The Wall Street Journal wrote an article in the last 10 days or so noting that both Walmart (WMT) and Amazon (AMZN) will begin pushing back on their supplier’s price hikes, which has forced the big retailers into the unenviable position of using “price” rather than traffic or volume to drive revenue growth since early 2020, given COVID and the various supply chain issues and distortions caused by COVID that have wreaked havoc on the business. The WSJ article was a eerily reminiscent of Joe Nocera’s article in the New York Times in the early 1990’s, where Nocera noted that the one reason inflation likely remained contained in the early 1990’s was due to Walmart and it’s emphasis on “every day low price” or EDLP, not in the literal sense, but from the perspective that the average American probably doesn’t realize the impact Walmart (WMT), Amazon (AMZN), now Costco (COST) and Home Depot (HD), have on retail pricing today, given their size.
Walmart recently had a good earnings report for it’s fiscal 3rd quarter ended October ’22, where revenue grew 8.75%, operating income grew 4% and EPS grew 3.5% year-over-year (y.y). This blog previewed the earnings report over on www.seekingalpha.com here.
If readers quickly peruse the earnings preview, it was noted that Walmart was suffering from “retail constipation” as inventory growth had far exceeded sales growth and for a company that runs like a Swiss watch, this was a rare occurrence indeed. However, as the following spreadsheet shows, Walmart has vastly improved it’s revenue growth vs inventory growth, although it’s still not yet in line with historical standards:
Readers need to click on the above spreadsheet to see the relationship between revenue and inventory growth y.y and note how during COVID in 2020, inventory fell sharply and then – perhaps – a much stronger reopening was expected, which drove an inventory build, and now in the late stages of 2022, particularly the last quarter, Walmart is finally getting the relationship back to normal, although it’s still not quite there yet, since ideally, revenue growth should exceed inventory growth y.y, for at least 3 of the 4 quarters every year.
What’s important for readers to understand is that this relationship impacts working capital and thus cash-flow-from operations, so just this one metric – particularly for a retailer – can have a dramatic influence on profitability and cash-flow.
Walmart’s typical “inventory turnover” is usually between 2.0x and 2.5x looking back to 2018, but it’s now at under 2.0x, with the last 3 quarters coming in around 1.8x as the retail giant tries to push the inventory bowling ball through the snake.
Average ticket vs traffic at Walmart:
If you ever want some insight into a retail business look at “average ticket vs traffic”: Walmart being the giant that it is, look how the two are used in tandem, both through the pandemic and then after it.
My guess is Walmart will do everything it can to reduce that “average ticket” over time. It’s a struggle now since the conference call notes said that Walmart is guiding to a consumer that might might slow spending in Q4 ’23 (ends Jan ’23) “given persistent inflationary pressure in food and consumables”, however that is probably a conservative guide for the giant retailer given it’s history.
This table shows the identical measurement that Walmart contains but it’s not apples-to-apples since Amazon Web Services, Subscriptions and Advertising revenue segments are now 31% of Amazon’s total revenue as of 9/30/22. It’s unknown to me how subscriptions and advertising impact “inventory” which would distort the inventory numbers so to speak.
What’s clear is that Amazon is still 69% online, physical stores and 3rd party resellers, and you would think that the advantage to the 3rd party re-sellers for Amazon is that it would allow for Amazon to not have to use their balance sheet to stock inventory. (That’s an assumption on my part.)
The point being that the last quarter where Amazon’s revenue growth exceeded inventory growth was the June ’21 quarter right around the time the stock peaked at $188 per share.
Coincidence or Correlation ? You tell me what you think.
Still as Amazon’s ecommerce division rights itself after expanding too rapidly, revenue consisting of 69% – 70% of $502 billion in total revenue, there should be ample opportunity to obtain supplier concessions in the Amazon marketplace.
Costco: TTM revenue for Costco as of the August ’22 quarter, was $226 bl.
Costco never suffered the “traffic” decline that Walmart and Home Depot have incurred, thus their quarterly comp’s, which averaged roughly 5% – 6% in calendar 2019, have averaged 13% since calendar 2020 or the earliest days since the pandemic began.
The problem with including Costco in an analysis with Walmart, Amazon and Home Depot, is that COST is a warehouse club and “inventory” is different than the typical retailer: my understanding is that inventory is taken in as a consignment rather than owned directly. COST is probably better compared to Sam’s Club directly than Walmart itself, (with Sam’s Club being a division of Walmart) but with $226 billion in TTM sales, I thought it was worth a look from a market power perspective.
