of the 21st century, Walmart does not rank that highly up the list in doing buybacks compared to say AutoZone, which is actually the second time I've invoked that company during today's episode. But nonetheless, their share count is moving in the right direction for a company that has pretty limited growth opportunities to reinvest in at the moment that are visible to us as shareholders. And so my concern is that they're basically buying back stock at 30 or 40 times earnings, which just means they're paying a higher price to retire stock than you might otherwise expect for a retailer.

51:01So each dollar of buybacks doesn't necessarily go as far as it could. And if you look at going back to 2012, Walmart stock has compounded at almost 12.5 % a year, which is really impressive. But But then you see that almost all of that is multiple expansion. The PE has compounded at 11.5 % a year, and actually their earnings per share has only compounded at about 4 % in the last 15 years. So basically, the market went from paying 12 times earnings to 38 times earnings for Walmart, while earnings per share growth has actually been very anemic. So I think that's just sort of an interesting point when you think about the buybacks that they've been doing and whether they're getting a good price on the stock that they've been repurchasing in the open market.

51:48And one other thing we should talk about is that Walmart has made some acquisitions in the past. And one of the bigger names was Jet.com, and they purchased that for$3.3 billion in 2016. But by 2020, just four years later, they'd ridden off the full amount of that investment. So, oops, that's a pretty costly blunder. And I know you're a bit of a stickler for capital allocation, Kyle, you're very unforgiving of companies that make these kind of big mistakes. So I definitely want to hear your thoughts on the deal and whether they've made any other big mistakes that would make you want to rule out Walmart as an investment.

52:23Yeah, absolutely, Sean. So I think just first, I want to comment on your point on buybacks there. I think that, yeah, obviously that is an optically high price, but perhaps it means that management views that 30 to 40 times earnings range as being a reasonable multiple. And if they can continue growing at current rates, the market will probably have a similar feeling about this business in, let's say, five years time, in which case the buybacks probably will be value accretive. But obviously, that's up to you, the listener here, to decide if that's a reasonable price or not. So getting back to the point that you just made on capital allocation, yes, Sean, you're completely right.

53:00I am most definitely a stickler. If I find a business that does a capital allocation move that I don't really like, to be honest, that's usually enough for me to either just sell the business entirely. Or if I'm evaluating it, if I find something I don't like, I'm just going to be like, I don't like the business. And that's that end of story. So, you know, when I initially looked at the jet.com deal, I definitely got a little bit of that icky feeling because at its face value, it's a pretty bad deal when you consider that they had the full write-off. But when you think you really dig down, this deal was actually pretty good for Walmart.

53:33So you have to remember to look at this deal with a little bit of context. So Jet.com's owner was a man named Mark Lohr, who sold diapers.com to Amazon for half a billion dollars. He then spent a few years inside of Amazon's e-commerce arm, learning the intricacies of that business. Then he started another venture. So I think the Jet.com deal was a way for Walmart to basically acquire Mark Lohr, who clearly was insanely valuable for scaling Walmart's kind of struggling e-commerce business. So he rapidly brought tens of millions of Walmart products online. And as a result, the e-commerce segment grew absolutely spectacularly.

54:06Much of Walmart's e-commerce success today can pretty much be tracked to lore. So while this deal does look very meh because of the write down, it was more of a smart hire strategy dressed up as kind of an acquisition. Now, the other acquisition that I'd mentioned is Flipkart, an India-based e-commerce company, which they purchased in 2018 for about$16 billion. So with international e-commerce continuing to grow over 20 % annually, I think it was probably a pretty intelligent use of capital as well. Flipkart allowed Walmart to just immediately have a presence rather than building from scratch in India.

54:38So overall, I think Walmart's capital allocation is quite good. I think the decision making becomes kind of easier for a large business like Walmart, simply because they have these limited reinvestment opportunities. Now, while the shares do seem overpriced, the buybacks have been value accretive. But again, you have to kind of make your decision into the future if you think that the current buybacks make sense or not. It's a tough situation to be in. They don't obviously have a successful playbook for acquisitions that they can keep rolling out, right? They're not a serial acquirer. And then, like I said, buying back their own stock only goes so far when you're trading at such a premium to the market, which is why I say they may need to look into new ways to dramatically diversify their business.

