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

In today’s episode, Kyle Grieve and Shawn O’Malley discuss Walmart and how it grew from Sam Walton’s small-town five-and-dime into a retail giant. Today, it also makes money from e-commerce, a marketplace, advertising and memberships. They cover the scale advantages behind Walmart’s everyday low prices, how its suppliers end up financing its inventory, and why its power over those suppliers continues to draw antitrust scrutiny. They also look at Walmart’s capital allocation, management, growth levers and the biggest risks facing the business. IN THIS EPISODE YOU’LL LEARN: (00:00:00) Intro (00:02:12) How Sam Walton’s early franchise lessons shaped Walmart’s strategy (00:11:10) Why trading margin for volume remains core to Walmart (00:15:21) How Walmart makes money beyond traditional brick-and-mortar retail (00:28:56) Why everyday low prices built lasting customer trust (00:34:48) How negative working capital supports Walmart’s free cash flow (00:38:01) What the PepsiCo case reveals about Walmart’s supplier power (00:41:19) How Walmart splits capital between buybacks, dividends and reinvestment (00:53:25) Why the Jet.com acquisition was a good acquisition despite the write-down (01:05:52) Where Walmart’s future growth may come from (01:10:14) How agentic AI shopping could threaten Walmart’s customer relationships (01:15:27) Valuation discussion of Walmart (01:16:58) Walmart's intrinsic value (01:19:43) Whether Kyle & Shawn will add Walmart to the Intrinsic Value Portfolio Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences. BOOKS AND RESOURCES Join the exclusive ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Intrinsic Value Mastermind Community⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Track ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Intrinsic Value Portfolio⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Portfolio Review ⁠⁠⁠⁠⁠⁠⁠⁠⁠Submit Tool⁠⁠⁠⁠⁠⁠⁠⁠⁠. Buy your copy of Sam Walton’s autobiography Made In America. Check out our previous Intrinsic Value breakdowns: Lululemon, Nike, Ulta, Our Biggest Losers. Follow Kyle on ⁠⁠⁠⁠⁠⁠⁠⁠X⁠⁠⁠⁠⁠⁠⁠⁠ and ⁠⁠⁠⁠⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠⁠⁠⁠⁠. Follow Shawn on ⁠⁠⁠⁠⁠X⁠⁠⁠⁠⁠ and ⁠⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠⁠. Related ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠books⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ mentioned in the podcast. Ad-free episodes on our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Premium Feed⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. NEW TO THE SHOW? Get smarter about valuing businesses through ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Intrinsic Value Newsletter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Check out ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Investor’s Podcast Starter Packs⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Follow our official social media accounts: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠X⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ | ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ | ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Facebook⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Try our tool for picking stock winners and managing our portfolios: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠TIP Finance⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Enjoy exclusive perks from our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠favorite Apps and Services⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Learn how to better start, manage, and grow your business with the ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠best business podcasts⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. SPONSORS Support our free podcast by supporting our ⁠⁠⁠sponsors⁠⁠⁠: Monarch Plus500 Netsuite References to any third-party products, services, or advertisers do not constitute endorsements, and The Investor’s Podcast Network is not responsible for any claims made by them. Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm

• 0:00Speaker 00

  You're listening to TIP.

• 0:03Speaker 01

  Welcome back to the Investors 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.

• 0:26Speaker 02

  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.

• 0:39Speaker 01

  And that's why I 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?

• 1:07Speaker 02

  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.

• 1:26Speaker 00

  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.

• 2:12Speaker 01

  I 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 North America is going to be very, very familiar with Walmart as it's a 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, you know, 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 tension really came from Walmart's stock.

• 2:57Speaker 01

  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, you know, 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.

• 3:27Speaker 02

  I remember you wasting some of those concerns to me and 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 40x earnings multiple for a retailer that is, you know, at more mature stage of growth, many of these institutions are still holding on to their shares in Walmart.

