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

The Investor's Podcast (We Study Billionaires) - The Investor’s Podcast Network

The hosts conduct a deep dive into Walmart's evolution from a discount retailer into a diversified e-commerce and services powerhouse, examining its scale advantages, capital allocation strategies,

Key takeaways

• Sam Walton's early franchise experience taught him to trade lower margins for higher volume, a strategy still reflected in Walmart's ~20% gross profit range today.
• Walmart generates negative working capital of approximately $27 billion, effectively allowing suppliers to finance much of its inventory without debt.

Main topics

• Walmart's historical evolution and Sam Walton's founding principles
• Revenue diversification beyond brick-and-mortar retail

Notable quotes

There's only one boss, the customer, and he can fire everybody in the company from the chairman on down simply by spending his money somewhere else.

Conclusion

The episode provides a thorough breakdown of Walmart's operational moat and strategic

Transcript preview

Speaker 1 (0:00) You're listening to TIP. Speaker 3 (0:02) Welcome back to the Investor's Podcast, episode 850. Today, we're going to look at a business in an industry we've largely stayed away from, which is the retail wholesale industry. Now, Walmart is arguably the most well-known business in all of North America. If you've ever lived here or traveled through, you know exactly what Walmart is. Cheap stuff, lots of selection. You can get pretty much anything you want, from socks to TVs to bananas, all under one roof. Speaker 2 (0:26) But here is where things get interesting. When you sit down and really think about what Walmart is doing today, it's clear they've added services to help improve their ability to get products to their customers as fast and as conveniently as possible. Speaker 3 (0:38) And Speaker 2 (0:39) that's why I Speaker 3 (0:40) really wanted to dive into this business. The business is doing all sorts of things in e-commerce and memberships that are improving their scale advantages even more, which is super impressive given Walmart's already very large scale. But I will say I've had some nagging tension with Walmart. pretty much the whole time I was doing my research on this business. Now, it's clear that Walmart is a very good business, but the stock is priced like a tech business inside of the Magnificent Seven. So I kept asking myself, is this actually a business worth covering on the show, given how expensive it is? Speaker 2 (1:07) And I think the answer is most definitely a yes, but maybe not for the reasons you'd think. What I found most fascinating about Walmart is that the market and lots of institutions seem to see Walmart in a different light from how we think about it. So we wanted to better understand if there was something we're missing. Speaker 1 (1:26) Since 2014, with more than 200 million downloads, we have interviewed the world's best investors, studied deeply the principles of value investing, and uncovered many compelling investment opportunities. We focus on understanding businesses and intrinsic value, investing accordingly, and sharing everything we learn with you. This show is not investment advice. It's intended for informational and entertainment purposes only. All opinions expressed by hosts and guests are solely their own. and they may have investments in the securities discussed. Now for your hosts, Sean O'Malley and Kyle Grieve. Speaker 1 (2:12) I Speaker 3 (2:12) want to start this episode by discussing a tension I had while making this episode. Walmart is a business that is pretty ubiquitous. I think anyone listening to this who lives in or has traveled in North America is going to be very, very familiar with Walmart as it's Speaker 1 (2:25) a Speaker 3 (2:25) very, very well-known American institution. I knew that, and I've always wanted to kind of dive into Walmart just to better understand the business itself. Because a lot has changed since Sam Walton was flying planes over potential new Walmart locations. But the tension I had had nothing to do with Walmart's quality as a business. A quick glance at some of their capital efficiency metrics shows a very durable business. And this business has been in retail since 1962 and has scaled significantly since then, making it clear that it's a very, very good business. So my attention really came from Walmart's stock. So it's a business with a rising price to earnings ratio that at a glance, I just don't really think is very well deserved. So as of writing this, it's trading on a trailing PE of about 38 times. Now, if we were discussing Walmart in its earlier years when it was doubling its store count every few years or so, sure, I could see that valuation being justified. But as of now, with a store count compounding at less than 1 % over the past few years, I just found it really hard to figure out if this was a business worth covering on the show. Speaker 2 (3:26) I remember you voicing some of those concerns to me. telling me it would probably still be a good exercise and doing a case study on really high quality businesses, because I do agree with you. Walmart is really as high quality as it gets in some respects. And it's had some very good periods where it provided shareholders with credible opportunity to compound returns. But given how much the stock is held by these institutions, I do think it's important to at least try and see if we can figure out what they're finding so attractive about the company and whether you and I are missing anything. Because even with this hefty, nearly 40 times earnings multiple for a retailer that is at more mature stage of growth, many of these institutions are still holding on to their shares in Walmart. Speaker 3 (4:12) Well, if institutions are staying in, there's clearly someone out there who thinks there's more to Walmart than there's very, very high multiple suggests. And speaking of shareholders a little more broadly, Walmart