Three Things We Learned from Wal-Mart’s 2Q2011 Earnings
Though virtually all commentary surrounding the quarter focused on the recent past same-store sales performance, Wal-Mart has, for the first time in a long while, boosted inventory. Adjusted for their new accounting system, Wal-Mart grew merchandise inventories by $1.4 billion or 4% over the previous year (a rare reversal-see chart).
Inventory growth can be interpreted two ways: Either they’re planning for improved sales in the 3rd quarter; or, they missed the sales budget by a wide mark in the 2Q. Anecdotal evidence suggests the former. Second, free cash flow is likely to decline during the second half of the year, meaning the company will boost borrowing to repurchase shares, so expect debt to build on the balance sheet. Finally, investors yawned at Wal-Mart’s $2 billion increase in quarterly sales. It took the company 20 years to reach $2 billion in 1982. Source: Company reports.
Satellites, Parking Lots and Sales Forecasts
Some Wall Street analysts are using satellite images to count vehicles in Wal-Mart parking lots in order to sharpen their quarterly sales forecasts. This is a novel idea for short-term forecasting, but might need a little fine-tuning as the first forecast was off. Source: CNBC
Why Sliced Bread Sales Took Off
Here’s a pretty good video by Seth Godin on marketing, using lots of good consumer goods examples. Source: BNET.com
AROUND THE HORN WITH SUPPLIER’S
AB-InBev – Noted Hedge Fund Manager Pitches the Stock
If you prefer deeper analysis than Jim Cramer’s superficial recommendations, here’s an uncommonly thorough thesis on Budweiser’s parent, AB-InBev. Skip forward to slide #51 for the AB-InBev analysis, unless you want to view the case for a continued homebuilding/mortgage meltdown. Source: Tilson Funds
Smart Money(?) Dumps Shares of Kraft
Longtime consumer goods investor Nelson Peltz has unloaded his entire position ($100 million-plus) worth of Kraft shares according to a recent SEC filing. Peltz, who made billions for investors in the can business (American Can, National Can), then later with the purchase and sale of Snapple, has sizeable stakes in Heinz, Dr. Pepper and Family Dollar Stores. Warren Buffett continues to pare his position in Kraft as well. Source: Marketwatch
Info Overload from Dr Pepper Snapple Group
The beverage conglomerate (13% of sales to WMT) has compiled what may be the world’s longest investor presentation at 23 MB and 185 slides; basically tells investors they are targeting 3-5% sales growth and expect to sell more drinks. A companion chart for data gluttons would be these beverage industry brand ownership slides courtesy of Michigan State University. Source: Company reports.
Wal-Mart Beef Supplier files for IPO
National Beef Processors (9.6% of sales to WMT) filed for an IPO. This might be a better deal for existing owners than new investors. Proceeds from the transaction will pay founding members. National is doing the deal to clean up a complicated and somewhat restrictive ownership and capital structure. The company doesn’t need the money to pay down its debt of around $270 million, which approximates the company’s annualized EBITDA. Source: SEC.
Wal-Mart Supplier is Called Out for Sweet Executive Pay
Smart Balance, which sells about $240 million of butter and related products annually (19% of sales to WMT) got called to the carpet for generous pay package to its departing COO. Facing sales declines, the company is in the midst of a major restructuring and repositioning as can be seen from their recent investor presentation. The shares have been nearly halved over the past few years and may be getting attention from potential acquirers. Source: footnoted.com
Will The Refinance Wave Boost Wal-Mart’s Sales?
Some 24 million homeowners have primary mortgages at interest rates above 6%. With 30-year mortgage rates at record lows and near 4.50%, refi activity is humming. Undoubtedly, refinancing will put cash back in consumer’s pockets. However, with the shock of declines in home values and investment portfolios still fresh in their minds, many consumers are likely to rebuild savings before they return to looser consumption patterns. So, it may be 2011 or 2012 before the consumers flock to the stores. Here’s our take on why refinancing now is advantageous. Source: Calculated Risk
FINALLY…
China Now Leads the World in Beer Consumption
Not sure if being number one in this category is good or bad. Source: The Economist
Diary of a Red-Eye Flight
If you travel extensively, you can relate to this. Source: NY Times.
Quote of the Day:
“Isn’t it funny when you walk into an investment firm, and you see all of the financial advisors watching CNBC — that gives me the same feeling of confidence I would have if I walked into the Mayo-clinic or Sloan Kettering and all the medical doctors were watching General Hospital…”
-Senior portfolio manager, UBS
Have a thought or comment? Give us a call or email.
Scott Alaniz, CFA
Joe Chumbler, CFA
Rogers (479) 657-694
