Walmart
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Walmart has been on the New York Stock Exchange since August 25, 1972. In that time, the stock has compounded at over 16%, more than a 2,000 bagger.
In the summer of 1962, Sam Walton stood outside a small storefront in Rogers, Arkansas, staring at the empty shelves inside. He had just leased the space and was preparing to open his new concept.
Sam was no stranger to retail. He had spent the past decade managing a chain of variety stores across the Midwest, but he had grown frustrated with the limitations of the traditional retail model. He believed that he could offer customers lower prices if he could find a way to streamline operations and cut costs.
With that in mind, Sam set out to build a new kind of retail store. He called it Walmart. To make his vision a reality, Sam spent months traveling the country, visiting other discount retailers and studying their operations. He took notes, asked questions, and absorbed everything he could about the retail industry.
Armed with this knowledge, Sam returned to Rogers and began rolling out his first Walmart store. In the early days, Walmart was a scrappy operation. Sam and his team worked long hours, often late into the night, to keep the store running smoothly. They experimented with new ideas and strategies, constantly looking for ways to improve their operations and offer customers a better experience.
As Walmart grew, Sam remained focused on his mission to provide customers with the best possible value. Even today, this idea is core to the business, with its commitment to Every Day Low Prices.
Today, Walmart is one of the largest and most successful companies in the world, with over 11,000 stores in 20 countries and more than 2.3 million employees. But its success is built on the vision and determination of its founder, Sam Walton, who never lost sight of his mission to provide customers with the best possible value.
I thought it would be interesting to go back to the early days and look at Walmart as an example of what a good business looks like. The company is a great example of an at-scale player that continually reinvests and lower prices on purpose.
When Walmart was founded, Sam Walton was 44 and he already owned 12 Ben Franklin discount stores, making him the largest franchisee. In the first four years, Walton opened about one 35,000 square foot Walmart store per year. By 1966, the company had 16 total stores, 4 of which were Walmarts. Walton had started to master the low price playbook in rural towns across Arkansas, southern Missouri, and Oklahoma. By 1970, shortly before the company raised about $5 million in IPO, Walmart had 20 stores, half of which were in Arkansas.
As you can see, the company grew revenue by 5x from 1966-1970, through doubling its store count and considerably increasing foot traffic. In 1966, the average revenue per store was $373,000 whereas by 1970, it was nearly $1 million. Nowadays, the average retail unit does somewhere in the ballpark of $50 million.
From those original 20 Walmart stores before the official 1970 IPO (excluding the 12 Ben Franklin ones), the company now has 11,443 units. Over the 53 years, that’s an average of 215 per year. That’s nearly one store every weekday for over half a century. And these aren’t small stores! The average supercenter these days is about 180,000 square feet, more than 5x the size of that first Walmart. Put a different way, that original 35,000 total square feet has turned into over 1 billion – yes, with a b.
After the original 1970 IPO, the stock was listed on the New York Stock Exchange on August 25th, 1972. Sales grew from a mere $31 million in 1970 to a staggering $167 million by just 1974. And profits grew 5x to $6 million. Free cash flow was likely negative at this point as the company was building out stores and stocking inventories, but even from very early on, the company was GAAP profitable.
By 1981, revenue reached $1.6 billion and profits hit $56 million, up over 800% since 1974. And only four years later sales were up to an astounding $8.5 billion with $327 million in net income.
So to level-set some of the data so far, revenue went from $6 million in 1966 to $8.5 billion in 1985. That’s just an unbelievable record of growth over two decades. And profits went up from $200,000 to $327 million. We can triangulate Walmart’s starting market cap at around $16 million. The company sold 300,000 shares at $16.5 and the Walton family owned 69% after the initial offering. Assuming they owned 100% of outstanding shares at the beginning, the $5 million offering means the total value of the company would be $16 million. So those original institutions were able to buy Walmart stock at just 13x earnings. In fact, buying 100 shares in 1970 for $1,650 would turn into 12,800 because of the 7 stock splits up until that point. The stock price was at ~$50 by the end of 1985 but the shares outstanding had increased 128x! So, over those two decades, that $1,650 would’ve turned into $633,600, a 384 bagger! Now that’s what holding onto a truly special business can do! However, it’s much more likely that people would’ve heard about Walmart after its NYSE offering in 1975. Even if we assume someone bought stock in 1980, a full 10 years after the original IPO, after it had already gone up nearly 50x and become a roughly $800 million company, they would’ve made 8x their money in 5 years. Even by 1980, though the stock was up 50x, the earnings multiple only went from 13x to 20x. That means that about 2/3rds of the stock increase was solely due to the increase in earnings. Now that’s a beautiful sight to behold!