55:21But that also cuts both ways. They're going to try and find their own version of Amazon's AWS success and expanding into a completely different area from retail. Expanding outside your circle of competency is just very difficult and can get people fired if done wrong. There's a lot of careers to it. It's very easy to say, well, we're Walmart, we're going to keep doing what Walmart does, as opposed to saying, we're going to do something dramatically different, but also some sort of innovation here is really needed to break the corporate stagnation cycle. So we just spent some time looking at management's capital allocation decisions.

55:55So let's also look at their track record in more detail, as well as whether you think they've organized this incentive structure very well in a way that creates value alignment with shareholders. Before I get to that question, I just want to address the points you just made about innovation. It's interesting because Walmart obviously is this really big innovative company. At least Sam Walton, in his DNA was this kind of innovator who did all sorts of new things. But I think the big difference towards Amazon, whereas is that Amazon, it's in their DNA to try new things that are really, really big and not necessarily directly connected to the core business.

56:32So whereas Amazon basically invented AWS because it was just kind of a ball to throw at the wall and see if it would stick. Obviously, they've had a lot of failures as well. I don't really think that's in Walmart's DNA. So it's probably going to be a lot harder for Walmart to try to innovate themselves to continue to grow over time. But maybe I could be wrong. And maybe that's why some of these investors are giving it the high multiple. Now, getting back to your point on management here, I've often discussed how great businesses tend to have these really, really strong cultures. And one hallmark of a great culture is that they promote from within.

57:05So, you know, if you spent 20 years working in a business and a position that maybe you've spent your entire career trying to achieve opens up and you're passed over for an outsider, well, you know, that's a pretty tough pill to swallow. So it's really great to see that in Walmart's case, the current president and CEO, John Ferner, has been with Walmart since 1993, working just simply as an hourly employee when he first started. And since then, he's worked in pretty much every role that you can think of, eventually serving as a president and CEO of Walmart US. Now, during that time, Walmart US has had decent, but I would say not spectacular growth of about 5.5 % in both revenue and operating income.

57:42But as I pointed out earlier, the US is really saturated at this point. So I don't think these growth numbers are necessarily an indictment against Verner. I think Verner doesn't have a long enough track record of CEO, obviously. He's only been in the position since the beginning of 2026. So I would definitely say it's really early to try and get a read on him. And I think if we check back in another year, though, we should have something of a clearer view of whether he's been able to add some value as the leader of Walmart. And if you think of a business like a basketball team, you can't really treat them the same.

58:16If an NBA coach comes in and the team only wins a quarter of its games, then there's a good chance that the coach is going to be fired because they have a lot of really influence on exactly how that season unfolds. But in business, it's like a cruise liner. It's really hard to turn it and make big changes to these massive, massive conglomerates. So in business, especially for companies that are more mature and long-term oriented, it's just harder to place the blame on the leader in short-term timeframes in the way that you might do with maybe an NBA season. Sean knows that the key to my heart is basketball references, but I think you're totally right.

58:54And honestly, even in NBA, if a coach were to win, let's say 20 games, which is about a quarter, but that team is rebuilding, well, that still might be actually seen as a step in the right direction. Now, in Walmart's case, I see John Furner as a coach taking over an already very well-established team. He doesn't have to really improve them drastically, but he needs to continue developing the players and just getting as much out of the players that he already has. Furner only has a few conference calls to draw conclusions from, but he had one really great quote that I want to share with you here from the latest earnings that I think shows that he's a long-term focus CEO.

59:26So he said, we're not managing our business for one quarter. We're managing our business on a multi-year basis to play to win. Now, over the past few quarters, Walmart has been reinvesting into itself, which has helped create a little bit of margin compression. But I think he feels that that's the right strategy to continue growing this company into the future. It does look promising. And I don't think he's going to be a visionary like Bezos or Musk, but at this stage of their growth. I also don't think that's what they need to accomplish the goals that they currently have set out. Right now, they need a great operator.

59:56They need maybe somebody more like a Tim Cook than they need a Steve Jobs. Unless, again, they want to kind of find their own version of AWS, which I keep speculating about today. This sort of really dramatic pivot that could allow them to become one of the great business titans in America, more so than they already are. But how do you think about their alignment, though. I mean, you mentioned that the Waltons own a ton of Walmart stock as the family has just continued to pass on shares across the generations. And so I think that's generally a pretty good thing, but how involved are they in Walmart's day-to-day operations?

