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Just thinking about Walmart.

Berkshire's buys (annual, not quarterly)

2005, 19.9 million shares at average price $47.33, total cost 944m
...
2009, 19 million shares at average price $49.81, total cost to date $1.89bn
...
2012, 15.8 million shares at average price $59.80, total cost to date $2.84bn
2013, 2.0 million shares at average price $70.11, total cost to date $2.98bn
2014, 10.9 million shares at average price $75.40, total cost to date $3.80bn
Current price is $80.76.

This shows a fair bit of confidence, and ongoing confidence.

Are most others coat-tailing on this one?
Any insightful comments?

Jim
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WMT is to ingored for me. Don't like that bloody stuff,,,

sw :)

4/1
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Not coat-tailing, but I got in at 85-86. DTB and others (IIRC including you) have laid out its strengths pretty clearly in the past. (High RoE considering the business, distribution network, clear focus on costs.) And financials - levels and growth - has always been steady for at least the last 10 years.

I was staying away because of the wildcard of what the Walton family can do, being the majority shareholders, but finally my greed overcame my fear.
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Berkshire's buys (annual, not quarterly)

2005, 19.9 million shares at average price $47.33, total cost 944m
...
2009, 19 million shares at average price $49.81, total cost to date $1.89bn
...
2012, 15.8 million shares at average price $59.80, total cost to date $2.84bn
2013, 2.0 million shares at average price $70.11, total cost to date $2.98bn
2014, 10.9 million shares at average price $75.40, total cost to date $3.80bn
Current price is $80.76.

This shows a fair bit of confidence, and ongoing confidence.

Are most others coat-tailing on this one?
Any insightful comments?



Funny you should mention it. I just increased my WMT position today to #2, bumping BRK to #3. I think you characterized it as an investment 'hiding in plain sight' a few years ago at $50, and while it has not exactly been a home run for me with a 60% price return plus about 15% in dividends, I sleep well at night with it, since I think it is one of my safest investments. I take comfort in the fact that it barely dipped during the Great Recession. and is unlikely to next time, either. It has 56% of US sales coming from groceries, which are not likely to go out of fashion.

I particularly love the way they ratchet up the buyback program when their share price is low, spending $6-7B most years, but $15B in 2010 when prices dipped below $50, and only $1B last year with prices in the mid-$70s.

They continue to invest wisely, with about 20% ROE year in, year out, and they are taking market share in US online deliveries, with 30% growth last year compared to Amazon's 20% growth. OK, it's true, Walmart started from a small base, going from $10B to $13B, while Amazon went from $71B to $85B, but I think Amazon's model might be in trouble, as their delivery costs continue to spiral out of control. Walmart actually has some competitive advantages over their pure online competitors (or, more or less, competitor) based on their existing bricks and mortar infrastructure. I didn't really believe they could ever catch up to Amazon as a place where online shoppers might think of going, but there are some early signs that this might work.

OK, this is a little off-topic from your original question, but since I can't provide a lot of insightful comments you requested, how's this for a question, to which others may provide insight:

How well can Walmart leverage its existing infrastructure to serve online commerce?

Here's what one guy thinks, from a recent Fortune article:

While these are not easy to replicate, if at all, an even more important issue is whether Wal-Mart’s distribution network could rival Amazon’s?

Amazon currently has 125 active warehouses that serve end-customers around the world while Wal-Mart only has a handful. This may seem surprising for the world’s largest retailer but keep in mind that a distribution center for resupplying stores with inventory is a completely different animal than a warehouse for shipping directly to end customers. Recently, Wal-Mart has announced plans to build a 1.2 million square-foot warehouse in Indiana dedicated to e-commerce. Wal-Mart currently uses its 4,200 existing retail stores as a nexus for shipping to end customers. Approximately 20% of online orders are now shipped from a store. This strategy is likely much less efficient and could prove quite costly relative to Amazon warehouse that have been optimized solely for online orders.



I'm sure there are disadvantages to a store-based model, but it seems to me there are a lot of advantages as well. The big advantage would be that stores can skip the costly last-mile delivery and get many customers to do the pick-up themselves, a strategy which is common in Europe apparently. They can also offer a variety of delivery options: more costly, fast delivery from the central Walmart warehouse, cheaper delivery in a few more days via the local Walmart store, or free u-pick from the local Walmart store. Retail and delivery experts please opine.

Anyways, with the share price down from the recent $90 level to sub-$81 where I bought 20% more today, I think this one may be hiding in plain sight again.

Regards, DTB
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Im in since Feb 2012.....looking at +37.4% so far and holding pat.
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ps. i cannot add anything insightful ;)
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It could have something to do with increasing BRKs share of WMT earngings. From page 8 of the 2014 annual report "And, if you think tenths of a percent aren’t important, ponder this math: For the four companies in aggregate, each increase of one-tenth of a percent in our ownership raises Berkshire’s portion of their annual earnings by $50 million."

I am not quite sure how to calculate how much an additional 27.7M shares (since 2012) would increase BRK's portion of WMTs earnings to get an indicator of why the purcases were made (undervaluation or increasing share of earnings), since the above statment only applies to the top four stock holdings.

Sam
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I'm sure there are disadvantages to a store-based model, but it seems to me there are a lot of advantages as well. The big advantage would be that stores can skip the costly last-mile delivery and get many customers to do the pick-up themselves, a strategy which is common in Europe apparently. They can also offer a variety of delivery options: more costly, fast delivery from the central Walmart warehouse, cheaper delivery in a few more days via the local Walmart store, or free u-pick from the local Walmart store. Retail and delivery experts please opine.

Wall of text incoming from not a retail expert per-se, but have worked in delivery logistics extensively (in the past) & live in a European country where ordering 'on-line & collecting' is very common. In Belgium (where I live) it is offered by the three largest grocery retailers (Colruyt, Carrefour & Delhaize) that compromise circa 2/3rds the grocery market. And we are also largish customers of Amazon, probably ordering 25+ times a year (in the last couple of months we've probably averaged at least 1-2 times a week).

