Observations

THE WALMART STORY

Saturday, March 3, 2007

“We just kept that stock.”

- Sam Walton in Made in America

This issue of Observations is about the best company to probably have hit the world…ever. In this issue, I go
back about four decades, to trace the incredible progress of a company, from very humble beginnings to
becoming one of the largest companies on earth. The US economy in the same period, has gone through
several recessions, and has been witness to couple of serious stock market crashes. But Walmart chugs
along, like an athlete on perennial steroids.

While the Walmart story points inexorably to the genius of Sam Walton, I think it has several valuable lessons
in investing and business. To me both are two sides of the same coin. As investment guru Benjamin Graham
used to say, “Investing is most useful when it’s most businesslike.” It seems one Sam Walton took his word a
bit too seriously.
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From Small…to Big….to Huge…to Gargantuan…

A guy named Sam Walton sees a big opportunity in small towns. He observes that people in the country side,
with little access to the mainland city, were direly in need of a neighborhood place to shop for their needs. And
he decides to give them just that. When he started, he had more drive and ambition than money in his bank
account. He sold and sold and sold, and over the next couple of decades, built a monster of a company.

In the tables below, I highlight the Walmart progress report in numbers, going back four decades.

TABLE 1: The business

1960 1970 1980 1990 2000 CAGR %

Sales 1 31 1,200 26,000 165,013 34
Profits 0 1 41 1,000 5,377 31
Stores 9 32 276 1,528 2,522 15

Sales/Store 155,556 968,750 4,347,826 17,015,707 65,429,421 16

Profit/Store 12,444 37,500 148,551 654,450 2,132,038 14
Profit Margin % 8.0 3.9 3.4 3.8 3.3
Source: Company filings, Made in America
Note: All numbers in USD Million; except ‘store’ ratios which are in USD.

Decade ending 1960

In 1960, the company managed about USD 1 million in sales. Its profit margins though were pretty healthy for
a company in the retail business. Sam Walton himself couldn’t have probably projected those numbers
appearing in the above table.

Decade ending 1970

Another decade passes by and the company touches USD 1 million in Net Profits in 1970. The Sales/Store
and profit/Store metrics improve significantly. The profit margins, however, drops to 4% levels. This is typical
of a business cycle, where a company starts off as a small and fast grower. The fast growth attracts
competition, leading to a drop in margins over time. After a period, growth slows down and ultimately tracks

Hemant Sreeraman 1
(hemant.sreeraman@gmail.com)
 Observations
THE WALMART STORY
Saturday, March 3, 2007

“We just kept that stock.”

- Sam Walton in Made in America

the overall growth rate of the economy.

Decade ending 1980

The 70s witnessed a bear market in equities. But Walmart was well on its way to another stellar decade. At the
end of 1980, it had crossed USD 1 billion in sales and profits had gone up by about 40 times compared to
1970.

Decade ending 1990

Wall Street started taking notice of the company and the intellects started voicing their opinions about the
fortunes of this company which had, by now, demonstrated two decades of super growth. When Walmart
acquired a chain of stores – Kuhn’s Big K in 1981 – several analysts felt that the company had got ahead of
itself and started predicting doomsday. The stock price went up and down in response to big institutional
investors acting on these esteemed recommendations. Meanwhile the company continued on its odyssey,
adding a little more to sales and profits and stores. Result: Another decade of super performance. The
significant thing over the past two decades was the profit margins – which stayed at the 3.5-4% levels
consistently. The stock market crash of 1987 pulled the stock price down by more than 50%...but the
underlying business continued its uptrend. After a while the markets realized their mistake, and ensured that
Walmart, the stock, ended 1990 with a gain of more than 100% from the 1987 low.

Decade ending 2000

Walmart ended year 2000 with a Sales/Store of approximately USD 65.4 Million. By now the story starts
sounding repetitive. Another stellar decade of growth, analysts rant and rave along the way, sometimes
focusing too much on the micro details than the larger picture. It didn’t matter that Sam Walton – the founder –
died along the way. The company continued growing…

Walmart had managed to grow its Sales and Profits at a CAGR of 34% and 31% respectively, over four
decades. I repeat, over four long decades! If that doesn’t qualify for a superlative performance I don’t know
what will.