1:00:34I hope that they're not interfering too closely. Right. So through the Walton Enterprise and the Walton Family Trust, they own over 50 % of Walmart shares. Now, getting to your point about the day-to-day operations, it's really not that much. So there's one Walton, Stuart Walton, who is actually Sam Walton's grandson, who's on the board. But other than that, they don't really run things, but do have much of the voting stake. Now, as for insider ownership outside of the Walton family, it's not that amazing. So insiders in the board own just a fraction of a percent of Walmart shares. But since the founding members of this business aren't really around, that's not that big of a surprise.

1:01:08Plus the business, you know, it has a market cap of$840 billion. It certainly makes sense how the Walton family has stayed so wealthy. You have to give them a round of applause for holding such a large stake in the business for so long as well. And they've escaped, I think, the standard tendency to just spend everything and actually have been able to truly create multi-generational wealth. But outside of the Waltons, then how does the compensation that management is getting look? Yeah. So unfortunately, this was kind of the first part of the business that I wasn't too happy about. So total compensation for executives when factoring in total compensation above their base salary seems pretty high.

1:01:48So in 2026, CEO John Furner made$27.3 million and other executives just weren't really that far behind him in terms of their comp either. But let's at least get some context here and look at how these incentives are achieved before we pass too much judgment. So the proposal that was approved in the latest proxy called for 82 % of compensation to be performance-based. Now that's definitely a step in the right direction. So the goals were based on things like operating income, sales, and ROI. Now I would say this is a pretty strong incentive program. I think that if management hits targets for all three of these metrics, and they have goals that are higher each year for the revenue and operating metrics, and maybe just static for the ROI, it would be pretty hard to see how over a multi-year time period, shareholder value is not going to increase at the same time.

1:02:33So I'm looking at the chart that you shared with me, and it looks like much of the compensation comes from stock awards that will dilute shareholders. But then again, that dilution rate isn't that bad at around 1%. But the share count has also been able to steadily reduce by 1 % CAGR over the last decade or so. So it does seem like the trend and net share count declining will continue to go on. And actually, if the stock sold off and they were able to do buybacks at a cheaper multiple, it would probably go much faster in their ability to retire more shares, which would be a pretty good situation for shareholders to be in.

1:03:11But this does assume that the elevated spending that they've been doing, where we've seen their operating margins fall over the last two decades by a third, doesn't eat into their ability to deploy capital into buybacks going forward. Yeah. And that's a really important note because this definitely is a business that has to spend money to continue growing as well as to just maintain the business. So depreciation and amortization for the business are currently running at about$58 billion annually. So this is definitely a business that does require quite a bit of capital to keep everything running smoothly.

1:03:44Walmart has made about$735 billion over the last year. So they're pretty safe from that standpoint. It's worth noting that CapEx as a percentage of sales has ticked up slightly over the past few years from around 3 % in 2024 to about 4 % in the latest earnings report. There are a few reasons for this. So Walmart has expanded its CapEx into new stores, remodels, and international expansion. The international expansion area is definitely interesting as it's been growing very well and could provide significant future growth since that US segment has been largely saturated. I could very much see a scenario where that 4 % number is the new norm for CapEx as a percentage of revenue.

1:04:21And if you look at Sam's Club, it seems to be doing well. So that's been a growth lever. And then you have the fact that Walmart Plus seems to be doing well too, meaning that fulfillment centers will become another area that Walmart will need to spend on if they want to continue growing the segment and their loyalty programs and volumes, especially in e-commerce. And then also looking at Walmart International, we do know that this is comparatively pretty small compared with the US segment, but you did say it's a fast growing segment. So is that an area that they're spending a lot more on as well?

1:04:55They are, Sean. And I think that's a really smart move. So they've been expanding internationally now for decades and have some really, really good insights into those international markets. So over the last 12 months, they've opened about 200 international stores. And since 2023, Walmart International's compounded revenue at about 9 % per annum. So Walmart's presentation cites kind of these two locations in China and India as major drivers for international growth. So in China, this would be from actual Walmart locations. And in India, since Walmart owns Flipkart, they had this kind of large e-commerce presence there.