On-line ordering & pick-up is great. The way it works here is that you'd order the evening before (generally), select a pick-up timing (there are limited numbers per time slot), pull-in to the side of the store where your order is loaded into the back of your car, you pay (if you haven't already when you ordered) & leave. The pick-up takes far less than 5 minutes & for time constrained people it's well worth the smallish (I'm thinking €5-10) fee. There are a number of interesting implications for the store once this model is rolled-out including ...

- The fee itself - at least here in Belgium - is often pretty variable & can be nothing. There are discounts available for 'easily picked' product quantities, promoted products (the manufacturer pays), near to best-before products etc. that can really reduce the fee to close to zero.
- The selection of the time slot helps the store manage it's labor productivity.
- This model can be leveraged to help the store/chain gain share in related categories. Around Christmas time, Colruyt's toy store chain (Dreamtime) was offering great prices & you could buy gifts there, have them shipped to the gorcery store & them do drive-by pick-up. This type of service chaining must impact Amazon (& other similar retailers) somewhat.
- As a result of all the above ... these services are remarkably popular around where I live.

Having said all that ... outside of groceries (where I expect the competition with people like Amazon will be fierce) I'm not sure it offers as great an advantage over pure-play internet retailers as you appear to suggest. Amazon - even here in Belgium where there is no 'official' presence or in the Netherlands - still often achieves much lower pricing for non-grocery or bulky items. And this is what I've observed on this ...

- Amazon is no slouch when it comes to logistics. Here in Belgium I may order from amazon.de, and have the product delivered out of amazon.co.uk or amazon.fr or on one occasion even the USA (or vice-versa). And Amazon too offers end-mile staging locations well situated with the final delivery service. For Brussels an order from Amazon often leaves Amazon's own logistic network to the local delivery service only in Antwerp. All the cross-dock possibilities stated for Walmart above exist for Amazon too, with the added advantage that the stock may be warehoused solely by the manufacturer and so Amazon working capital is kept to a minimum. No product hanging around shelves anywhere here.
- Amazon also has huge clout with the parcel delivery services. Last time this theory was floated on other boards, it was pointed out that Amazon almost certainly gets the best rates around. Amazon also understands the cost of delivery & updates the cost dynamically - we often pay slightly more per item here in Belgium compared to Germany as a result.
- Amazon will (almost certainly) avoid a lot of extra handling through it's supply chain. For Amazon a product may be ordered, received from the manufacturer, immediately picked & packed & shipped out to a cross-dock location for the local parcel delivery service, who then automatically sorts it & delivers it (in my case to the office along with other peoples orders). Every step in this chain has the ability to be highly optimised & efficient due to the volume of orders. For a Walmart the chain may go something like ... manufacturer delivers to a cross-dock location where (in the best case) it is efficiently cross-docked & sent to the store, where it is stored and then hand-picked into a order that can be collected. In the store it may sit on the shelf consuming working capital and it may sit in the central warehouse for a while consuming even more, and depending upon labor costs hand-picking could be pretty inefficient (from a cost perspective). In short ... it is not clear to me that the Walmart supply chain will be more cost effective, however what is certain is that Amazon appears to have the ability to minimize the costs of its own supply chain on an order by order basis (based on my own observations).
- It's not clear to me that Amazon's delivery costs are spiraling out of control for it's 'mature' business. It is entirely possible that Amazon is deliberately investing in less efficient delivery mechanisms - same day service in San Francisco for example - to achieve critical mass that then positions the company very well into the future with a permanent competitive advantage. It's also possible that it's in trouble from a delivery cost perspective. Amazon is so aggressive in business expansion & investment, and plays it's card so close to its chest that there is no way to know. You just have to trust management.

What could be concluded though is that Walmart is the leading US contender if the local store pick-up model proves most efficient (although I have my doubts given the local picking outside of grocery items), and Amazon is the likely internet pure-play winner (unless something new comes along) and so if you can invest in both at prices that makes economic sense (I'm looking at you Amazon) a bet both ways could well be a good strategy.
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Google has a stake in the evolving procurement & delivery marketplace:
http://en.wikipedia.org/wiki/Google_Express
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I am not quite sure how to calculate how much an additional 27.7M shares (since 2012) would increase BRK's portion of WMTs earnings to get an indicator of why the purcases were made (undervaluation or increasing share of earnings), since the above statment only applies to the top four stock holdings.

Sam


I keep a spreadsheet with this info. I just use data from Yahoo so it could be off.

As of year end 2014.

Berkshire shares.......1,642,909
WMT shares owned.......67,707,909
WMT ttm earnings.......5.05
WMT dividend...........1.96
Berkshire dividend per A share.....$80.78
Berkshire dividend per B share.....$ .05
Berkshire *UE per A share.........$127
Berkshire UE per B Share..........$ .08

*Undistributed earnings


Wells Fargo is the largest contributor (I think)

Dividend per A $412.00
UE per A $795.00
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The big advantage would be that stores can skip the costly last-mile delivery and get many customers to do the pick-up themselves, a strategy which is common in Europe apparently.

People in Europe are used to going to the store daily to pick up their stuff. The distances are far less, the sprawl is less, and the habit is different. Americans are used to having things plopped directly in their hands, not in a store 8 miles away. The term "lazy Americans" didn't fall out of the sky.

Now that could change, of course, and it's not absolute, but there are different cultures afoot, so I would be hesitant to draw parallels. More than that, it's difficult for me to see how Walmart shipping to their stores, from which it is shipped to end consumers is any more efficient, and indeed it seems far LESS efficient, as the package must be picked at a warehouse, shipped to a store, where it is sorted again, then (in some cases) put into a shipping container and end-mile shipped same as Amazon does. That rather implies more manpower at the stores, which is exactly the opposite direction of where Walmart has been headed.

Which leads me to my very contrarian theory, if you will indulge me. While I am told how wonderful Walmart's returns have been over the past several years (I have been an owner, more on than off since the 90's, so I have been paying attention), I note that the financials have been artificially goosed by a clamp down on costs at the stores. Wages have not progressed at all (more in a moment.) Indeed, the numnber of associates per store has dropped dramatically, even as the company has expanded locations apace and increased total sales.