is one of those businesses where it's actually primarily Walton family members who benefited from owning the company's shares rather than just outside investors. And they've done exceptionally well with seven Walton family members becoming billionaires primarily due to their ownership of Walmart stock. So Walmart is a fascinating business to me because it has created so much value for the Walton family who clearly were set up to be very, very good long-term investors. But another reason that Walmart is interesting is just how the business has changed. So quick question for you, Sean, when you think of Walmart, what really just pops into your head? Speaker 2 (4:54) Low prices and Speaker 3 (4:56) probably a retailer with lots and lots of scale. And that's exactly what I would have said as well. But Walmart surprised me in a lot of ways with just how the business has kind of kept up with the times. So when I first analyzed the business, I felt like I was looking at a more modern retail slash e-commerce business with these multiple revenue streams. I think that's probably part of the reason why the market is giving them this kind of premium multiple. This isn't your typical brick and mortar store. They're making money from multiple angles, including retail, of course, but also from things like e-commerce, marketplace, pickup and delivery services, advertising, and then from membership fees as well. So while Walmart at its core, Speaker 2 (5:32) yes, Speaker 3 (5:32) it is still a retailer with a lot of scale, it's a business that has clearly diversified its revenue streams to try and continue to grow the business into the future. Speaker 2 (5:40) When you see all these different strategies that they've taken to diversify, it does really make me think of Amazon. And I mean, it's much less. diversified than Amazon overall, but Walmart looks like they've probably taken a lot of inspiration from Amazon and Amazon gets all the attention for its prime memberships and recent successes and moving into advertising. But Walmart has carved out success in these areas as well. Speaker 3 (6:04) Yeah, that's exactly what I was thinking as well when I came across all the ways they're adding these new growth levers to the business. And I think it's smart. Otherwise, they run into the risk of becoming just another giant department store like Sears, which is essentially comfortably buried in the cemetery of once great businesses. Charlie Speaker 2 (6:20) Munger, as you know, famously called Alibaba just another damned retailer. And you could have said the same about Amazon back in the day, but with AWS now being the company's main profit center, I don't know if most people know that, it feels like they took that very literally. And so Walmart is obviously a retailer and there's no massively profitable cloud business backstopping it. But it is a very special retailer, nevertheless, which is to say, I do think there's a difference between these mega retailers, these wholesale retailers who take inspiration from the Costco model and try to return as much excess value as possible to customers by way of lower prices, and more specialized retailers who lack the same scale like Dick's Sporting Goods or individual brand retailers like Lululemon. And Lululemon has been a real learning lesson for me on this show. It's a company that Some will know I pitched about a year ago and was quite excited about, but the entire thesis moved against me. And I felt there was no other choice than to just drop it from our intrinsic value portfolio. And to be fair, both Daniel and Kyle had warned me about their hesitations around Lulu and investing in retail in general, and I pushed ahead anyways. And so Lulu, though, is trying to do something very different from Walmart, of course, as a premium athletic wear brand. But the most important difference is that Lululemon is a single brand. They're not a marketplace of brands. And single brands will inevitably have the popularity and coolness of their products fluctuate over time, making for a very volatile sales cycle and no real ability to be a true compounder in the long term. Whereas Walmart can ride the wave of different product cycles, like literally selling knockoff Lululemon products. And when people stop buying yoga pants or whatever it is, they can move on to the next thing. So retail is this catch-all word we use in investing, but in many ways, Walmart is as robust of a retailer as it gets, and there's no real individual brand risk. They derive their value from their wide selection and affordability, and that's reinforced by their economies of scale and their negotiating power over suppliers, which we'll talk about. But anyways, that's my rant on the spectrum of retail. When it comes to Walmart, where do you want to start today? I think we kind of have to start with Walmart's Speaker 3 (8:32) history because Sam Walton, the company's founder, has played just a massive role. not just in Walmart, but just in general retailing. So Sam Walton has helped influence a number of today's business people that everyone's going to know. Think of Jess Bezos, Jim Senegal of Costco, Jack Welch, the former CEO of General Electric, and even Bernie Marcus, the co-founder of Home Depot. So where did the genesis of Walmart come from? Well, Sam Walton had a long history in retail. It started with a variety store back in Newport, Arkansas. So Sam's wife wanted to be in a small town, and by a small town, I mean... really tiny. And she told him specifically 10,000 people maximum. So Newport had about 7,000 at the time. So he was making his wife happy by opening his shop there. So he settled on a franchise called Ben Franklin. He was eventually forced to give up the store once his lease was up as a landlord saw his success and just wanted to pass it on to his Speaker 2 (9:20) son. So the landlord basically told Sam, thanks for proving that this land can make a lot of money. Now get out, right? I'm going to do it myself. And that's pretty rough. Speaker 