• 4:12Speaker 01

  Well, you know, if institutions are staying in, there's clearly someone out there who thinks there's more to Walmart than their 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, you know, outside investors. And they've done exceptionally well with seven Walton family members becoming billionaires, primarily due to their ownership of Walmart's stock. So, you know, 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?

• 4:55Speaker 02

  Low prices and probably a retailer with lots and lots of scale.

• 5:00Speaker 01

  And that's exactly what I would have said as well. But, you know, 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/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, yes, 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.

• 5:40Speaker 02

  And 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 in moving into advertising. But Walmart has carved out success in these areas as well.

• 6:04Speaker 01

  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, you know, 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.

• 6:20Speaker 02

  Charlie 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

• 7:04Speaker 02

  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

• 7:46Speaker 02

  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?

• 8:30Speaker 01

  I think we kind of have to start with Walmart's 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. You know, think of Jeff Bezos, Jim Senegal of Costco, Jack Welch, the former CEO of General Electric, and even Bernie Marcus, the co-founder of Home Depot. So, you know, 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.

• 9:14Speaker 01

  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 son.

• 9:20Speaker 02

  So the landlord basically told Sam, you know, 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.

• 9:29Speaker 01

  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.

• 9:56Speaker 02

  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.

• 10:13Speaker 01

  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 franchiser 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 franchiser. 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 the 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 Ben Franklin franchise.

• 10:57Speaker 01

  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.

• 11:10Speaker 02

  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.

• 11:20Speaker 01

  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 Five and 10 in Bentonville, Arkansas. Now, I'm old, but I'm nowhere near old enough to know what a five and 10 was.

• 12:03Speaker 01

  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.

• 12:20Speaker 02

  That whole era, I would say of discount stores like these are, is probably really largely over. And of course, you've got the dollar stores and the like out there. But if you've 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 are 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. Like he'd show up with a notepad at his competitor's stores and like famously take all of these notes on prices and displays and customer traffic. And he'd even note the space between aisles

• 13:01Speaker 02

  and how many checkouts or anything that he could collect it on that might give him some sort of advantage or takeaways that he could clone.

• 13:09Speaker 01

  Yeah, he was the king of deep due diligence. And I think he'd 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.

• 13:52Speaker 02

  Like any great founder, Walton was a fanatic about his business, maybe on the same level as a Jeff Bezos or a 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, you know, 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.

• 14:17Speaker 01

  He did, and it's a really, really good list. So 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 from 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

• 14:58Speaker 01

  was literally expected as the norm at Walmart, and he actively encouraged it. Then 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.

• 15:21Speaker 02

  Well, 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's 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.

• 15:55Speaker 01

  Yeah, I think you're completely correct. And perhaps this is part of my own bias as to why I never really decided to look super deeply into Walmart. You know, my bias is that Walmart is just a retailer, but you know, 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 disclose revenue from three major segments. You've got Walmart US, you've got Walmart International, which is in about 18 countries outside of the US, and then you've got Sam's Club.

• 16:18Speaker 02

  It's really wild to think that Walmart now is making a half a trillion dollars in revenue annually just from the US alone. And 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.

• 17:00Speaker 02

  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 right, this is kind of a niche specialty grocer, of course, and they're at around 30,000 square feet per store footprint.

• 17:40Speaker 02

  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.

• 17:56Speaker 01

  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 a 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.

• 18:40Speaker 02

  The 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.

