Walmart (WMT) eCommerce growth: A Wolf on a Leash

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by terryprints

For this year, 2020, Walmart is set-up to do about 480 Billion in in-store sales, and 41 Billion in eCommerce sales.

As of now, only 8% of Walmarts total sales are coming from the eCommerce channel.

If you are an investor considering Walmart and properly are evaluating Walmarts eCommerce upside potential, then here’s one of the limiting thoughts you’ve probably had:

“Even if I bet on Walmart, how much will a meteoric rise in eCommerce sales be weighed down by Walmart’s established but “boring” brick and mortal sales? Stock value won’t ever capitulate the way a tech company can with so much of it’s market cap locked into the in-store sales where PE ratios are low”

Looking at the growth scenarios laid out below, their in-store sales should not be as big of a negative ‘gut-check’ analysis would have you believe.

If Walmart can execute the eCommerce growth story, then not only does Walmarts eCommerce have the potential to out-size all of it’s current total yearly in-stores sales within a decade, but also massive overweight expectations for it’s Market-cap because analysts will be forced to re-evaluate the type of holding Walmart is entirely.

Walmart will not be “defensive-retail” when that shift begins to happen and it’s PE multiple will move accordingly. If it’s eCommerce deliveries on a successful growth story, it’s value will justify a much higher multiple of it’s earnings.

So – what are some potential out-comes for Walmarts eCommerce sales trajectory in the next few years?

If Walmarts eCommerce division grows at an optimistic consistent 40% YoY increase, Walmarts eCommerce total gross sales will eclipse the sales of its current in-store business for this year in less than 8 years.

In-store Walmart sales this year are set to be 480 Billion~

eCommerce 2020 set to be 41 Billion and grows to 432.40 Billion in 7 years..

8 years is a long time, but that is massive upside potential and growth.

At a more conservative growth rate of only 25% YoY eCommerce sales, Walmarts eCommerce sales will eclipse its current in-store business for this year in less than 11 years.

Again, in-store Walmart sales this year are set to be 480 Billion~

eCommerce 2020 set to be 41 Billion and grows to 477.30 Billion in 11 years, year 12 it’s 596.63 Billion.

Walmarts in-store business does not have the same growth potential as online.

In-store sales growth outpaces inflation slightly, but it’s subject to so many more head-winds, low-margin products, and lack of automation/efficiency innovation than eCommerce.

Assuming Walmart does not stop it’s eCommerce initiatives, there will at some point be an intersection point when Walmarts fast-growing eCommerce outweighs it’s in-store sales.. and given the scenarios above, it will be obvious to more people that this is happening in the next few years when that 8% of total sales continues to move higher and higher.

Seeing the massive, utterly massive opportunity here for Walmart stakeholders on the table from the upside of 40%+ compounding eCommerce growth and the successful execution of a high margin online ecosystem of products – will Walmart be able to achieve that YoY exponential growth investors are so fond of, or will they let us down?

Strategically speaking – it doesn’t take a genius to see that Walmart should be deploying all of its available resources into an eCommerce growth story when Amazon has already paid the innovation tax and proved the concept and scale which can be achieved.

Walmart, if it wants to deliver value for shareholders, should be using its massive existing infrastructure to facilitate and replicate everything Amazon has proven works and is profitable in its successful eCommerce ecosystem, and beyond that, it should be developing ahead of Amazon in areas that leverage “what only Walmart can do”, for the eCommerce customer, with their existing unique assets & systems.

Not only is it very obvious that they should be pursuing this area of growth with full focus, it is painfully obvious that they should be doing it as quickly as possible, because once consumers have gotten used to that Amazon prime-membership, they will be harder and more expensive to pull back to Walmarts ecosystem.

While Walmart is uniquely positioned to overcome the value proposition there with media partnerships, and loss leader offers only it can provide from it’s massive scale, it shouldn’t be waiting.

Walmart’s management team is intelligent and risk-averse, that’s how you get to Walmarts size, but the issue is that deferring these expensive and “inefficient” eCommerce investments and customer acquisition costs is that an eCommerce ecosystem will still be Walmarts absolutely biggest and best growth opportunity for the next couple decades…

Strategically speaking, they not saving anything by moving slow… in fact they are piles burning stakeholder money this way.

Understanding the online opportunity Walmart has, Walmart should not be leaving anything off the table in related to its spending to grow it’s eCommerce user-base and ecosystem.

40%+ yearly eCommerce growth is achievable for Walmart… Amazon has done it during many years in it’s growth between 2006-2019, before they had any of the customer recognition or infrastructure Walmart has today.

Also, Walmart will do 40%+ so this year, tracking for 44%+ growth for this year while they are sitting on un-invested cash and unambitious growth strategy…

This is the “idiot-proof” tail-wind Covid-world can provide, and which is why Walmart is a wolf.

What is holding Walmarts exponential eCommerce growth story back?