The table below shows the decade-over-decade growth rates of key business parameters.

TABLE 2: Business growth rates (per decade in %)

CAGR % 1960-70 1970-80 1980-90 1990-2000

Sales 36 44 36 20
Profits 27 42 38 18
Stores 14 24 19 5

By far, the 1970-80 decade was Walmart’s best in terms of growth rates. Ironically, that same decade was the
worst for Walmart, the stock! The early 70s recession took its toll on ‘investor sentiment’ and for long the stock
wasn’t accorded its due. Both sales and profits grew over 40% over the decade, but the stock price grew only
20%.

Hemant Sreeraman 2
(hemant.sreeraman@gmail.com)
 Observations
THE WALMART STORY
Saturday, March 3, 2007

“We just kept that stock.”

- Sam Walton in Made in America
TABLE 3: Walmart stock price performance (per decade in %)

CAGR % 1970-80 1980-90 1990-2000

Stock Price 20 44 29
Note: Walmart became a public company on October 1, 1970. Stock Price for the decade 1970-80 represents the price change since listing.

But over time, the markets have a good habit of reversing their short term mistakes. The markets recognized
that Walmart was a gold mine and upped the price by over 40% over the next decade. The stock price grew
faster in 1990-2000 compared to the sales and profits.

Although I have been looking macro till this point, let me take that forward a little more. I will look at the
business and the stock price over the three decades of Walmart’s listed existence. I have heard expert after
expert speaking about how stock prices track profits over long term.

TABLE 4: Walmart – the business and Walmart – the stock (over approximately three decades)

CAGR %
Profits 31 Well…
Price 31

CHART: Walmart stock

Source: BigCharts
Hemant Sreeraman 3
(hemant.sreeraman@gmail.com)
 Observations
THE WALMART STORY
Saturday, March 3, 2007

“We just kept that stock.”

- Sam Walton in Made in America

Conclusion
Walmart is about the genius of Sam Walton – and some more. The Walmart story is about vision, action, a
sound sustainable business and strong management. It’s that rare example of a stupendous business being
run by stupendous people. That combination is a very difficult one to find, and if one is lucky enough to find
one somewhere, then the wisest thing that one could do is to make a life-long commitment and buy the stock.
And keep it…As Sam Walton so succinctly put it, “We just kept that stock.” In fact, he has vowed to haunt his
grandchildren, should they even as much as contemplate selling Walmart stock!

This is the kind of thinking that I strongly believe should govern an investor’s philosophy. A businessman
never thinks about selling and cashing out of his business at the first instance of trouble. I wonder why
investors in stock markets should think otherwise.

While the numbers ultimately have a way of taking care of themselves in the long run, it’s in the shorter time
frames that investor behavior can be chaotic. Near term aberrations temporarily cause investors to dump
something they shouldn’t be dumping – and loading up on something they shouldn’t be loading up on! The
power of compounding is an investor’s best friend.

I tend to believe that macro factors should mostly drive an investor’s behavior. The stock market’s excessive
focus on quarterly earnings readily gives an advantage to a macro-focus investor. The importance of the
ability to ‘see’ the big picture, rather than worrying excessively about what discount rate to use in an excel
discounted-cash-flow model, maketh a super investor in the long run, in my opinion. When Warren Buffet talks
about thinking ten years out, one begins to appreciate his wisdom.

The analyst community seems to have mastered the art of conducting businesses by sitting comfortably in
plush offices! Isn’t it strange that retail sector analysts – with probably not more than couple of years of
lip-service ‘experience’ in the retail business – were ‘advising’ Sam Walton, who probably had spent more time
in the retail business than the analysts spent on earth, on how to conduct his business, on whether he should
be expanding here or there?

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Disclaimer: This article is meant for information purposes only. The author has no opinion on Walmart, the stock, currently, nor does he hold the stock
in his personal portfolio.
Hemant Sreeraman 4
(hemant.sreeraman@gmail.com)