1:05:27Walmart discloses some of its international revenue and China has been a major growth driver with about a 20 % revenue kegger over the last three years. So I'd say it's a very good sign that they are investing in these areas where consumers clearly are validating that they like their offering. What about their Walmart Plus membership program? How meaningful of a growth engine do you see that to be in adding revenue for them? Yeah. So I think it's decent. Membership for your revenue has grown well. It's grown at a 21 % kegger since 2021, but the revenue from the segment is still less than 1%. So it's pretty hard to see what kind of growth driver this business can really, really be over the long term.

1:06:04I think the other real growth driver for this business is in e-commerce. So with global e-commerce growing sales at about 23 % and representing a quarter of Walmart's revenue, that's a growth segment that could easily help move the needle for Walmart. The other growth lever in the e-commerce business is that its margin profile is probably going to be superior to that of the brick and mortar business. So this means that if we continue to see a larger share of revenue from the segment, we could also see some operating leverage over time. Well, if you look at Walmart's growth trends over the last few years, we have seen some acceleration, right?

1:06:36They were kind of pretty flat for a period of time and the business has picked up again and it's growing at 6 % year over year, which is not massive, but it does tell you that some of these growth levers are really starting to contribute meaningfully. And I'm still not sure these levers will get the business back to double digit growth rates, but having mid to high single growth rates for years going into the future, that would be seemingly somewhat doable. And as the business scales up into this e-commerce segment and relies less on their physical locations, that could create some operating leverage, but also it's going to create new sorts of risks for them as well, because retail is really the bread and butter of Walmart and definitely a major part of their DNA.

1:07:21It is. But we have to remember that e-commerce isn't really a new segment for Walmart. If they decide to build their own autonomous vehicles or get into AI data centers, I would probably be pretty concerned. But e-commerce is, I think, a logical adjacent business for Walmart that I think they have validated as a working, growing, and highly profitable piece of their business. So the largest risk that I personally see for this business probably lies in labor costs. So we have to remember that Walmart does operate on these very, very razor thin margins. And any increase in expenses beyond its control would mean that the business would face some very, very big hurdles that it has to overcome.

1:07:56So here's the potential risk with labor. There are multiple pressures working simultaneously. You can call it a Lollapalooza effect if I'm borrowing from Charlie Munger that could potentially work against Walmart. So first is that labor markets are tightening. This means that wage growth could outpace inflation. Second, unions, just they're not going away. So Walmart already has employees in Canada who are in unions, although the US has made it out unscathed so far. Third is that healthcare costs are continuing to rise and Walmart will need to continue hiring more people and then taking care of their healthcare needs.

1:08:26And then you have the fact that if these labor costs rise, it becomes harder and harder for them to pass the savings on to your customers, making competitors like Amazon more likely to steal their market share. Robert Leonard Unfortunately for Walmart, if they're struggling with labor costs, then Amazon is also going to too. But I do get the impression that Amazon's warehouses are much more automated as a share of maybe the total business, right? Just because we know that Walmart has such a large physical footprint manned by lots of employees working those stores. So that may actually be something of an advantage for Amazon comparatively.

1:09:01And then And this business has some pretty high fixed costs already too, as you discussed, right? Depreciation and amortization take up 8 % of revenue. So it's like having an expensive car, you know, it costs a lot of money to maintain and it depreciates over time. And that can be really significant when you have all these stores and warehouses, you have to account for the fact that you're going to need to replace them, or at least there's going to be serious maintenance work that you need to do. And so even if this year it's a non-cash expense, you're not making major renovations to those warehouses and stores, eventually you will have to.

1:09:34And so that's sort of what that line item is meant to reflect. Right. And kind of getting to your point back there on automation, I think that will probably help here. Walmart has actually been automating for years now, but even with that automation, they're still facing these labor inflation costs. So most normal businesses could maybe solve this by raising their prices, but obviously that flies in the face of their focus on these everyday low prices and violating that brand promise could lead to losing customers. And that's something that I don't think that they're willing to do. So the second risk that I'd outline here relates to issues that AI is creating with finding the best possible deals out there.