This has caused, at least to some degree, a general worsening of the shopping experience, to the point where the company had same-store-sales declines for more than eight quarters in a row. When you drop for a year, then are not matching your own pathetic drops a year later, there's something serious going on. I recall one conference call where the CFO told analysts their employees couldn't keep the shelves stocked. (Now that might be a terrific story. "The merchandise is flying off the shelves!" Instead, it was "SSS are down, and the reason is because the shelves are empty." Welcome to some rather serious problems, I think.) For the record, Dollar Stores of various ownerships were increasing SSS at the time. As was Target, minus the quarters impacted by the credit card fiasco, so it wasn't the financial meltdown, as the company has occasionally implied.

I expect that Walmart's heralded announcement of wage increases is not due to beneficence on their part, but because their employee turnover has increased to an alarming degree, and the only way to slow it down is to actually pay people better. (Hurrah!) Some might remember when Henry Ford pulled this same trick with his $5 a day wage, and I look to McDonald's announcing an increase at company owned stores for the same reason, not because they're "giving in" to a few noisy agitators but because the training costs and set-up costs for new employees is worse than raising the wages. But I digress, I guess.

WalMart announced an increase in SSS for the last quarter, and that is good, except buried in the numbers is that SSS in the mother ship (the big stores) still went down, and the number was rescued only by the large increases in the Neighborhood Stores, which have just started opening. Stores in their sophomore year often see this, as the first year people don't go in, or go in an pick around, but become comfortable with the experience and by the second year are "fully engaged" customers.

I take from this that they have much work to do at the mother ship, and (for one) I don't see how they do it without impacting financials somewhere. Raising wages, as I noted, may actually be a benefit and help, but they still have logistics problems and store shelving problems, and apparently merchandise selection issues to deal with, and none of that is going to happen easily or quickly. The new CEO is moving cautiously; that might be right, or it might be wrong, I have no idea.

I hope no one takes from this that I am saying "Oh, the sky is falling." Walmart is a great and powerful corporation, if Value Line asked me on "safety" I would say "1". That does not mean, however, that I am sure their financial performance will, uh, outperform over the next short term period. I recall when Nardelli came in and nearly wrecked Home Depot that they did OK after a period of attitude adjustment.

[Now some smart aleck will come in and tell me that Home Depot doubled revenues during Nardelli's reign, which is true. Lowe's, operating from a far weaker position, tripled. Home Depot, of course, survived and prospered, and I expect Walmart to do the same. My question is "over what time frame."]

I am often a contrarian, although I do not play one on TV. But I know how easy it is to pump the financials of a company while gutting it; I watched several lauded executives do just that during my business career. Then they were off to retirement, or another vaunted post, while somebody else had to clean up the mess. It's perhaps not as bad as I am picturing it, but it is not as good as those saying "Wow, look at the stock over the past couple years! And that capital allocation! Zowie!" either.

There is trouble in the back room. They have new management. I am holding my position in the company, but that does not mean that I am sure about the next few years. I have reason to be hopeful, I have reason to believe the investment completely safe, but I also have reason to think that there might be some difficult maneuvers for the company ahead. And I am pretty sure that shipping the long-tail product line from warehouses built to deal with a traditional brick-and-mortar retail model, and then asking people to drive to pick up their products isn't going to save the day.
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I suppose I have.

Purchases in 2006, 2007 and 2011. Average purchase price of $48.24 with weighted average CAGR of 8.1%.

WMT is my second largest position.

John
Long WMT with covered calls on some shares.
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I love the original WMT culture and have owned the stock on multiple occasions. I sold because I saw everything Goofyhoofy pointed out and maybe even a little more disturbing in terms of the cleanliness of the stores in my area and the financial engineering that went with the labor shortages when there was a very definite problem.

I think the other issue that one has to have serious concern about is the financial health of the core Wal-mart customer. If you read any of the notes from Charlie's DJCO meeting you will get some good color on the inevitability of this problem given globalization and the plight of lightly educated Americans competing with the offspring of Korean tiger moms willing to work 84 hrs. a week without over time.

I'm the sixth son of a machinist, and my clients are mostly middle class so I think about this plight quite a bit. For instance, even with the resurgence of auto sales and even though many of the cars are assembled in the US, a larger percentage of the parts are imported. It's hard to see the bright spots for the average Wal-Mart shopper ( I am one, but of course I consider myself above average :)
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I think the other issue that one has to have serious concern about is the financial health of the core Wal-mart customer.

The "silver lining" view of this is that this makes Walmart stronger in downturns.
Where else are the financially squeezed going to shop?
So, oddly, financial stress can make WMT's sales go up, or at least fall less than those for other retailers.

Longer term risks?
One is a big jump in the cost of fuel to there in your car, which isn't a pressing issue.
Or a crashing US dollar, since so many of the products are imported. Not happening at the moment, anyway.

Jim
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I think the other issue that one has to have serious concern about is the financial health of the core Wal-mart customer.

The "silver lining" view of this is that this makes Walmart stronger in downturns.
Where else are the financially squeezed going to shop?
So, oddly, financial stress can make WMT's sales go up, or at least fall less than those for other retailers.

Longer term risks?
One is a big jump in the cost of fuel to there in your car, which isn't a pressing issue.
Or a crashing US dollar, since so many of the products are imported. Not happening at the moment, anyway.


I have a friend that is frequently homeless and almost always unemployed. (Mental and related issues.)

Even she dislikes WalMart products. I have taken her there on occasion for clothes and such. But even though the prices are low, the quality is so much lower that she prefers I take her to different stores. I have bought her several winter coats, for example. They tend to fall apart in a couple of months. They pull apart at the seams, the buttons fall off, or the zippers come apart. Basically, they are Chinese crap manufactured to sell for some price point, and there are no quality standards imposed.

So, unfortunately, the poor, or those who are about to become poor, do not save money by shopping at WalMart. It actually costs more because of the continuous replacement costs of the stuff one buys there.
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"So, unfortunately, the poor, or those who are about to become poor, do not save money by shopping at WalMart."