The man in-charge of Walmarts eCommerce business is Marc Lore. Sort-of. He’s in-charge but not fully in-charge.

In an effort to understand Walmarts likelyhood of delivering value in the coming years for investors, we need to understand how Marc is navigating Walmart through it’s eCommerce strategy, and how well that area is moving ahead.

Marc’s history is beyond the scope of this DD post, but he’s certainly proven himself extremely capable before hopping on-board as a Walmart executive with multiple big eCommerce growth stories and successes under his belt.

One of those successes, was his business Jet.com, which Walmart purchased for 3.3 Billion in 2016, and as part of sale conditions also acquired Marc who would take the helm and position Walmart for eCommerce growth for 5 years, maybe more.

He was hired onto Walmart through that acquisition, and if we look at 2016 until now, Walmart has made progress with him around. Much of the traction we are seeing now for Walmart in their eCommerce initiatives has been a result of folding Jet.com’s team into pushing Walmart ahead.

Despite the progress he has made for Walmart, we really need to figure out how he stacks up to the competition, and this sit down with Marc and Recode’s Jason Del Rey is basically a psychological window into the suffering soul of a man that should be leading Walmart to rapid exponential growth, but seems hindered in his ability by Walmart corporate leadership to act decisively, “inefficiently” (but as is necessary for blitzscaling eCommerce growth), and comprehensively.

Points of note:

About 18 minutes in-

Marc’s early strategy was to grow with major acquisitions / partnerships to fill out WMT’s online portfolio.

Seems WMT executives have blocked these and are having him develop in-house incubated projects (Slow)

About 25:30 minutes in-

He’s clearly discouraged with how many approvals he needs and projects he can push forward… executives are not allowing him to push at the speed he wants to innovate with.

General impressions –

You’re welcome to watch it yourself, make your own impressions, but it certainly seems like, in contrast to Amazon, where 12 exciting, high-margin and complimentary innovations are all taking place with full force on the same time horizon, Walmart leadership is afraid of burn-rate, afraid of anything “wasteful” and are not correctly evaluating the massive return on capital they could achieve with aggressive eCommerce spending.

The environment seems too cautious for this guy to do his thing and make stakeholders money. The philosophy of those above him is not showing any indications they see the true merit in blitzscaling Walmarts eCommerce or that they are properly evaluating the upside potential compared to the in-store, which is strange, because Amazon is proof of concept and has shown that if they get customers online they will get better margins. Digital products take no money to deliver and are wildly profitable.

As a narrative of Walmarts online growth story, I can’t think of anything more unpleasant than:

“Entrepreneurial maverick with a track record of home-runs Marc Lore unable to make decisive, timely, and massively profitable decisions which can double Walmart’s size and operating margin in 10 years due to resistance from the committee of “the-old-guard” leadership”.

Internally, it seems off-base that Walmart continues to pay dividends to shareholders and is recording that 15 Billion on the balance sheet as profit, instead of re-investing it in online growth, as though that decision is “helping it’s stakeholders get value”.

Walmart should be deploying capital with less focus on “efficiency” and more focus on growth, allocating much more of it for guys like Marc to deploy and execute what Amazon has proven works.

I can’t think of any possible valid analysis that would indicate that Walmart’s best growth opportunity for the next 20 years is anything other than an eCommerce ecosystem… and the longer they defer the investment the more expensive it will be to pull the marketshare back from other platforms like Amazon.

For the Walmart investor here what is scary is that Marc, (or whoever fills his shoes eventually) seems to be viewed as a minor part of Walmarts story.

“The-old-guard” of decision makers don’t yet seem to want to grant the power and decision making authority the CEO of that division should wield considering how the execution there is the going to move Walmart billions of dollars up or down, and psychologically speaking that makes sense.

“He’s only running 8% of the business” is probably an easy misconception to make as a Walmart executive.

Marc has laid some very positive groundwork on some very positive things for Walmart, but until that philosophy changes, Walmart will be it’s own worst enemy to share-holder value.

The competitive landscape is with them, Covid-19 is with them, consumer shopping habits are with them… they are holding themselves back.

Despite this somewhat critical analysis on Walmarts comprehension of it’s future – I don’t want to be overly harsh on them or on Walmarts prospects.

Risk averse executives who calculate, focus on margin and avoid mis-steps at all costs is how Walmart got it’s crown and massive size to begin with.

In the end, this year is a 40+% growth for it’s eCommerce sales.

Perhaps they will under-invest, under-perform internally with restrictions on Mavericks like Marc who can move the needle for them, and yet still slowly adjust and re-prioritize their focus and capital allocation over the next few years.

Maybe a more optimistic outlook is that – Walmarts eCommerce potential can (and probably still will) over deliver on expectations even with executive management guiding Walmart away from its best use of capital with their old school philosophy.

A rising eCommerce tide will deliver for the incumbents with buying power and established logistics, especially when you’ve got the customer trust already in-place.

 

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.

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