1:10:07So the switching costs to switch from, let's say, Walmart to Amazon are basically zero and AI isn't really helping Walmart's cause. So let's say we use an agentic tool that can help with things like product search, discovery, advertising or purchasing. So these agentic tools are probably out there and they're going to continue to improve, which is going to make customers e-commerce shopping even more efficient. And this causes a few risks. First, it may be able to find better priced or sale items from other e-commerce companies. Second, it reduces the need for customers to access omni-channel experiences through Walmart's physical store and websites, which would then have the effect of cutting down on Walmart's ability to monetize customers via things like memberships and advertising.

1:10:49It's a pretty interesting risk to think about. it. If I wanted to, let's say, buy my favorite brand of laundry detergent when I don't have time to get it, but I do need it ASAP, I could go to Walmart or Amazon's website, or I could try using an AI agent through maybe Claude to search for me. I could just ask it to find me the cheapest detergent with same-day shipping, and then the agent doesn't care who offers it. And if another company offers a sale or faster shipping, it can dig through the internet and find that for me. And so then Walmart would lose my business. And so it sort of takes the customer relationship out of their hands if everybody's shopping through ChatGPT and Claude and AI agents.

1:11:30And even further, it commoditizes, I think, certain types of shopping on the internet, which is going to put Walmart in a tough position. I have my doubts about whether we'll all be shopping with agents, but there's certainly a lot of people who think that that is very possible. Exactly. So I personally don't feel too comfortable with agentic buying yet, but I could see that changing quickly once I have some family or friends who try it out with success and share their good experiences with me. But until then, I'm probably just going to log on to something like Amazon or Walmart to buy most of my stuff.

1:11:59If I have to pay 10 cents extra, so be it. So the final risk I'd share relates to Walmart's supply chain. In the latest Walmart earnings report, the company reportedly received about$2.9 billion in tariff refunds. So this means that they were clearly affected by the cost side of tariffs. Walmart discloses that most of its imports do come from China, so that threat really isn't going anywhere. And with the current state of US-Chinese relationships not being so great, to put it mildly, tariffs will continue to be an issue that could affect Walmart's business. On top of that, any geopolitical issue between China and US would certainly force Walmart to have to source its merchandise from other countries.

1:12:38And I'd assume the prices on those products would be higher. Otherwise, Walmart would already be using them as a supplier and not having to worry about the potential effects of tariffs. So I don't really think any of these risks are existential by any means at this time, but they could definitely cause Walmart some real pain in the short term if they were to worsen. I agree with you there, but still, you got supply chain and tariff uncertainties. You've got agentic AI shopping. You've got labor tightness. You've got these buybacks at a premium, which can kind of squander away cash and maybe not be the optimal way to create intrinsic value.

1:13:13You've got maturing growth in the US, competition from Amazon in particular. It just does feel like a business that's facing a lot of challenges, even though we sort of mentioned earlier that it is a great business and its simplicity and it's sort of self-evident. But then again, still, that does not mean that they're completely anti-fragile to all of these different threats that could be weighing on the business, especially when you're buying it at nearly 40 times earnings, right? If you're buying it at 10 times earnings, you'd say, well, I think a lot of these concerns are more than priced in.

1:13:48At 40 times earnings, you're thinking, hey, there's not a lot of wiggle room. If things don't go perfectly well and more than beat Wall Street's expectations in the coming quarters and years, there's a real chance that the stock lags the performance of their underlying revenue and operating earnings growth. So I think on that note, we should take a moment. And I think it's that time of the episode where we should go over the intrinsic value of Walmart. So maybe let's start there with your kind of high level view of the business's value. Yeah. So I think I'd echo your points there on the evaluation part totally.

1:14:21But I will say that Walmart, if we take the evaluation part out of it, it's just a really, really interesting company. I really see the benefits that the business has in scale. And as they scale up, chances are that prices will remain very attractive, probably more attractive for shoppers looking for the best possible price. It's going to be hard to find an everyday low price from somewhere else. And while they are in a highly competitive industry, it's just nearly impossible for any competitor to compete with them on price, just because chances are they're never going to have the same scale that Walmart currently has.