In Costco’s 10-Q, the various product lines are broken out and the revenue detailed and for COST, “Foods & Sundries” and “Fresh Foods” are roughly 50% of COST’s total revenue. (I’m guessing – and please note that – COST is probably considerably smaller than Walmart is the pure grocery or “fresh foods” segment. COST’s Q shows that “fresh foods” is just 13% of total revenue as of the last quarter. (Note too that the next COST earnings report is December 8th and thus readers will get another look at food and grocery inflation as of November ’22 quarter end, before the next CPI report.)
Although it’s not considered a “general merchandise retailer”, Home Depot was thrown into the mix given it’s annual revenue growth and housing’s importance to the CPI, i.e. owners equivalent rent, and such are a 30% weight in the CPI basket.
This above spreadsheet shows that Home Depot like Walmart is relying on “ticket” vs traffic to make it through both the post-Covid supply chain issues and the housing slowdown.
What I worry about regarding Home Depot is that if you look at “cash-flow vs net income” you could make a case for the Home Depot business model being under some stress.
This table compares Home Depot’s cash-flow and free-cash-flow vs net income and readers can see that as far back as 2017, the relationship looked normal but with the recent slowdown in housing, there is no question Home Depot is feeling the pressure, although part of it could be supply-chain issues as well.
Is this a reason to sell Home Depot’s stock – probably not – but it speaks to how the quality of a company’s earnings are impacted when the model is placed under stress.
Summary / conclusion: The total dollar value of US GDP at the end of 2021 was $23 trillion dollars, and the four companies listed above represent about $1.5 trillion, or about 6.5% of that $23 trillion as of the latest quarter, using the “trailing-twelve-month” (TTM) revenue metric. Walmart is America’s largest private sector employer employing 2.2 – 2.3 million, while Amazon is still a ways away from overtaking Walmart in that metric, but now employs 1.5 million American’s as of 9/30/22, up from 1.1 million as of September, 2020.
Here’s how the trailing-twelve-month revenue falls out by company as of the latest quarter reported:
- Walmart: $600 billion
- Amazon: $502 billion
- Costco: $227 billion
- Home Depot: $157 billion
- Total: $1,486 trillion
The Wall Street Journal article made the point about Walmart’s and Amazon’s importance to consumer inflation, although many including David Faber of CNBC have done media specials on Walmart’s treatment of suppliers, etc. some of which are not always “fair and balanced” (and I’m not speaking of Faber’s special, which I thought was balanced) but it’s at times like this that you can appreciate that as supply disruptions and the pandemic influences fade, Walmart has the ability to squeeze consumer inflation out of the pipeline. (Having never modeled Target, it wasn’t included in the above analysis.)
In Michael Porter’s legendary “Competitive Strategy” book, one of the competitive tenets in industry sparring matches is “power over suppliers”, thus Walmart could be said to have two of the basic principles, i.e. low-cost leader and power over suppliers, although Amazon has unquestionably closed the gap on Walmart and has become a formidable competitor since early this century.
Looking at Walmart’s “average” revenue growth since the mid ’90’s here’s what I found:
- ’20 – ’22: avg’ed 3% revenue growth
- ’10 – ’19: avg’ed 2% revenue growth
- ’00 – ’09: avg’ed 11% revenue growth
- ’96 – ’99: avg’ed 14% revenue growth
What happened to Walmart’s revenue growth was Amazon if the same “compare” were run for Amazon, Amazon (and probably Costco too) would likely be the mirror image of these bullet points, which is probably a surprise to no one.
Walmart’s enormous competitive advantage today is that at least half their revenue – which was $600 billion TTM as of the last earnings report – is grocery, the holy grail of retail since it’s low-cost and it drives foot traffic. Walmart has to be the largest grocer in the world, or at the very least America, although I heard one CNBC guest around Walmart’s last earnings report say that he thought grocery was now 70% of Walmart’s total revenue. (That was a surprise.)
When Jeff Bezos stepped down as Amazon CEO, he said he was going to take on the “physical store” aspect of Amazon’s revenue base, which is the Whole Foods acquisition, thus while its big opportunity for Amazon is still “grocery” that has to be a very long uphill battle for the ecommerce giant given Walmart’s dominance. Not being a sell-side analyst it would seem that Costco and Kroger represent larger competitive threats to Walmart today than Amazon.
Agreeing in principle with the Wall Street Journal article, I hope this article provided a little more “analytical flavor” in terms of the numbers (and this article was probably too technical for easy reading), since these 4 retailers represent 6.5% of what was 2021 total GDP of $23 trillion. Typically and historically per what’s been read, once inflation starts to roll over, it tends to continue to fall, so as Walmart and Amazon work through their bloated inventory and supply-chain issues, expect more pressure on inflation, and in Walmart’s case especially food inflation.
Take everything you read here as one opinion, and with a substantial grain of salt. Hopefully readers found the content interesting.
Thanks for reading.