• 19:14Speaker 01

  Yeah. And similar to you, I'm the exact same thing. Amazon gets a lot of my business compared to a Walmart. But, you know, 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, you know, I've obviously been to Walmart. I'm sure you've been to Walmart as well. But one of the reasons that I probably don't go that often is simply that there's just not a location that's particularly close to me. So I only really shop there a few times a year. Perhaps if I had one, you know, within a five minute distance, I would shop there much more regularly as I do think that they do have exceptionally well priced things and they have a wide variety. So getting back to their membership, it looks like they're to some degree trying to copy Amazon Prime and Costco to some degree. So the membership fees are very small, representing just 1% of their revenue

• 19:59Speaker 01

  at this point, but it's growing quite steadily. And what do you get with Walmart plus membership? So kind of the usual things, unlimited free shipping, unlimited delivery from the store. And then you get some added benefits like fuel discounts. So I know in Canada, you actually get access to Crave, which includes HBO and Mac. So you kind of get this TV streaming angle. So, you know, that's an interesting angle for them to try to pursue. Then there's Walmart Marketplace. So it makes me think a lot about Amazon as well and how they have allowed sellers onto their platform just to take advantage of the network effects and their fulfillment capabilities. So Walmart has done that as well. It allows third party sellers to sell specifically on Walmart. Walmart Marketplace can integrate things like its catalog, it can help manage orders, it can manage shipments, all while allowing its sellers to take advantage of its massive user base.

• 20:45Speaker 02

  And speaking of that user base, I saw some estimates that Amazon draws around 2.5 to 2.7 billion visitors to its website every month. And I'm not sure I'd believe you if you told me Walmart could compete at all on that number. I mean, their global footprint is just very small compared to Amazon's.

• 21:04Speaker 01

  Yeah, I don't think you take me seriously, even if I try to convince you otherwise. But you are correct to point out that distinction. We can't really compare Amazon to Walmart because Walmart is a very US centric business. And therefore it's just not really an apples to apples comparison. So the number of visits to Walmart's website seems to be somewhere in that 500 million plus range, which is super high. But again, you know, that's primarily just in the US with comparing that to Amazon. So yes, you know, these numbers are five times smaller, but it's also, like I said, hyper concentrated. There's not really any way, unfortunately, that I found to find Amazon's US numbers. So I'm not exactly sure who has lead in the US, but my guess is that they're somewhere near par in terms of monthly visitors.

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  All right, back to the show.

• 24:54Speaker 02

  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. And another part of Walmart that I found pretty surprising and impressive is its advertising segment, which has grown 38% in the last quarter.

• 25:12Speaker 01

  Yeah, that's really impressive growth. But you know, 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 Sams Club. So 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.

• 25:57Speaker 01

  Now, as for Sams 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.

• 26:09Speaker 02

  I definitely understand 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, you know, very small detail that you don't understand that actually crushes the thesis. And so, you know, 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.

• 26:53Speaker 02

  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.

• 27:13Speaker 01

  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. If I do a little thought experiment, if I want cheap, you know, 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, you know, 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. You know, if I want to gain weight, okay, maybe I go that route.

• 27:57Speaker 01

  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.

• 28:05Speaker 02

  You also know that Walmart is physically there for you in a certain way, right? Like 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. And that's sort of how I think about it. But, 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.

• 28:44Speaker 01

  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 their pricing philosophy that develops trust between Walmart and its customers. So 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 Cheerio 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.

• 29:27Speaker 01

  Many places just changed their pricing based on promos and are frankly just completely dishonest about what the normal price is. The second part about the equation is everyday low cost. So if Walmart were running 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.

• 29:47Speaker 02

  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. And 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.

• 30:32Speaker 02

  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. And 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 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

• 31:16Speaker 02

  and e-commerce operation can be, firstly. But then also that intense competition has probably constantly weighed on them in this time, namely from Amazon. But 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.

• 32:00Speaker 02

  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. So 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.

• 32:41Speaker 01

  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. So explicit conviction in investing is generally seen through numbers, 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 Tarasoff gives the example that implicit conviction is evident when a company goes

• 33:24Speaker 01

  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. So 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 the 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? You know, instead of taking more of that margin for themselves, they're passing it 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.

• 33:57Speaker 02

  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. And 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.

• 34:41Speaker 02

  He picked one of their competitors, Costco. And on price, I do think Costco is the final authority, as long as you're okay with bulk sizing. It'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.