She would be better served visiting Salvation Army, AmVets, or your local City Mission. They often have gently used clothing and furniture at bargain prices. She just needs to get over the stigma of shopping at a bargain shop.

Tim
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She would be better served visiting Salvation Army, AmVets, or your local City Mission. They often have gently used clothing and furniture at bargain prices. She just needs to get over the stigma of shopping at a bargain shop.

She eats at soup kitchen, she knows about Salvation Army. No AmVets,
There are lots of problems. She does not know how to drive, and has no car (fortunately sometimes). So when she needs a car, I frequently drive her, though she lives about 2 1/2 hours away (each way) from me, so I do it only when she cannot arrange transportation from her case worker.

She can sometimes get food stamps, but they can take a long time to get, and you have to live in a place where it is legal to live, and it must have a stove and refrigerator. She sometimes has to stay at places that have neither, or in places where the person there would get evicted if she were there. And places like homeless shelters will not take you even if they have space available (which is rare) unless you do not have a record of drug use. With her history, this is difficult.
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"With her history, this is difficult."

Truly a sad tale which is all too common in the modern world. All of us have associates or family members which have gotten into trouble. We just have to help them in any way we can.

Tim
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Longer term risks?
One is a big jump in the cost of fuel to there in your car, which isn't a pressing issue.
Or a crashing US dollar, since so many of the products are imported. Not happening at the moment, anyway.



If the median distance to a Walmart in the USA is 4.2 miles (http://therobinreport.com/walmart-can-crush-amazon/), and with new cars sold in 2014 getting over 25 mpg, and with gas at $2.50 a gallon, the median cost to Walmart and back (in a new car) is 84c. Ok, that's the median, not the average, but it's hard to see how a 100% increase in gas prices would make a lot of difference.

As for exchange rates, do you think Walmart imports a larger % of its merchandise than its competitors? I can't find data on this, but I think the difference is unlikely to be very great. A falling dollar would mean higher costs, but I expect these could be passed on to the consumer if competitors have the same cost increases.

My top 3 worries would be Amazon, unionization, and longer term, general increases in prosperity making people move their business to stores that have better service or a better reputation for style or quality.

My baseline case is that none of these will change very much in the next 5-10 years, and I get a steady 6% earnings yield, wisely deployed by management.

Optimistically, there are some early signs that they might be able to compete online, and the huge potential if they can compete on dollar store turf with small format stores.

Regards, DTB
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If the median distance to a Walmart in the USA is 4.2 miles (http://therobinreport.com/walmart-can-crush-amazon/), and with new cars sold in 2014 getting over 25 mpg, and with gas at $2.50 a gallon, the median cost to Walmart and back (in a new car) is 84c. Ok, that's the median, not the average, but it's hard to see how a 100% increase in gas prices would make a lot of difference.

I think the assumption is that it Walmart uses fuel ship things around and an increase in gas increases prices (although perhaps you could argue Walmart is more efficient or at least equal to competitors, so all other things being equal it would not matter).

Or people drive places other than Walmart and any increase in gas prices reduces available spending money.
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The "silver lining" view of this is that this makes Walmart stronger in downturns.
Where else are the financially squeezed going to shop?


During the last depression it seems the financially squeezed increasingly went to the dollar stores and Costco, which thrived while WMT went from one merchandizing misstep to another. WMT couldn't even keep products on the shelves as it cut workers. I lost count on how many management changes it went through in their US business, and yet you hear of problems persisting.
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WMT couldn't even keep products on the shelves as it cut workers. I lost count on how many management changes it went through in their US business, and yet you hear of problems persisting.

And yet you hear of earnings increasing, from something like $3 /share in 2008 to around $5 / share today, partly accomplished through a 20% reduction in share count.

The company sells for 0.5 sales, about 15 times next year's earnings, with returns on equity pretty consistently in the low 20s.


No position, but I could be tempted.
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During the last depression it seems the financially squeezed increasingly went to the dollar stores and Costco, which thrived while WMT went from one merchandizing misstep to another.



Yes, but how did all these missteps affect Walmart's results, during the crisis?


Year. Rev. Net inc.
2007 378 12.7
2008 404 13.4
2009 408 14.4
2010 422 16.4
2011 447 15.7
2012 469 17.0
2013 476 16.0
2014 486 16.4

These are my kind of bunglers. Now just imagine if they could start getting a few things right!

Regards, DTB
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Year. Rev. Net inc.
2007 378 12.7
2008 404 13.4
2009 408 14.4
2010 422 16.4
2011 447 15.7
2012 469 17.0
2013 476 16.0
2014 486 16.4
These are my kind of bunglers. Now just imagine if they could start getting a few things right!


Well, I've been Mr. Doom and Gloom in this thread so far, why stop now?

I see a possible pony in those numbers. Emphasis on possible. I've already talked about the Home Depot/Nardelli era, where revenues continued to go up, even as the core experience and SSS cratered. To the point where the BoD asked Mr. Nardelli to leave, and paid him $200 million for the privilege. It took a few years to straighten it out, IIRC.

I also remember when Starbucks kept those revenues growing, but again at the cost of the store experience, and Howard Schultz stepped in to stop the pell mell expansion and to reset what I call "the mother ship". It turns out that the prior CEO (name forgotten; too lazy to look it up) kept the numbers lofty by squeezing blood from the stone; fewer baristas per store but more store openings and more revenue, hooray!

I note that Walmart has opened nearly 500 Neighborhood Markets in the past two years, and that they are coming in with favorable comps. However compared to the traditional WalMart footprint store, the numbers are quite small, even as the "growth" is favorable.

Meanwhile I gaze in wonder at the last two columns in the "net" category, and note that even as revenue increases, the net has flattened (polite talk for "gone down".) Is this a Nardelli/Schultz moment, or perhaps just an aberration in the numbers? I don't know, but it will be interesting to see what that 2015 figure is.

(I would guess that opening another 250 Neighborhood Stores, along with another 115 large format locations will challenge the capital budget, and the benefits [assuming there are benefits, which I think there are] of the increased pay and benefits plans will come down the road, so I don't expect a walloping great number for 2015, but we shall see, won't we?)