1:14:50Amazon and Costco are the two closest competitors, but I think there's room for all three of them to succeed. Since Walmart can order such large quantities of merchandise, they get bargaining power over their suppliers. This is going to help them continue to offer customers low prices that make it even harder for low price competitors to even attempt to compete with them. So I really like Walmart's competitive advantages here. I doubt they're going to really go anywhere. And with its growth drivers coming from things like e-commerce and international, chances are they're going to continue to grow for years to come, albeit at kind of these mid to single digit growth rates.

1:15:21So with all that said then, is there a number here that you land on for the intrinsic value of Walmart? For my base case, I assume that Walmart can grow its revenues at around its historical average revenue growth rate a touch below 5%. You don't really have to make any heroic assumptions for this number to hold. So US same store sales need to hold steady somewhere around 4 % to 5%. International would continue to grow in the high single digits as well, which seems all quite reasonable to me. Now for the net margins, I increased them a touch over the next five years to a little over 3%. This was a harder part to model for because we simply just don't get that much information from Walmart's disclosures as to what kind of numbers are behind their higher margin revenue segments like e-commerce, advertising, marketplace, and fulfillment.

1:16:01So they are clearly growing really fast, but we don't know what the margins are or where they need to be to generate consistent profits. So I'm okay with this number, but it could be adjusted once more information is disclosed. Now, as for the exit multiple, Well, I ended up using 20 times. And yes, that might seem high for a business growing at 5 % with negligible margin expansion. But I think it reflects the market's optimism for an admittedly durable business with very, very good capital efficiency. So with all this, I get a price of about$78. 20 times earnings for a five-year exit multiple probably isn't too crazy and maybe even conservative based on how the market has been valuing Walmart in recent years.

1:16:39But definitely longer term, a mature retailer could probably trade at an even lower multiple. And unless they find some ways to, again, dramatically reinvigorate growth and reimagine their business, which I haven't seen any evidence of them being prepared to do. So how widely does the value of the company shares fluctuate when you compare the bull case and the bear case between them? Yeah. So if I factor in my bear and bull case, add in a 15 % margin of safety, I actually get an intrinsic value of about$50, which is less than half of the current share price. So I think it's clear to both of us that Walmart is a great business, but as Charlie Munger famously taught Warren Buffett, you want to buy a wonderful business at a decent price.

1:17:20And in my view, Walmart is a wonderful business, but at its current price, I'm just not interested in being a shareholder. I'll keep shopping there though. So even in my bull case, without the margin of safety, you're making just a 1 % return. And sure, you can add in the 1 % dividend yield to the returns, but it still just doesn't really change the fact that you aren't really even beating inflation. Perhaps it would be defensible if you were making a 5 % dividend yield with a really low return, but I just can't really see any other way of justifying owning this business. So I will say if the business dropped to$50 or even further below$50, I would probably get interested as a simple multiple expansion play on a really, really high quality business.

1:17:59But as it stands, this is just a wonderful business at a price that I'm sorry to any shareholders out there, but it's pretty abysmal. I wouldn't want to be competing with Walmart. I know that very confidently. And I'm very happy to be a customer of Walmart. But do I want to be a shareholder at today's prices? I don't think so. I'm in agreement with you there. I just don't see the growth prospects for how you justify 38 times earnings. And there's enough challenges facing the business that again, I'm not inclined to pay a significant premium relative to the S &P 500, which is already historically richly valued just looking at the numbers.

1:18:34So for me, it's been a great case study today. It's been fun, but definitely one that I'm happy to pass on. Well, that's all we have for you today. And as usual, I'd like to share a quote with you before we let you go. This one is by, no surprise, Sam Walton. So he said, there's only one boss, the customer, and he could fire everybody in the company from the chairman on down simply by spending his money somewhere else. I think this is the key to Walmart success. They focus on doing everything they can for the customer. And as far as I can tell, they're still doing that really, really well. That's all we have for you today.

1:19:04And we'll see you next time. Thanks for listening to TIP. Follow the Investors Podcast on your favorite podcast app and visit theinvestorspodcast.com for show notes and educational resources. This podcast is for informational and entertainment purposes only and does not provide financial, investment, tax, or legal advice. The content is impersonal and does not consider your objectives, financial situation, or needs. Investing involves risk, including possible loss of principle and past performance is not a guarantee of future results. Listeners should do their own research and consult a qualified professional before making any financial decisions.

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