• 34:59Speaker 01

  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, et cetera. Lucky for you, your supplier who supplies all of those inputs is very, very generous. So 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, it 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.

• 35:43Speaker 01

  So they sell stuff on the shelves and collect the cash before they've paid the companies that supplied it to them. So in finance terms, this is referred to as negative working capital. And 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, it'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.

• 36:26Speaker 02

  Yeah, 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. And 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.

• 37:10Speaker 02

  It'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.

• 37:23Speaker 01

  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. So specifically, they gave Walmart preferential pricing, which, quote, "disadvantaged retailers who compete with Walmart in the resale of Pepsi soft drinks across the United States, including family-owned neighborhood grocery stores, local convenience stores, mid-tier grocers, and independent retailers." Now, 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.

• 38:07Speaker 01

  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. So 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 regulator's angle, as Walmart ended up exiting Germany entirely.

• 38:34Speaker 02

  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. And 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 pushed back in some places or in entire markets.

• 39:07Speaker 01

  Yeah, I can totally see it, too. And it actually really reminds me of the small town in B.C. that I've been through multiple times called Merritt. So if you pass through there and you need to shop for something, chances are, basically, you're going to head straight to Walmart. You know, 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. So, 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

• 39:52Speaker 01

  zero margin or even a loss on specific items if they feel like that's going to choke out competition and bring in customers who are going to still end up buying, you know, other high-margin products from Walmart. Now, 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, you know, 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.

• 40:29Speaker 02

  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. And 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

• 41:12Speaker 02

  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. So it's a good measure of the efficiency of the internal operations of the company.

• 41:30Speaker 01

  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. Now, 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 there are a mix of completely owned and leased locations. But over the past four

• 42:13Speaker 01

  years or so, they've returned about 82% of their earnings to shareholders through things like dividends and share repurchases. 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%. Now, 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.

• 42:52Speaker 02

  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. But 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.

• 43:23Speaker 01

  Yeah. And that sounds right to me. I think continued 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-store 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. But 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.

• 43:58Speaker 02

  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 Mercado Libre, 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. And I'm completely speculating about whether they will try and do that. But 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

• 44:42Speaker 02

  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. And 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.

• 45:18Speaker 01

  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 over leveraged 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. If you look at it from a net debt to EBITDA basis, their leverage ratio is less than one. So you know, not really any issues there. And if you look at it from a pure free cash flow 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 2.6x.

• 45:54Speaker 02

  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.

• 46:09Speaker 01

  Yeah. 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, you know, 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. And 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

• 46:54Speaker 01

  its own ownership stake increase with time.

• 46:57Speaker 02

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• 49:08Speaker 02

  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 Manca. Each week, we get together on live calls to dig into markets and individual businesses. We 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

• 49:50Speaker 02

  do the same, apply for free at theinvestorspodcast.com/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. And 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,

• 50:32Speaker 02

  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 40x earnings, which just means they're paying a higher price to retire stock than you might otherwise expect for a retailer. So each dollar of buybacks doesn't necessarily go as far as it could. And you know, if you look at going back to 2012, Walmart's stock has compounded at almost 12.5% a year, which is really impressive. 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

• 51:17Speaker 02

  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. And 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 written off the full amount of that investment. So oops, that's a pretty costly blunder. And I know you're a bit

• 52:00Speaker 02

  of a stickler for capital allocation, Kyle. You're, 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.

• 52:14Speaker 01

  Yeah, 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 you know, 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 are completely right. I 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

• 52:58Speaker 01

  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 I think you really dig down, this deal was actually pretty good for Walmart. So 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 Lor, 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

• 53:41Speaker 01

  deal was a way for Walmart to basically acquire Mark Lor, 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. Much of Walmart's e-commerce success today can pretty much be tracked to Lor. So while this deal does look very meh because of the write-down, it was more of a smart, higher 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

• 54:22Speaker 01

  a pretty intelligent use of capital as well. Flipkart allowed Walmart to just immediately have a presence rather than building from scratch in India. So overall, you know, 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 know, you have to kind of make your decision into the future if you think that the current buybacks make sense or not.