I repeat for late thread-joiners, I'm not saying "Walmart is crashing." I'm saying "It hasn't been well run." You can squeeze a business too hard, and it will work for a while, but at some point you will have damaged it. My belief is that the prior administration at Walmart did exactly that, and that it may take some time to repair. I'm pretty sure the "We can't keep the shelves stocked" comments plus the sudden salary lift and the "flat" net are all indicative of that. And since history doesn't repeat, it seems vacuous to say, but Walmart's stock performance over the two and a half decades I have watched tends to run flat for some time, then suddenly catch fire and catch up, and then run flat again. That's not a prediction of anything, of course, just an observation.

But I'll be looking at the 2015 net number, and I suspect a lot of others will too.
 
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If the median distance to a Walmart in the USA is 4.2 miles
(http://therobinreport.com/walmart-can-crush-amazon/), and with new
cars sold in 2014 getting over 25 mpg, and with gas at $2.50 a gallon,
the median cost to Walmart and back (in a new car) is 84c. Ok, that's
the median, not the average, but it's hard to see how a 100% increase
in gas prices would make a lot of difference.

As for exchange rates, do you think Walmart imports a larger % of its
merchandise than its competitors? I can't find data on this, but I
think the difference is unlikely to be very great. A falling dollar
would mean higher costs, but I expect these could be passed on to the
consumer if competitors have the same cost increases.


Re gas, I'm thinking more like a $12.50 a gallon, not $2.50, as my risk scenario.
Longer time frame.
The greatest determinant of value is the longevity of the earnings stream.
The vast majority of every stock's value is tied up in what it will do much more than 5 years from now.
Living in Europe brings this risk home. I asked my maid to do some cleaning at another
place just a few km away, but she wouldn't do it unless I paid for the fuel.
I thought she was being petty, but after doing the math for her very small car we settled on 12 euros per trip.
One might overgeneralize and say that the big box model works only in the US, and will work there for only so long.
Fundamentally it doesn't make sense to expend that much energy to buy something inexpensive.

Re currency, I wasn't thinking so much of their position vis-a-vis competitors, or even all other retailers.
(which is not so good...many other retailers have lower import ratios).
I was thinking of their dollar exposure relative to all other firms in which one could invest.
It's one of the risks I keep my eye on as an investor in dollar stores.
For the equivalent overgeneralization of the long term risk, it doesn't make sense for a US
blue collar worker to be able to spend less than an hour's wage to buy a collection of items
that took blue collar workers somewhere else more than an hour in total to produce.
This too shall pass.

These two things aren't pressing concerns, certainly not this year.
But one should be aware of what breaks a business model.
e.g., sustained low real interest rates kill the business models of most P&C insurers.
Not just lower profits: they don't have a reason to exist. There's a good case to wind them up.
The market sometimes spots this nonsense, driving them to trade below book value.
I just did a quick scan for firms with positive shareholder equity,
good balance sheets (B or better in Value Line), trading below book value, and currently profitable.
There are 46 of them. Turns out I own two or three of them, depending how you count. CHK and L, and CNA indirectly because of L.

Gosh, it seems I'm down into the bargain bin myself.
It's getting harder and harder to keep my portfolio's weighted average P/E under 12, my target.
For firms better valued by book/share, I replace E with (conservative cyclically
adjusted book/share growth rate * very conservative cyclically adjusted P/B ratio)
e.g., if you assume BRK will normally trade above 1.35 times book and book will reliably grow at 9%/year,
then the current cyclically adjusted rate of price increase would be $17757/year.
If the price increase is the proxy for your earnings, then BRK is at a P/E of 12.18.

Jim
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Re gas, I'm thinking more like a $12.50 a gallon, not $2.50, as my risk scenario.
Longer time frame.
The greatest determinant of value is the longevity of the earnings stream.


Even assuming gasoline in USA remains at $2.50 a gallon (around here today, the cheapest regular grade is US$2.119 per US gallon), which is unlikely if you think we have passed the peak oil tipping point. Consider if the politicians come to believe that man-make climate change is a genuine phenomenon and impose gasoline rationing, not to preserve the gasoline supply, but to preserve the air and climate supply.

Just as there is lots of coal that could be extracted and burned, so also the even the existing oil supply cannot be extracted and burned or the climate changes resulting will make droughts and flooding (depending on where you are) worse too. Even if oil and coal were free (in terms of immediate cost), the total cost of their use is far too high, even if the long-term costs are not considered in the way accounting is done.
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GH,

I share most of the same worries. But I am a bit skeptical of this 'service has been sacrificed' meme, since it does not correspond to my own Walmart experience. On the other hand, my experience is small, limited almost entirely to Canada, and I am not a frequent customer, being just wealthy enough to be able to afford somewhat better quality merchandise than what is typical for Walmart.

I also wonder whether some of the carping against W is not based on political disagreement with their low wages or sale of foreign-manufactured goods, or their elimination of previous smaller retailers, the infamous Mom and Pop stores. Are you aware of hard evidence of a general decline in service levels ?
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Are you aware of hard evidence of a general decline in service levels ?

When you go to a store to buy something, and there's an empty shelf where the product is supposed to be, that's a clear indication of a "general decline in service level."

Wal-Mart Stores Inc, already struggling to woo shoppers constrained by higher taxes, is “getting worse” at keeping shelves stocked, the retailer’s U.S. chief told executives, according to minutes of an officers’ meeting obtained by Bloomberg News.
“We run out quickly and the new stuff doesn’t come in,” U.S. Chief Executive Officer Bill Simon said, according to the minutes of the Feb. 1 meeting.

http://www.bloomberg.com/news/articles/2013-02-27/wal-mart-s...

When you go to a store and can't find anyone in the aisles to help, that's evidence of a decline in service levels:

Wal-Mart Stores (WMT) has been cutting staff since the recession—and pallets of merchandise are piling up in its stockrooms as shelves go unfilled. In the past five years the world’s largest retailer added 455 U.S. Walmart stores, a 13 percent increase, according to company filings in late January. In the same period its total U.S. workforce, which includes employees at its Sam’s Club warehouse stores, dropped by about 20,000, or 1.4 percent. A thinly spread workforce has other consequences: longer checkout lines, less help throughout the store, and disorganization.
http://www.bloomberg.com/bw/articles/2013-03-28/walmart-face...

