Wal-Mart, P&G, NBTY, Crystal Bridges and More!

Wal-Mart: What’s Driving ROI?

At a high level, retailing is similar to, but far less complicated than, banking. In banking the 3-step mantra is “get it in, get it out, get it back,” i.e., collect deposits, lend the deposits out, and make sure you get paid back. In retail, only the first 2 steps apply: get it in, get it out, i.e., get the right merchandise in at the right time and place, and sell it quickly (at the right price).

Doing More with Less: Inventory as a Percent of Sales at Wal-Mart (over 40 years)

Source: Company reports

Wal-Mart perfectly illustrates this concept in its Return-On-Investment (ROI) calculation. Though ignored by most, WMT provided its ROI on the last page of its financial press release, clueing investors in to the return the business is producing. In FY2010 WMT produced a ROI of 19.3%, same as last year, and very good by any standard. The trick is not only to grow sales, but to grow sales while maintaining or even increasing ROI. How do they do it? By making sure that assets don’t grow faster than sales or profits. As the accompanying graph illustrates, a prime lever has been reducing inventories as a percent of sales (or, increasing “turns”). Sure, the moves into grocery, Sam’s and different formats affect the calculation, but the prevailing trend is crystal clear. And 2010 was another exercise in asset efficiency as WMT again decreased its inventory-to-sales ratio.

Financially, here’s why this measure is relevant to investors. In the last decade, WMT has added $350 billion in sales to its base, while needing a mere $14 billion in incremental inventory investment. For perspective, in FY2000, WMT did a little more than $150 billion in sales on $19 billion in inventory. Driving the inventory-to-sales ratio down from 12.4% to 8.2% over this period had a dramatic effect on financial performance and was not at the expense of net profit margins (actually up 30 points over this period). Had the company not improved its efficiency, ROI would have been meaningfully lower and the company would have produced far less cash for dividends, buybacks and new stores. SKU rationalization is not a one-and-done occurrence, but is here to stay.

Pampers in China

Must reading if you work in this category or in emerging markets; an excellent article on P&G’s experience selling diapers in a market where the product was not a cultural norm. Issues raised in the article lit up the comment board and it’s worth a glance as well. Source: BNET.com

The 300% Markup, a Primer on the Rent-to-Buy Business

Here’s great perspective in this commentary on a business that competes with Wal-Mart in categories like electronics and certain home furnishings. In essence, rent-to-own companies maintain minimal SKU’s, mark the items up 100%, but the real price is 48 or more monthly payments that tally 4x the price. If a TV wholesales for $1,000, the payments total $4,000. Source: Bronte Capital

Do Board Directors Listen to Shareholders?

The proxy statement of Wal-Mart supplier NBTY, Inc. (18% of sales to WMT, operates Vitamin Shoppe stores, sells Natures Bounty, Sundown & Rexall nutritional supplements) had this morsel in its proxy that doesn’t go down so smoothly. “…After the mail is opened and screened for security purposes, it will be logged in, and (other than mail that our General Counsel determines to be trivial or obscene) then forwarded to the particular Director identified, or to the Board as a whole, as requested in the stockholder’s correspondence. Trivial items will be delivered to the Directors at the next scheduled Board meeting. Obscene items will not be forwarded.” Nice to know that there’s a process in-place ensuring that the directors see all the trivial items. On the subject of nutritional supplements, here’s a busy, but useful graph positioning various supplements based on scientific evidence. Source: Footnoted.org

Econ 101

Excellent charts on trends in unemployment, the housing market and the looming wave of foreclosures. The bottom line is a seismic shift in consumer priorities─ consumer’s now view paying off their credit cards ahead of paying off their mortgages according to this study by TransUnion. In the short term, this is probably good for most retailers, when the day of reckoning comes spending on discretionary items gets walloped again. Source: American Observer, Calculated Risk, and TransUnion

Though stale, incomplete, and probably wrong, the government has just published statistics for online retail sales. The categories of sporting goods and books & magazines saw the biggest gains. For data geeks only.

Random Walk

Texting is pervasive with many adults and teens glued to their mobile devices. Here’s a new look at the dangers of walking and texting. The politically-correct term is “inattentional blindness” which means we are oblivious of our surroundings when staring at a screen. Early solutions ─ In London, lampposts are being padded while in Finland “some crosswalks now display red and green lights on the pavement itself, so texters looking down know whether it’s safe to cross.“ Source: Book of Odds

Musings

Warren Buffett’s Letter to Shareholders is available here and is required reading for anyone interested in improving their business communication skills.

Where do bars outnumber grocery stores?

Why music has gotten louder? Intriguing look at the manipulations sound engineers make.

Sneak Peek at Crystal Bridges

If you haven’t done so, check out the progress at Crystal Bridges. Compton Gardens is the perfect place to take a 20 minute relaxing stroll to an observation deck that offers an incredible view of the construction in progress. Better yet, give Jamey McGaugh a call at 479-418-5725 and ask if he will accompany you. An assistant to Associate Director Sandy Edwards, he can provide not only an insightful narrative of the current progress and plans, but also tell you about the upcoming corporate sponsorship opportunities.

Oil, Cash for Clunkers & Healthcare

Oilfield math from an oilfield worker: A clunker that travels 12,000 miles a year at 15 mpg uses 800 gallons of gas a year. A vehicle that travels 12,000 miles a year at 25 mpg uses 480 gallons a year. So, the average Cash for Clunkers transaction will reduce US gasoline consumption by 320 gallons per year. They claim 700,000 vehicles so that's 224 million gallons saved per year. That equates to a bit over 5 million barrels of oil. 5 million barrels is about 5 hours worth of US consumption. And, 5 million barrels of oil at $70 per barrel costs about $350 million dollars. So, the government paid $3 billion of our tax dollars to save $350 million. We spent $8.57 for every dollar we saved. We are pretty sure they will do a great job with our health care, though.

The Last Word

Response to an executive who was willing to overpay for an acquisition because it was small and therefore would have little effect on shareholders:

“Are we supposed to applaud because the dog that fouls our lawn is a Chihuahua rather than a Saint Bernard?”

—Charlie Munger (Warren Buffett’s business partner)

Have a thought or comment? Give us a call or email.

Scott Alaniz, CFA

scott@bostonmmm.com

Joe Chumbler, CFA

joe@bostonmmm.com

Rogers (479) 657-6940

Information in this report has been obtained from sources that we believe to be reliable. Boston Mountain Money Management does not guarantee its accuracy or completeness and assumes no responsibility for actions taken with respect to information contained herein. The authors held a position in Procter and Gamble and Wal-Mart Stores at the time of this newsletter.