WALMART VS AMAZON - The Economist

WALMART VS AMAZON

Economist 2016 Investment Case Competition

sponsored by RealVision

Abstract

Over the next 10 years Walmart stock will outperform Amazon because:

? Combining brick-and-mortar with e-commerce is a winning

strategy: Although the growth of e-commerce is impressive, brick-and-mortar

stores still account for 90% of retail revenues. Walmart is better positioned as an

omni-channel retailer given its global store network and strong online presence.

? Early entry in China will pay dividends as country¡¯s middle class booms: The

growth of the Chinese middle class will alter global consumption trends in the next

decade. Walmart has been laying the foundation to meet this demand and is

accelerating expansion in China.

? Earnings, not dreams, drive value: Walmart has proven it can deliver long-term

profitable growth. Comprehensive strategy and operational excellence will

continue to provide above average profitability.

? Strong balance sheet and robust free cash flow provide low cost capital to

support growth: Relatively low debt insulates Walmart from rising rates.

? Undervalued stock will provide most value to shareholders: Conservative DCF

model shows the market is significantly mispricing Walmart¡¯s stock.

Cole Buckley, Pete DeFina and Lindsay Root

Table of Contents

Walmart vs Amazon .................................................................................................................. 2

Industry Summary ...................................................................................................................... 2

Company Overviews.................................................................................................................. 3

Amazon .................................................................................................................................. 3

Walmart .................................................................................................................................. 4

Market Position & Analysis ....................................................................................................... 5

Walmart is positioned to become the leading omni-channel retailer ..................................... 5

Walmart is able to capture growth in Asian middle class ...................................................... 7

Walmart¡¯s global network provides competitive advantage .................................................. 9

Financial analysis ..................................................................................................................... 10

Walmart has above average profitability and a strong history of profitable growth............ 10

Walmart¡¯s conservative capital structure makes it easy to raise capital and reduces impact

of rising rates ........................................................................................................................ 11

Valuation .................................................................................................................................. 12

P/OIPS .................................................................................................................................. 12

Discounted Free Cash Flow ................................................................................................. 14

Conclusion ............................................................................................................................... 16

Works Cited ............................................................................................................................. 17

1

Walmart vs Amazon

Amazon and Walmart have become ubiquitous, household names in the US and for good

reason: both of these companies have revolutionized the way in which we shop. Amazon offers

a convenient experience, and an ever-expanding selection of products whereas Walmart has a

wide network of store locations and famously low prices. As investments, these companies

highlight the dichotomous nature of the retail industry ¨C brick-and-mortar vs e-commerce; high

growth vs steady growth; US vs International; actual vs market expectations. To coalesce these

stark differences, we will first summarize the industry and these companies, followed by an

analysis of market position and financials, and finally an analysis of the firm valuation, all of

which point to Walmart as the clear investment over the next 10 years.

Investment decision: Buy WMT

Industry Summary

For the ease of comparison, we¡¯ve grouped both Amazon and Walmart into retail, however,

the industry forces that drive each of these companies are distinctly different and the firm that

is best able to leverage these forces will ultimately make a better investment for the next 10

years.

2

Table 1: Industry Summary1

Industry

E-commerce and Online

Auctions in the US

Warehouse

Clubs &

Supercenters in

the US

Department Stores

in the US

Per capita disposable income

Number of mobile internet connections

Percentage of services conducted online

World price of crude oil

Key Drivers

Life cycle

stage:

Growth

Mature

Decline

Concentration

Level:

Low ¨C HHI 250

High ¨C HHI

5,000

High HHI 2,000

Technology

Change:

High

Medium

Medium

Barriers to

Entry:

Low

High

Medium

Threats

High reliance on shipping

companies (FedEx, UPS, etc.).

Gas stations

generate large

portion of

industry

revenue.

E-commerce sites

are better

positioned due to

low overhead

costs, offering

lower prices and

wider inventories.

Operating profits limited when

oil prices are high. Membership

(like Prime) limits ability to pass

higher costs onto customers.

Opportunities

Disposable income levels determine quantity and quality of online

purchases

Integrate in-store and online for personalized customer experience

Company Overviews

Amazon

, founded in 1994 by current CEO Jeff Bezos, is the largest internet-based retailed

in the US. They maintain three different operating segments: North America, International, and

1

(IBIS World, 2015)

3

Web Services. In Q2 of 2015, Amazon reported $23 billion in sales of which North America

represented 60%, International 32%, and Web Services 8%.2 Amazon currently sells over 300

million products in a variety of categories. Its retail operation encompasses many different

business models ¨C Amazon Retail, Amazon Marketplace, and Amazon Web Services. In

Amazon Retail, the company purchases and takes possession of inventory in which it stores in

one of its 743 distribution centers in the US. In Amazon Marketplace, third party sellers are

able to list items on Amazon¡¯s website and the seller pays a fee to Amazon. Amazon Web

Services is cloud-computing platform providing services like online storage and virtual

servers.4

Walmart

Walmart, founded in 1962 by Sam Walton, was the world¡¯s largest company by revenue5. Its

operating segments include Sam¡¯s Club, Walmart US, and International. In Q2 of 2015,

Walmart reported $119 billion in sales of which Walmart US represented 62%, International

26% and Sam¡¯s Club 12%.6 Sales are generated predominantly through one of its 11,526 stores

throughout the globe. Walmart also generates sales through its website , however

less than 3% of sales are generated online.7 Evolving to compete in the digital space, Walmart

is moving from a traditional brick-and-mortar retail store to an omni-channel model which

includes online sales.8

Table2: Selected Company Metrics9

Company Name

Employees

Shareholders

Walmart (WMT) Amazon (AMZN)

2.2 Million

154,000

250,000

2,744

2

(Amazon, 2015)

(MWPVL, 2015)

4 (Amazon, 2015)

5 (Fortune, 2015)

6

(Walmart, 2015)

7

(Forbes, 2015)

8

(Walmart, 2015)

9

(Mergent Online, 2015)

3

4

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