• 54:52Speaker 02

  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. But that also cuts both ways. If they're going to try and find their own version of Amazon's AWS success and, you know, expanding into a completely different area from retail, expanding outside your circle of competency is just very difficult and it can get people fired if done wrong, right? There's a lot of career risk 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, you know, we're going to do

• 55:35Speaker 02

  something dramatically different. But also, some sort of innovation here is really needed to break the corporate stagnation cycle. But so we just spent some time looking at management's capital allocation decisions. So 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.

• 55:59Speaker 01

  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, you know, in his DNA was this kind of innovator who did all sorts of new things. But, you know, 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. So whereas Amazon, you know, 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, you know, maybe I could be wrong, and maybe that's why some of these investors are giving it the high

• 56:44Speaker 01

  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. So, 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,

• 57:28Speaker 01

  but I would say not spectacular growth, about 5.5% in both revenue and operating income. But as I pointed out earlier, you know, the US is really saturated at this point. So I don't think these growth numbers are necessarily an indictment against Ferner.

• 57:42Speaker 02

  I think Ferner 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. If 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, you know, it's really hard to turn

• 58:23Speaker 02

  it and make big changes to these massive, massive conglomerates. So, you know, 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.

• 58:41Speaker 01

  Sean knows that the key to my heart is basketball references. But, you know, I think you're totally right. And 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, Walmart's case, I see John Ferner as a coach taking over an already very well-established team. You know, 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. Ferner 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 focused CEO. So he said, we're not managing our business for one quarter, we're managing our business on a multi-year basis to

• 59:23Speaker 01

  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.

• 59:35Speaker 02

  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, they need a, maybe somebody more like a Tim Cook than they need a Steve Jobs. And last, 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, you know, 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

• 1:00:20Speaker 02

  a pretty good thing. But how involved are they in Walmart's day to day operations? I hope that they're not interfering too closely.

• 1:00:28Speaker 01

  Right. So through the Walton enterprise and the Walton family trusts, 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. Plus, the business, you know, it has a market cap of $840 billion.

• 1:01:03Speaker 02

  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?

• 1:01:28Speaker 01

  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. So in 2026, CEO John Ferner made $27.3 million, and other executives just weren't really that far behind him in terms of their comp either. But, you know, 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

• 1:02:11Speaker 01

  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.

• 1:02:24Speaker 02

  So 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 a 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, that would probably go much faster in their ability to retire more shares, which would be a pretty good situation for shareholders to be in. But this does assume that the elevated spending that they've been doing, you know, where we've seen their operating

• 1:03:09Speaker 02

  margins fall over the last two decades by a third, doesn't eat into their ability to deploy capital into buybacks going forward.

• 1:03:17Speaker 01

  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, you know, maintain the business. So depreciation and amortization for the business are currently running at about $58 billion annually. So, you know, this is definitely a business that does require quite a bit of capital to keep everything running smoothly. Walmart has made about $735 billion over the last year. So, you know, 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

• 1:03:59Speaker 01

  interesting, as it's been growing very well and could provide significant future growth since that US segment has been largely saturated.

• 1:04:06Speaker 02

  I could very much see a scenario where that 4% number is the new norm for capex as a percentage of revenue. And 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, and especially in e-commerce and so. 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?

• 1:04:47Speaker 01

  They 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 have this kind of large e-commerce presence there. Walmart discloses some of its international revenue, and China has been a major growth driver with about a 20% revenue CAGR 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.

• 1:05:31Speaker 02

  What about their Walmart Plus membership program? How meaningful a growth engine do you see that to be in adding revenue for them?