As I said, you CAN squeeze blood from a stone, but only for so long. Any first year b-school candidate can tell you to do that when a company is post-mature ("harvest"), see: Sears, but doing so while the company is still viable is just terrible management. Not to belabor the point, but here is a SSS chart that tells the sad tale:
http://cdn1.vox-cdn.com/assets/4569353/image005.png

Now there certainly could be more causes to that than just empty shelves (merchandise selection, for instance, or if fuel was a really important segment, cratering fuel revenues even as volume was constant). But then I also visit WalMart. Two of them, actually, one here and one near my father's nursing home (700 miles from here) and both suffered the same phenomenon, which I observed even before the press began writing about it, the company started denying it, and then reluctantly admitted that yes, it was true.

The good news is that none of these things are fatal. The bad news is that they are self-inflicted. The possibly unhappier news (I take no position on this) is that competitors have been "filling in" with abandon. I now pass three Dollar-ish stores on my way to Walmart, I remember none five years ago. Target now has two locations closer to my house than Walmart, and Kroger has expanded three regular size locations into Super locations, complete with clothing, gas, and furniture (seems silly to me, but what do I know?).

All of that puts a question mark in front of the stock symbol for me. I'm not selling, but I wouldn't add, either. Sometimes it's obvious, sometimes it's not. For now, it's in the "too hard" pile.
 
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Are you aware of hard evidence of a general decline in service levels ?
=========
When you go to a store to buy something, and there's an empty shelf where the product is supposed to be, that's a clear indication of a "general decline in service level."

Wal-Mart Stores Inc, already struggling to woo shoppers constrained by higher taxes, is “getting worse” at keeping shelves stocked, the retailer’s U.S. chief told executives, according to minutes of an officers’ meeting...

In the past five years the world’s largest retailer added 455 U.S. Walmart stores, a 13 percent increase, according to company filings in late January. In the same period its total U.S. workforce, which includes employees at its Sam’s Club warehouse stores, dropped by about 20,000, or 1.4 percent. A thinly spread workforce has other consequences: longer checkout lines, less help throughout the store, and disorganization.



Call it denial if you like, but I am underwhelmed. We have a few anecdotes of understocked shelves, including yours, which I do not doubt, and the company has acknowledged the problem (2 years ago) and made it a priority to solve the problems that have been identified. And there are credible-sounding people like this one in the bloomberg article, who say that customers are mad:

“When times were good and people were still shopping, the lack of excellence was OK,” says Zeynep Ton, a retail researcher and associate professor of operations management at the MIT Sloan School of Management. “Their view has been that they have the lowest prices so customers keep coming anyway.” Ton says Walmart shoppers are “mad about the way they were treated or how much time they wasted looking for items that aren’t there.”

But is there really any evidence that customers are mad, or madder about Walmart than they are about any other store that can have such problems from time to time? I haven't seen any. And the fact that same store sales have stagnated can be taken both ways; in fact, it also means that the company has been able to maintain sales at constant levels, despite increasing store number by 13% and decreasing total employees by 1.4%. If the occasional empty shelf is the price to pay to have 14-15% less employees per store, I am cautiously in approval.

Lots of mature companies have stagnant same store sales, and Walmart's US SSS were up 0.5% in 2014, after being down 0.6% in 2013. Target's were up 1.3% last year, after being down 0.4% the year before. I expect that online sales are a significant part of this. I am not so sure that operational issues were a big part.

Still, any prudent investor has to be open to the possibility that this 'blood from a stone' issue might really be a problem, or to use a better metaphor, that they may be starving the golden goose (well, I guess that's a mixed metaphor.) Here is some evidence that service really has suffered:

http://www.theacsi.org/index.php?option=com_content&view...

As you say, something to be on the lookout for, to see whether the company is able to turn this around or at least stop the decline.

Regards, DTB
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Goofy's view of America:


"When you go to a store to buy something, and there's an empty shelf where the product is supposed to be, that's a clear indication of a "general decline in service level."


Our local Walmarts are always well stocks. I never have to go without a product. I shop at the Neighborhood Market and the two Super Centers. Nearest one is about 1.5 miles, the Super Center is about 5. My car gets 44 mpg.

I buy gas at the Kroger store only because it is half mile from home. Otherwise, I could drive to Costco but it isn't worth the 14 mile round trip once a month unless I need other stuff there that day.

No problem with the Walmarts here. Clean, stocked, busy.

---------


“We run out quickly and the new stuff doesn’t come in,” U.S. Chief Executive Officer Bill Simon said, according to the minutes of the Feb. 1 meeting."

Yeah...union strikes at the Ports in Los Angles and west coast....Let's blame the right people.

----------



"Wal-Mart Stores (WMT) has been cutting staff since the recession—and pallets of merchandise are piling up in its stockrooms as shelves go unfilled."


I hope they laid off all the 'diversity Councillors' and other liberal bloat overhead types.

Yeah..Obama Kare brought the 28 hour workweek.....thanks Obama....jobs got cut back from full time to 'part time'.

----------







Goofy:"Now there certainly could be more causes to that than just empty shelves (merchandise selection, for instance, or if fuel was a really important segment, cratering fuel revenues even as volume was constant). But then I also visit WalMart. Two of them, actually, one here and one near my father's nursing home (700 miles from here) and both suffered the same phenomenon,"

No problem here in TX. Likely all your stores in your town are about the same.

Dollar stores have mostly crap. Junk food.


---------


Don't bet against Wal-Mart.

t.
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Call it denial if you like, but I am underwhelmed. We have a few anecdotes of understocked shelves, including yours, which I do not doubt, and the company has acknowledged the problem (2 years ago) and made it a priority to solve the problems that have been identified.

