This week, Walmart's shares crashed on October 14 after the company reported a disappointing profit outlook. Profits will fall 6% to 12% next year, the company said.
Walmart founder Sam Walton wrote in his 1992 memoir "Sam Walton: Made in America".
"Now, when it comes to Wal-Mart, there's no two ways about it: I'm cheap,"
If the notoriously cheap Walton were alive today, he would probably be surprised that his pioneering profit formula -- keep costs low so that prices are as low as possible and customers buy more -- is now virtually impossible to maintain. Full blame for that can be pinned on employees demanding higher wages and the rise of e-commerce giants such as Amazon (AMZN), which are open 24 hours a day, seven days a week.
Walmart founder Sam Walton (Click Image To Enlarge)
Perhaps the retail legend saw some of this on display from up above on what was a dark day in Walmart's history on Wednesday. Walmart's usually stable stock price tumbled 11% as the company said at its annual investor day that higher wages for associates will dent profits by about $1.5 billion in the 2017 fiscal year, following a $1.2 billion hit this fiscal year.
For years, Walmart has had the upper hand with its employees, paying them state minimum wages, offering basic healthcare plans, and using computerized systems to control their hours. But with the rise of social media and the internet giving employees a free platform to express views, and the rising cost of living causing state governments to push through higher minimum wages, Walmart has had to change with the times.
As a result, it has lost a key element of its business model put in place by Walton that has supported the company's profits since its founding. Further, rising employee costs are arriving as online shopping is also limiting the ability of Walmart to raise prices at all to help deliver sustainable profit growth.
Walmart added on Wednesday that it expects earnings per share to decline between 6% and 12% next year. Wrote Sterne Agee analyst Charles Grom in a note to clients on Wednesday :
"What's surprising to us is that the new outlook is incorporating roughly $20 billion in share buybacks in the next two years, which implies significant margin contraction along with modest sales growth."
Employee costs aren't the only line item on the income statement Wal-Mart is battling to control.
Walmart's investments in e-commerce and digital initiatives are expected to total about $1.1 billion in the 2017 fiscal year. This year, Walmart is projected to shell out $1.2 billion to $1.5 billion on e-commerce and digital.
These investments are a necessary evil to stay competitive with Amazon, as well as with Best Buy (BBY) and Target (TGT) , which are continuing down their own paths to reduce prices, improve checkout speeds and offer a range of delivery options.
When Walton opened the first Walmart store in Rogers, Arkansas in 1962, though, it's unlikely he foresaw a day when a sweater could be purchased off a handheld device. Today it can be, however, and to make it happen seamlessly and at the lowest cost is proving to be a major profit headwind for the once mighty Walmart.
Even with such enormous investments in digital, however, Walmart still sees sales as being under pressure. Walmart said it now expects net sales growth for the current fiscal year to be relatively flat, down from a forecast of between 1% and 2% in February. Excluding the impact of currency exchange fluctuations -- mostly the stronger dollar -- net sales growth is estimated to be about 3%.
Goldman Sachs analyst Matthew Fassler in a note on Wednesday pointed out.
"New guidance reflects that Walmart's competitive edge -- historically largely assortment and price -- has faded relative to purveyors of extreme value (warehouse clubs, hard discounters) or extreme convenience (dollar stores, hard discounters), as e-commerce has neutralized the impact of selection."
The deterioration of Walton's pioneering business model has been playing out for some time in Walmart's numbers.
According to Bloomberg data, Walmart's operating profit margins, which takes into account its costs to run stores and pay for wages and healthcare, has fallen from 7.1% in 1987 to 5.6% in 2015. From 1988, Walmart's return on assets -- an indicator of how profitable a company is relative to its total assets -- has gone from 13.7% to 8.0% in 2015.
The alarming downtrends in these measures, partly fueled by investments to compete online and compensate workers better, have been overlooked for years by Walmart's investors who have focused on the retailer's healthy dividend and relative stability.