• 1:05:40Speaker 01

  Yeah. So I think it's decent. You know, membership free revenue has grown well. It's grown at a 21% CAGR 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. I 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.

• 1:06:22Speaker 02

  Well, if you look at Walmart's growth trends over the last few years, we have seen some acceleration, right? Where they were kind of pretty flat for a period of time, and the business has picked up again. And, you know, 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

• 1:07:04Speaker 02

  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.

• 1:07:13Speaker 01

  It is. But we have to remember that, you know, 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, you know, 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. So 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

• 1:07:57Speaker 01

  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. And 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.

• 1:08:28Speaker 02

  Fortunately for Walmart, if they're struggling with labor costs, and 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. And then this business has some pretty high fixed costs already, too, as you discussed, right? The depreciation, 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

• 1:09:10Speaker 02

  Houses, 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. And so that's sort of what that line item is meant to reflect.

• 1:09:28Speaker 01

  Right. And kind of getting to your point back there on automation, I think that will probably help here. You know, Walmart has actually been automating for years now, but you know, even with that automation, they're still facing these labor inflation costs. So, you know, 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. So 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,

• 1:10:11Speaker 01

  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 omnichannel 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.

• 1:10:40Speaker 02

  It's a pretty interesting risk to think about. 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 chat, GPT and Claude and AI agents. And even further, it commoditizes, I think, certain types of shopping on the internet,

• 1:11:25Speaker 02

  which is going to put Walmart in a tough position. You know, 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.

• 1:11:35Speaker 01

  Exactly. So, you know, I personally don't feel too comfortable with agentic buying yet, but I could see that changing quickly. Once I have, you know, some family or friends who tried out with success and shared 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. If I have to pay, you know, 10 cents extra, so be it. So the final risk I'd share relates to Walmart's supply chain. In the latest Walmart's 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, you know, not being so great, to put it mildly,

• 1:12:19Speaker 01

  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. And 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, you know, 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.

• 1:12:49Speaker 02

  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. You'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?

• 1:13:35Speaker 02

  If you're buying it at 10 times earnings, you'd say, well, you know, I think a lot of these concerns are more than priced in. At 40 times earnings, you're thinking, hey, there's not a lot of wiggle room. If things don't, you know, 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 a time of the episode where we should go over and the intrinsic value of Walmart. So maybe let's start there with your kind of high level view of the business's value.

• 1:14:09Speaker 01

  Yeah. So I think I'd echo your points there on the evaluation part totally. But I will say that Walmart, if we take the evaluation part out of it, it's just a really, really interesting company. You know, I really see the benefits that the business has in scale. And as they scale up, you know, 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, you know, 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. Amazon and Costco are the two closest competitors, but you know, 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.

• 1:14:52Speaker 01

  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.

• 1:15:12Speaker 02

  So with all that said, then is there a number here that you land on for the intrinsic value of Walmart?

• 1:15:18Speaker 01

  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 four 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 increase 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. So 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.

• 1:16:03Speaker 01

  Now, as for the exit multiple, 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.

• 1:16:21Speaker 02

  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, but 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's shares fluctuate when you compare the bull case and the bear case between them?

• 1:16:54Speaker 01

  Yeah. So if I factor in my bear and bull case, add in a 15% margin safety, I actually get an intrinsic value of $50, which is less than half of the current share price. So, you know, 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. And 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 you know, 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,

• 1:17:36Speaker 01

  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. But 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.

• 1:17:57Speaker 02

  You know, I wouldn't want to be competing with Walmart. I knew that very confidently. And I'm very happy to be a customer of Walmart's, 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 and P 500, which is already historically richly valued, just looking at the numbers. So for me, it's been a great case study today. It's been fun, but definitely one that I'm happy to pass on.

• 1:18:32Speaker 01

  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's 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 and we'll see you next time.

• 1:18:57Speaker 00

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• 1:19:41Speaker 00

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