OK, I will leave this alone after this:

It's more than "a few anecdotes". It's the CEO of the company telling his own executives that they can't keep the shelves stocked. It's the CFO telling stock analysts that. It's independent surveys of the store back when:

In March, Wal-Mart executives said at a company meeting that store shelves need to be better stocked and that resolving the matter could be a $3 billion opportunity. They said improving “in-stocks” -- a measure of how much merchandise is available for shoppers to buy -- was a top focus for Wal-Mart.
Getting Worse
The situation hasn’t improved, according to a June 20 report from Cleveland Research.
The availability of products on shelves “actually seems worse year-to-date,” the report said. The merchandise has been piling up in aisles and in the back of stores because Wal-Mart doesn’t have enough bodies to restock the shelves, according to interviews with store workers.

https://www.google.com/search?client=safari&rls=en&q...'t+keep+the+shelves+stocked&ie=UTF-8&oe=UTF-8&gws_rd=ssl

A couple of things. The declining Walmart employee count probably means there are fewer in the distribution centers, too. A few years ago Walmart was the world leader in store inventory logistics. Suddenly they can't keep merchandise on the shelves? (I note that if the stuff is stacking up in the back room, that lowers inventory turns, which has a deleterious effect on receivables, since Walmart used to tell everyone how they sold the stuff before they had to pay for it. Now you have 'capital' stored in the back room, unavailable to be purchased for another week. Fewer associates also means longer lines at checkout, or else it means people from the floor have to rush to the front every time there's more than 3 people in line. Which is it, because it can't be both.

(I note that some of Walmart is stocks by the manufacturer's own vendors: notably Coke, Pepsi, and Frito-Lay, as the most visible, so presumably those aisles are just fine. That makes the "stock out reports" even worse, I would think.)

I meant to respond to a point you made earlier, that perhaps this is all (or mostly) just the amplified dissatisfaction of people who already don't like the company. I don't think so. Independent surveys of customer satisfaction showed Walmart falling while others were rising. Surely the tens-of-thousands of survey takers can't all be bearded protestors, can they? As you linked, the ASCI survey shows a real decline in satisfaction.

I know what this is like; I heard the complaints of Home Depot associates when Nardelli took over (in person and on the HD board!), and my own personal HD seemed fine. And the overall numbers were going up. It was only a couple years later, after having been inconvenienced one too many times by stock outs (Nardelli was famous for shaving inventory) and being confronted with "box-openers" instead of knowledgable help that I switched to Lowe's. Of course I still go to HD, but my shopping habits definitely changed, and not in Homer's favor.

I'd guess, if I had to, that the new CEO of Walmart is making some good moves. The increased pay isn't voluntary, I'm sure, but it's still the right thing to do to retain employees. The opening of small format may or may not staunch the bloodletting of customers to Dollar stores, but I don't know how else you do it. (I think "the price of gas" is a minor issue. The difference - for me at least - is that I drive 15 minutes to a Walmart, or 5 minutes to a Dollar Store, CVS, Walgreen's, or Kroger. So now I only to to Walmart when it's a big item, and unlikely to be found at one of those small footprint stores.) Convenience has become the key, the extra 50-cents of gas I don't even think about.

As you say, something to be on the lookout for, to see whether the company is able to turn this around or at least stop the decline.

They're so big it's hard to imagine them failing. Flailing, maybe, or ailing, but not bailing ;)
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Spoke to a friend in the construction industry today. He said Walmart is building 700 Walmart Neighborhood Markets in the NEXT twelve months. He commented Walmart's Neighborhood Market is primarily a grocery store aimed directly at the Kroger, Food Lion, Albertsons, etc. market space. Here is a link from a local paper that validates his comments about Walmart suddenly putting up several stores in a market:

http://www.bizjournals.com/triad/news/2014/10/07/walmart-nei...
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Spoke to a friend in the construction industry today. He said Walmart is building 700 Walmart Neighborhood Markets in the NEXT twelve months. He commented Walmart's Neighborhood Market is primarily a grocery store aimed directly at the Kroger, Food Lion, Albertsons, etc. market space.

Someone criticized the neighborhood market strategy in this thread, but it makes sense to me. I'm not going to shop at Walmart for pants, but a bag of store brand shredded cheese is a bag of store brand shredded cheese no matter where you shop. Also, it is more difficult for Amazon to enter this market, Amazon fresh is a weak substitute available in certain areas and not going to appeal to a certain class of shoppers.
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Apologies for resurrecting a dead thread, but I found this article enlightening about the competition between Amazon, Walmart, and, well, everyone.

Amazon accounts for roughly 50% of all online retail sales growth in the United States and 24% of total retail sales growth across all channels, according to Macquarie Research. More than half of U.S. shoppers had planned to buy holiday gifts from Amazon, according to a poll from Reuters/Ipsos. Big-box retailers are falling further behind in their ability to compete with Amazon—Walmart, the world’s largest retailer was the destination of choice for just 16% percent of holiday shoppers, according to the poll.
http://www.forbes.com/sites/lauraheller/2015/12/28/amazon-wi...

It appears that "Prime" has all the makings of moat; once people join (now estimated at 25% of online shoppers, predictions that it will reach 50% within a few years) they tend to go to Amazon first and they tend to spend *much* more than non-Prime members.

It's kind of like a Costco membership. Once I have paid for that, am I really going to buy a Sam's membership too? I will surely do some shopping at other stores, but I will *favor* my "club", and that's a competitive advantage that may be durable.

The fact that Amazon, already huge, is pulling away faster from Walmart (in the online space) is telling. The law of big numbers, and the conventional wisdom that Walmart can "crank it up" to catch up may be dead wrong.
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I think they should rebrand their online store to not carry the walmart name. I am sure they have done branding studies, so maybe i'm wrong. But the walmart brand isn't great for many people.

My image of a walmart store is that its huge, annoying to get in and out of, employees often not really that happy or helpful. Basically its the image of a low cost retailer.

Why make their online store carry all that brand baggage? They still have all their purchasing leverage and infrastructure advantage....but that stuff's behind the scenes.

They should pick something cool and hip. They could still have store level integration with all their retail outlets (walmart, sams, etc).

I don't get it.

Rob
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I think they should rebrand their online store to not carry the walmart name. I am sure they have done branding studies, so maybe i'm wrong. But the walmart brand isn't great for many people.