3 (9:28) It is. And he said that it was one of the low points of his life, but On the positive side, this experience really helped lay the foundation for what would eventually become Walmart. While running Ben Franklin, he learned how to clone. And so you could find him at his competitor stores regularly where he would inspect everything to see just how he could do things maybe just a little bit better. And he also learned things about cutting costs, both how to save money for his customers and how to make sure not to let costs get out of control so he could make some margin, although margins were at that time razor thin. Speaker 2 (9:55) It's fascinating that he essentially started his retail career in such a small town. And Walmart today is in the biggest cities in North America and all across small town America. And Walmart, though, is not a franchise. So it does seem to me like they may have soured on that franchise business model at some point in their history. Speaker 3 (10:12) Yeah, I think he probably would have gotten away from the franchisee model at some point because he noted one really big bottleneck in his book, Making It in America. And that was that the franchisor basically forced him to buy 80 % of their supplies from the franchisor rather than from independent sources. So he had to do this basically to earn a specific rebate that he would get from the franchisor. But Sam had a lot of issues with this. So as part of Sam's attraction to just being someone who was interested in innovation, he would travel outside of the state just to find suppliers who would sell directly to him rather than paying. Ben Franklin owners, the Butler Brothers, a 25 % premium for literally the exact same items. So he noted that some of the suppliers wouldn't do it because they didn't want to harm the relationship that they had with the Ben Franklin franchise, but he could find the odd supplier who wasn't in the business with them, or maybe just didn't care about stepping on their toes. So he said that doing this drove the Butler Brothers mad because he was able to price these items even lower than he would have if he bought them directly from them. Speaker 2 (11:10) It's surprising that the Butler Brothers even put up with that, but I guess when you're the highest revenue generating store in the franchise, you can definitely get away with certain things. Speaker 3 (11:19) Yeah, that seems to be the case here. But the biggest lesson that I think he learned from this experience was just how volume worked. He figured that when he took a lower gross margin on products, let's say he'd take 20 % instead of 40%, there was a really big trade-off that was worth doing. Yes, he'd make half the profits on each item. but he could sell over three times as much. So the volume offset the decrease in the margins, meaning that he was still making an even higher profit. This would be absolutely key to Walmart's strategy. And if you look today, their gross profits are still in that kind of low 20 % range, showing they're still taking advantage of the strategy that Sam implemented many, many decades ago. So in 1950, he opened his first store, which was called Walton's 5 and 10 in Bentonville, Arkansas. Now I'm old, but I'm nowhere near old enough to know what a 5 and 10 was. So it's basically a store that has items that cost a nickel or a dime. And he really liked these stores because he saw other stores using a pretty similar framework and being very successful. A really good example of this was a store called Kmart, which has been out of business now for quite a few years, but I remember it when I was a kid. Speaker 2 (12:19) That whole era, I would say, of discount stores like these is probably really largely over. And of course, you've got the dollar stores and the like out there. But if you visited one of those stores lately, you certainly know that they don't sell anything for a dollar anymore. And I think thrifty shopping today runs pretty frequently through behemoths like Amazon and Costco and Walmart to get the best prices. And so there's just so many great stories about Sam Walton doing the kind of deep due diligence that made Walmart special and helped it grow into one of these behemoths. He'd show up with a notepad at his competitor's stores. like famously take all of these notes on prices and displays and customer traffic. And he'd even note the space between aisles and how many checkouts or anything that he could collect aid on that might give him some sort of advantage or takeaways that he could clone. Yeah. He was the king of deep due diligence. And I think he'd Speaker 3 (13:12) even take it even further. So he had his own plane that he would use to survey potential locations for his expansion plans. So he owned this small single engine plane and he would fly over nearby towns to look for new spots. or he'd get an aerial reconnaissance of his competitors to assess things like the size of their parking lots or their traffic patterns. So, you know, when Charlie Munger was talking about investing in intelligent fanatics, this is exactly the type of behavior that he was looking for. But back to the whole discount thing, you know, that is still key to Walmart's DNA today. And the reason he went in that direction was that he felt that low prices and great service was just a business model that could work really, really well. And it's hard to argue that he was wrong given the success that Walmart has had. Speaker 2 (13:52) Like any great founder, Walton was a fanatic about his business, maybe on the same level as a Jeff Bezos or Steve Jobs, sort of any of those names that we know well today, even though Bezos actually took a lot of inspiration from Walton. But he had these guiding principles that he just intuitively, I think, knew the importance of. And I read in his autobiography that Sam Walton actually had 10 rules that he specifically obsessed over. Speaker 3 (14:16) He did. And it's a really, really good list. It mentions concepts such as