Description

Morningstar analyst Joel Bloomer on the company's bumpy overseas expansion and the firm's transition to reduce its capital expenditure budget and boost its free-cash-flow margin.

Transcript

The Outlook for Wal Mart Erik Kobayshi-Solomon: Hi Erik Kobayshi-Solomon, Co-Editor of Morningstar Option Investor Newsletter and a few weeks ago, I wrote an article about Wal Mart, the retailer or stand to gain about 50% profit over about a year’s time. To fine more about Wal Mart, I’ve invited Associate Director of the retail team and the coverage analyst for Wal Mart, Joel Bloomer to come and talk to us today. Thanks for coming. Joel Bloomer: Sure. Erik Kobayshi-Solomon: One of the things that I worry a little bit about Wal Mart is a few years ago when they started to expanding overseas, I think they kind of flub things a little bit. I know their expansion in Germany didn’t out very well. What do you think the risk is that the same kind of thing will happen again? Joel Bloomer: You’re right. They have had some stumbles in the past and I think Germany is a good example of that. Its about a billion dollar investment, they were in the market about 8 years and basically lose money over that entire period and sold the business and now seeks for about a billion dollar lost will equates to shareholder value discretion— distraction. Erik Kobayshi-Solomon: So you see, this worries me already— Joel Bloomer: Right. Erik Kobayshi-Solomon: Because we’ve a bullish position on so— Joel Bloomer: The one major lesson that they take away from that is that you have to adopt your strategy to the local market. You can't force the local market to adapt to your strategy. And in Germany they try to really force what they were doing here over there but that somewhat isolated. Outside of Germany, self create and go as well but that’s so much smaller venture. Outside of those, it’s actually doing pretty well. They’ve learned their lessons. They know you need to kind of get your toe in and learn the market, grow from there. Erik Kobayshi-Solomon: And where are their biggest overseas markets right now? Joel Bloomer: Well the largest none U.S. would be Mexico’s a very large market. Erik Kobayshi-Solomon: Oh sure. Joel Bloomer: Canada, so North America’s good piece in general. Latin America, Brazil is doing very well and now growing pretty quickly there. China has becoming a big piece and— Erik Kobayshi-Solomon: Right. Joel Bloomer: Obviously if that continues to go well, that could become a very large piece. Erik Kobayshi-Solomon: Sure. Joel Bloomer: Japan making some strives there. Erik Kobayshi-Solomon: And one thing that you’ve highlighted in your research that I kind of glommed on to is now, they’re really trying to consolidate their growth and trying to reduce their capital expenditure budget and boost that free casual margin. The thing that I worry about is that if you have a company that’s work for years and compensated people for years on the expansionary policies can they really make this paradigm shift and start to produce more cash with the sales that they’re generating. Joel Bloomer: In Wal Mart’s case, I think one thing that gives me comfort around the whole situation is that sort of their efficiency both from—and containment prospective as well as the capital allocation prospective has always been there. An overwriting goal over the whole period is to be the best retailer not just the biggest. It becomes the best by being the biggest but its kind of—there’s a culture that’s always been there and I think— Erik Kobayshi-Solomon: To executives, to a hotel room kind of culture right? Joel Bloomer: Yeah, exactly. They take cause control to the extreme to the whole process. So some of the international expansion wasn’t as great as they had hope but for most parts done well. They’ve allocated that capital well and that was what you’re alluded to in the U.S they’ve realized maybe expansions done or close to them anyway. So they pulled back and just make existing stores much more efficient. They find ways to squeeze even more cause out. Maybe position themselves to gain share and do other things with that cash whether its international expansion or hopefully returning some to shareholders. Erik Kobayshi-Solomon: Right. Joel Bloomer: And one thing about Wal Mart that I think sometimes overlooked is their decent with allocating share all the capital in terms of stock buyback or from a different prospective they’ve been growing the dividend at a pretty healthy clip for a decade. And now that the stock price have been flat for a little bit, kind to yelled that’s too much percent. Erik Kobayshi-Solomon: right, percentage—yeah. Joel Bloomer: And I think going forward that dividend growth should continue like price single digit maybe. It’s not hard to add up about 10% total return for a company that I think most people think off as just its done, it’s grown. Erik Kobayshi-Solomon: Right. Joel Bloomer: It’s where it is and it’s going to stay there. Erik Kobayshi-Solomon: Right, sure. Joel Bloomer: Erik Kobayshi-Solomon: Joel Bloomer: I don’t know if that’s quite the case. Erik Kobayshi-Solomon: I’m glad you say that. That’s really what I’m thinking that there is kind of a bottom on the share price and that their pushing up that bottom with the increase cash flow. Joel Bloomer: Yeah, I think so. Erik Kobayshi-Solomon: Joel thanks a lot for coming today. I really appreciate it. And thank you for joining us. Please stop by the option investor website where we have hundreds of terrific option ideas base on Morningstar’s Fundamental Research.