Walmart CEO Doug McMillon (Click Image To Enlarge)
But the stock's nosedive on Wednesday, and an 11% drop for the year prior to that point, suggests Walmart's investor base is growing concerned that the retail giant's business is broken. Wrote Stifel analyst David Schick in a note,
"The market is reacting to meaningful evidence that Walmart has substantially over-earned."
In other words, Walmart is now being forced to play catch up on investments it neglected to make in the past to keep the profits flowing.
And if Walmart's business model is broken, profits are likely to stay under pressure for some time, and future dividend hikes may not be as robust as in years past.
Now, Walmart has to find a way to channel Walton and become cheap once more. Indications have emerged that it may be willing to take drastic actions to return to some sense of frugality.
Walmart CEO Doug McMillon said at the investor event.
"We are more than open to re-shaping our portfolio."
McMillon added the company continues to "evaluate its portfolio" of assets, and pointed to Walmart's history of exiting non-strategic assets and closing underperforming stores.
For example, the retailer exited Germany in 2006 and took a $1 billion hit to profits as a result. By shedding assets such as Sam's Club or lagging international operations, Walmart would also be shedding costs related to employees and maintaining physical stores. In turn, those savings could be used to offset the investments being made in core assets such as the online business and Walmart U.S., or simply be brought to the bottom line to appease investors.
Walton wrote.
"You can make a lot of different mistakes and still recover if you run an efficient operation -- or you can be brilliant and still go out of business if you're too inefficient."
Words of wisdom from beyond the grave for McMillon and the execs tasked with turning around the largest ship in retail.
Walmart did not respond to request for comment for this story.
COMMENTARY: When I heard that Walmart's stock had plummeted 10% in mid-October over its shitty earnings report, decling profit margins and the CEO's statements that earnings will continue to be stagnant due to higher employee wages and investments in ecommerce, I shed crocodile tears and managed a smile.
Walmart has been the "king of exploiters." For years it has exploited its employees, vendors and foreign suppliers.
Walmart has been the subject of numerous lawsuits from employees seeking payment for overtime and unfair labor practices, including paying female managers less than their male counterparts, among other sins.
For years Walmart has squeezed its vendors for lower prices, often forcing some into bankruptcy, while others have fled the retail giant, and swore never to return again.
The pricing deals that it has extracted from Chinese suppliers has cost hundreds of thousands of US jobs, and many U.S. small businesses have gone out of business.
So, if you were to ask, I don't feel the slightest remorse for this disgusting company? Nope.
The Walton family, prior to the recent stock market decline, were worth $140 billion, the wealthiest American family, and representing the very top of that 1% which owns 90% of America's total net worth. After the stock price crash, they are still worth at least $125 bllion. Now I hear they are blaming the far left's campaigns to increase the minimum wage for cause of their problems.
From my viewpoint, the cause of Walmart's problems is mostly about Walmart's values, and they are all about profits, and more profits, at any cost.
Do you think the Walton family cares about all the small retailers they have put out of business, or the Chinese workers being exploited by suppliers so that they can pay bottom dollar for their goods, the US vendors they squeezed for lower prices then put out of business, or even their employees who are finally getting paid minimum wage (a paltry $9.00 per hour)?
This is more of a condemnation of Walmart's values coming back to bite them in the ass. It is not about their business model going to pieces. You can bet that Walmart's CEO Doug McMillon and his team will find ways to restore the viability of their dirty business model by screwing somebody. Stay tuned for more bad news about this indecent company.
The Wharton Business Radio ran an excellent broadcast titled Marketing Matters Walmart, that details where Walmart fucked up, their failure to react to the dollar discount stores, their botched entry into Canada, their badly executed store remodelling, and failure to gain traction in online sales to combat Amazon, and what is really going on, to get them into this disasterous hole. Definitely worth listening to.
Courtesy of an article dated October 16, 2015 appearing in The Street, an article dated February 19, 2015 appearing in Newsmax, an article dated October 16, 2015 appearing in Business Insider, and an article dated October 14, 2015 appearing in Fortune Magazine
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