commitment, alignment, and motivation. I think he used this on himself and his associates to help them perform at their best, which obviously helped customers keep coming back for more. He also noted the importance of communication for management. So he felt that the more you communicate, the more your partners will end up caring. Sam clearly placed a very strong emphasis on how success came from literally everyone inside of the business and not just himself or the top. So he made sure to appreciate and celebrate successes from literally everyone in his company. This also meant listening to people through the organization to make the best possible improvements. And then, you know, speaking to his kind of more contrarian nature, Sam noted that doing things differently was literally expected as the norm at Walmart. And he actively encouraged it. And lastly, you know, I think he believed in exceeding customers' expectations, which kind of speaking to your point about Bezos, I think Bezos copied that directly from Sam, as well as Sam's kind of views on the importance of cost control. So if you could control your expenses better than the competition, you'd have a really, really good competitive advantage. Well, Speaker 2 (15:21) I would probably bet that Bezos had that list up on his fridge or something in Washington State when he was shipping those books from his garage in the early days of Amazon. And it just seems like many of those concepts sound like they're straight out of Bezos' mouth, even though they're actually from Walton. But as far as influences go, I'm not sure Bezos could have found a better person to try and clone. especially for what he was trying to do. And similar to Amazon, I think it's quite clear that Walmart, when Sam Walton was around, wasn't the same business we see in today's Walmart. Speaker 3 (15:54) Yeah, Speaker 2 (15:55) I Speaker 3 (15:55) think you're completely correct. And Speaker 2 (15:56) perhaps Speaker 3 (15:57) this is part of my own bias as to why I never really decided to look super deeply into Walmart. My bias is that Walmart is just a retailer, but the business has definitely gotten a lot more interesting than that, I'd say, over the last few years. So when it comes to Walmart, they disclosed revenue from three major segments. You got Walmart US, you got Walmart International, which is in about 18 countries outside of the US, and then you got Speaker 2 (16:17) Sam's Club. It's really wild to think that Walmart now is making a half a trillion dollars in revenue annually just from the US alone. Speaker 3 (16:26) And Speaker 2 (16:26) it's just what a mind-boggling number. It really puts the scale of that business into context. And I've heard before that Walmart is the largest grocer in America too, which It sounds kind of crazy with groceries just being one aspect of the retail business. But when you hear those kinds of numbers, I mean, you absolutely realize there's no one else operating at their scale through physical stores that customers can visit in person. And even Amazon across its entire e-commerce business is doing less revenue in North America than Walmart. And you would think that in 2026, that most shopping would be occurring online. And don't get me wrong, Walmart is also a big player in e-commerce. but the business first and foremost runs through their stores. Whereas Amazon only has really Whole Foods and to a lesser extent, Amazon Fresh and Amazon Go, which I think are now being phased out as stores for customers to physically walk into. And a Walmart super center can be 180,000 square feet. And then multiply that by the fact that there are over 5,000. Walmart locations in the US and you get an idea of their footprint. And then look at Whole Foods and this is kind of a niche specialty grocer, of course, and they're at around 30,000 square feet per store footprint. And there's just over 500 of them in the US. So clearly the physical consumer facing footprints aren't comparable. And yet, despite the rise of e-commerce, Walmart is selling more merchandise to customers than anyone, including even Amazon. Speaker 3 (17:56) Yeah, I mean. The scale of what Walmart is doing is just jaw dropping to say the least. And of course, I'm not going to say that Walmart is a better business than Amazon. It doesn't have the same amount of diversity and it's much more reliant on the US, whereas Amazon is much more global business compared to Walmart. Now, looking at the US segment, we get access to a few pretty helpful KPIs in the revenue breakdown. First, we get comp sales. This is kind of a standard measure that shows the change in sales for the previous 12 months comparing to the same period in the prior year. So it essentially shows how their existing store performance is tracking. You'd like to see this number rise as it shows that they're selling higher and higher amounts of volume. So in the US, we also include revenue from things like e-commerce, delivery, marketplace, advertising, and membership fees. The Speaker 2 (18:40) e-commerce and delivery part of this business seems pretty straightforward to me, right? I mean, they sell things online and then they make money on delivery fees, but how about the marketplace and the membership fees? I'd heard that Walmart had a membership program. meant to rival Amazon, but I'm so devoted to Amazon, I've never really given Walmart much of a try. I mean, I think there have been one or two electronics products over the years that I found I could get a better price at on Walmart or I wanted to get day of, but otherwise it's not really a place that I've spent a ton of time personally shopping. Speaker 3 (19:13) Yeah. And similar to you, I'm the exact same thing. Amazon gets a lot of my business compared to a Walmart. But maybe that's a bad look specifically for Walmart's advertising department because I actually never even knew that Walmart had a membership option before I started researching this episode. So I've obviously been to Walmart. I'm sure you've been to Walmart as