There’s this awesome story that comes from the 1987 annual shareholders meeting where the CFO at the time, Jack Shewmaker, says a Vietnam veteran’s widow found 200 Walmart shares in a closet that her husband had bought in 1970. Factoring in the seven splits since they were issued, she held 40,000 shares worth $1.7 million.
You can see below a chart of all of the stock splits from 1970 to 1999.
By the time of Sam Walton’s death on April 5, 1992, the company was already doing well over $1 billion in profits. Sam sure knew what he was doing (I would encourage you to read Made in America, his autobiography).
In fact, it wasn’t until 1996 that Walmart had its first earnings decline. It only took 26 years! While Sam was at the helm, there wasn’t a single year of earnings decline. I can’t emphasize enough how impressive that is. 30 years at the helm (though there was one year where Walton retired in 1974 before coming back) and not one year where earnings went down.
By April 1999, those original 100 shares of stock worth $1,650 would’ve been worth, a mind-blowing, $9 million! And in 2002, the company became the Fortune 1 company in the world with $212 billion in sales, surpassing Exxon Mobil. Since then, the company has only dipped to #2 in the rankings (Fortune 1 means it has the most sales out of any company) in 2006, 2009 and 2012. While it’s likely that Amazon will take over this top spot sometime in the next five years, Walmart's reign over the past two decades – scratch that – six decades has been utterly impressive.
From $31 million in sales at the 1970 IPO to $611 billion last year, the legacy that Sam Walton started lives on. What’s wild is just how measured growth was under Mr. Walton. Sam got sick in 1990 when he was diagnosed with bone cancer. Up until that point, the company didn’t have a single year of sub-30% growth! That is just unbelievable. Under Walton’s leadership, before 1990, that was 28 straight years of more than 30% growth. Talk about compounding!
That sort of growth really compounds after a while. Going from $31 million in sales upon the original IPO to nearly $26 billion by Sam’s diagnosis, is just astounding. And further, it wasn’t until 1996, that the company grew slower than 20% annually. During Sam’s reign of excellence, net income increased by 110,000%, going from $1 million in 1970 to $1.1 billion by 1990. What blows me away is the consistency of the growth. It wasn’t like there were years where the company grew 200% and 100%. It was 30-45% growth almost every year – like clockwork.
I think one takeaway here is that consistency trumps big numbers that trail off. Ten years of 30% growth gives you almost 14x what you started with whereas two years of 100% growth and then eight years of 10% growth, gets you about 8x.
Walmart is still a staple in many communities and the company has moved diligently into e-commerce. However, the law of large numbers has seemed to catch up to the company. Walmart hasn’t grown sales in the double digits since 2007. Since that point, sales have grown, on average, at just over 4%. Meanwhile, earnings have plateaued since 2006. In fact, net income has grown at less than 3% per year since 2002.
The simple explanation here is that the company didn’t invest aggressively enough in e-commerce early in the lifecycle of the internet. In a sort of classic innovator’s dilemma, what differentiated Walmart at its founding – the emphasis on rural towns – didn’t lend itself to large, uncertain investments. If a small town only has enough people to support a Walmart, it’s likely that the delivery economics don’t make sense. After all, delivery is all about lowering incremental costs by having strong route density. It’s no wonder that Walmart didn’t invest aggressively in e-commerce. At the same time – and it’s easy to say this in a position as an armchair business historian – supercenters could have been used as mini-fulfillment centers as the company is doing a great job of now. Still, the main point of e-commerce is that you don’t have to get in the car and pick something up. If you’re going to make it all the way to the store, it’s not that much of a pain to go in and pick up a few things. It’s very interesting how the strength of one differentiator can be a weakness under a different paradigm. Focusing on rural towns set Walmart apart and laid the foundation for decades of supernormal growth but it also made jumping on the e-commerce bandwagon very difficult. And you know, I don’t blame Walmart management in the early 2000’s for not heavily investing in e-commerce infrastructure. If you want to get your year-end stock bonus for hitting earnings targets, investing in uncertain e-commerce plans certainly isn’t the way to do it!
Walmart has also been investing heavily in e-commerce since its 2016 Jet.com acquisition. The company now does $81 billion in online revenue, accounting for a little bit less than 13% of overall revenue. For context, Amazon does $434 billion in non-AWS revenue so Walmart still has a lot of ground to make up. In fact, Amazon’s advertising revenue alone was $38 billion last year, or about half of Walmart’s entire e-commerce revenue base.
Amazon will inevitably become the Fortune 1 company but I admire what Walmart is doing and they’ve certainly made some strides to keep Amazon on their toes.
To sum it up, here are my two lessons from studying one of the great companies over the past 60 years.
Durability of growth matters far more than any one year of eye-popping growth
The strengths under one paradigm can be a weakness in another
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