I disagree. First, II find the Walmart experience more pleasant than you report. I live in Encinitas CA 92024, certainly a demographic favoring Costco and Amazon over Walmart. We have a new Walmart. I find myself going there more often rather than less. And I find myself buying somethings online to pick up in the store. I am an Amazon Prime member, so when I choose in-store pickup at Walmart, they are effectively beating Amazon at the price-convenience (one-day delivery?) vector. And every time I pick Walmart over Amazon prime makes it more likely I will shop Walmart for my next biggish purchase.

Second, the Walmart brand is probably well positioned to capture that customers that they might capture. Sure there are a segment of dingdongs who think Walmart is for ludicrous looking poor people and that it abuses workers by hiring them and paying them. But to the extent that I am representative of the Costco and Amazon Prime brand demographics, I want a brand which is reliably associated with value for price. If you shop Walmart, you come away with that association.

So I actually think they are smart to expand the meaning of their brand to the kind of smart value and convenience that Costco and Amazon Prime brands carry. And I think they are succeeding at doing it based on my own behavior.

R:
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It appears that "Prime" has all the makings of moat; once people join (now estimated at 25% of online shoppers, predictions that it will reach 50% within a few years) they tend to go to Amazon first and they tend to spend *much* more than non-Prime members.


And yet, arithmetic is conspiring against Amazon.
If about 100M households subscribe to prime at about $100/year, it will add about 3.33% to Amazon's earnings yield ($10B on $300B market cap), bringing it up to about 3.5-4% (25 to 35 P/E, in round numbers.)
I am not sure it matters how much Prime members spend, if (apart from the annual fees) Amazon makes no profit. Anecdotally, as a Prime member, my wife gets free stuff thrown at her all the time. Shipping, for example. It's hard to see that as an equivalent of CostCo which, apart from annual fees, also makes up to 15% on the merchandise.
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I find the Walmart experience more pleasant than you report. I live in Encinitas CA 92024, certainly a demographic favoring Costco and Amazon over Walmart. We have a new Walmart. I find myself going there more often rather than less.

Aside from my political objections to shopping at Walmart, I have another, to me more serious, objection to shopping there. The incredibly poor quality of the merchandise. I have a frequently homeless friend and we used to go to Walmart (conveniently near the homeless shelter where she occasionally lives, to get necessities like shoes, socks, underwear, shirts, pants, sweaters, winter coats. But their short lifetimes means that their total cost of ownership is just too high. There is a less well known local chain of similar (but smaller) stores called Marshalls. Their prices are slightly higher than at Walmart, but a winter coat will last an entire winter, where a Walmart one will last only a couple of months. Similarly for other stuff.
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Talk about dead thread resurrection!

But is there really any evidence that customers are mad, or madder about Walmart than they are about any other store that can have such problems from time to time? I haven't seen any. And the fact that same store sales have stagnated can be taken both ways; in fact, it also means that the company has been able to maintain sales at constant levels, despite increasing store number by 13% and decreasing total employees by 1.4%. If the occasional empty shelf is the price to pay to have 14-15% less employees per store, I am cautiously in approval.
Lots of mature companies have stagnant same store sales, and Walmart's US SSS were up 0.5% in 2014, after being down 0.6% in 2013. Target's were up 1.3% last year, after being down 0.4% the year before. I expect that online sales are a significant part of this. I am not so sure that operational issues were a big part.
Still, any prudent investor has to be open to the possibility that this 'blood from a stone' issue might really be a problem, or to use a better metaphor, that they may be starving the golden goose (well, I guess that's a mixed metaphor.) Here is some evidence that service really has suffered:
http://www.theacsi.org/index.php?option=com_content&view...
As you say, something to be on the lookout for, to see whether the company is able to turn this around or at least stop the decline.


How Did Walmart Get Cleaner
Stores and Higher Sales?
It Paid Its People More


BENTONVILLE, Ark. — A couple of years ago, Walmart, which once built its entire branding around a big yellow smiley face, was creating more than its share of frowns.

Shoppers were fed up. They complained of dirty bathrooms, empty shelves, endless checkout lines and impossible-to-find employees. Only 16 percent of stores were meeting the company’s customer service goals.

The dissatisfaction showed up where it counts. Sales at stores open at least a year fell for five straight quarters; the company’s revenue fell for the first time in Walmart’s 45-year run as a public company in 2015 (currency fluctuations were a big factor, too).

http://www.nytimes.com/2016/10/16/upshot/how-did-walmart-get...

I note that profits have not come back yet, but that's always a lagging metric. It's hard to goose profit while sales are falling unless you're willing to gut the organization in mid-stream, which I have long contended the prior Walmart management did.

The stock, FWIW, has fallen after the period of increasing profit through terrible service cuts, decline after the 2015 realization that the company was ((to coin a phrase) on the wrong track and consequent decline, and has bounced back to about where it was in 2012.
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Of the two companies, IBM and WMT, I believe WMT has a better chance of surviving.

I don't understand why they don't invest in online more. Paying more money to employees to sell more DVDs and Toilet Paper in stores is not the future. Walmart.com sucks. The Walmart stores suck.

While Amazon is investing in next generation robots, drones, artificial intelligence, Walmart is investing in cleaning up its stores and preventing people from stealing. I would raise the investment from $1B to $2B per year, invest in online and the distribution system and put Amazon on the back foot.
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"I don't understand why they don't invest in online more. Paying more money to employees to sell more DVDs and Toilet Paper in stores is not the future. Walmart.com sucks. The Walmart stores suck."

Not a huge fan of it, but giving credit where it's due: the $3B jet.com acquisition is a rather large investment in their online infrastructure and presence.

Also, Walmart Labs is highly regarded.
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I don't understand why they don't invest in online more. Paying more money to employees to sell more DVDs and Toilet Paper in stores is not the future. Walmart.com sucks. The Walmart stores suck.

I read recently that Wal-Mart is slashing its investment in new store to focus on the online market.

I can see where they might have some advantages especially in groceries.

In other news, Amazon seems to be building brick and mortar grocery stores:

http://www.geekwire.com/2016/amazons-secretive-drive-grocery...
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