Stock Pitch

Albert Wong, ay8wong@uwaterloo.ca, 1A

AFM, University of Waterloo
Michael Song, m44song@uwaterloo.ca, 1A
CFM, University of Waterloo
Agenda
Industry Overview
Company Overview
Investment Thesis
Valuation
Investment Risks
Retail Industry
Trends
• Technology changes customer experience
• Mobile shopping continues to grow
• Creating meaningful experience
• Personalization is the future of retail
• Attracting and retaining talent is critical
• Delivery service is the next major trend

Source: U.S. Census Bureau, Bloomberg, Strategy& analysis Source: GlobalData Retail estimates and analysis 3
 Company Overview

Business Overview
• Ticker – NYSE: WMT
• Groceries, fashion, technology
• Low costs to low-income customers
• Convenience to high-income customers

Performance CEO
Doug McMillon • Bachelor’s
Degree at
University of
Arkansas
• MBA at
University of
Tulsa

Source: Yahoo Finance

 E-commerce Expansion

• E-commerce sales rose 50% last quarter

• Free 2-day shipping on orders $35+
• Walmart online sales in 2016 - $12.5 billion
• 2017 projections - $17.85 billion
• Less than 4% of sales - large room for growth
• Investments in trendy, niche e-commerce companies
• Discounts for over 1 million items online for in-store pickup
• Partnership with Google for voice-controlled shopping
 Grocery Giant

• 56% of total sales

• 21.9% share of U.S. market Walmart Sales in 2016
Home
• Online shopping - estimated $100b+ industry by 2025
7% 8% Apparel
• 1000 to 2000 food pickup locations by 2018
9%
• Partnership with Deliv - same-day grocery delivery Hardlines
56% 9%
• 10 miles distance from 90% of U.S. population Entertainment
• Planned in-home grocery delivery services 11%
Health and
• Attracts urban, high-income customers Wellness
Groceries

Source: Business Insider

Why Invest in Walmart? (NYSE: WMT)

Walmart uses everyday-low pricing strategies to attract customers from the consumer market to purchase a
variety of products, including household supplies, groceries and clothes.

Competitive Advantages
• Low, competitive prices compared to other businesses
• Wide distribution system
• Significant barriers to entry
• Highly effective inventory management system to meet consumer demands
• Great bargaining power over its suppliers
• Attracts consumers from both sides of income spectrum

Long-term Growth Opportunities and Value:

• Highly inelastic demand for groceries
• Overall consumer shift towards e-commerce
• Growth of home-delivery market
• Ability to continue scaling
• Expansion of international operations
Investment Thesis
Walmart’s historical dominance in the traditional retail industry, projected grocery sales growth, and aggressive
expansion in e-commerce combine to create a compelling investment in a reputable company.

Recommendation: Buy Current Price: $99.62 (USD) Price Target: $ 120.73 (21% upside)

Catalysts

• Magnitude of Walmart’s e-commerce growth

• Rapid development of delivery services (Deliv, Uber, Lyft)
• Return on investments into staffing and customer service
• Success of grocery pick-up location expansions
• Continued robust quarterly earnings reports

Key Risks

• Amazon: e-commerce and partnership with Whole Foods

• Potential failure to improve thin profit margins
• Strong U.S. dollar decreasing international profits
Comparable Companies Analysis

Source: Wall Street Journal

Discounted Cash Flow Valuation
Price Target
Base Case: $120.73 (21% upside)

• Based on revenue growth projections from Yahoo Finance

• Weighting: 75% Exit Multiple Method, 25% Gordon Growth Method

Bull Case: $125.61 (26% upside)

• Based on constant revenue growth of 5% in next 5 years

• Assumes continuous success of Walmart e-commerce and grocery expansion

Bear Case: $103.73 (4% upside)

• Based on Thomson Reuters consensus revenue projections for 2018 and 2019
• Assumes constant 2% revenue growth in three years beyond 2019
Risks & Mitigation
Internal Risks
• Thin profit margins do not justify higher wages
• Lack of customer loyalty
External Risks
• Competition: Amazon in e-commerce
• Gradual decline in traditional retail sales
Mitigations
• E-commerce growth reduce SG&A costs in long-run
• Investments in better customer service
• Rise of mobile app Walmart Pay
• Enrolls tens of thousands of customers daily
• Unchallenged as world’s largest physical retailer
• Target market prioritizes cost and convenience
• Straight-to-fridge food delivery network
• EDLP strategy protects Walmart
Implied upside of 21%
Investment Rationale
• Company misperception
Current Price: Implied Price:
• Inelastic demand
$99.62 $120.73 • Positioned to take advantage of other retailers
• Recession-proof business
• Staple of American consumer market
• Increased focus on customer service and loyalty
Catalysts

• E-commerce expansion Key Risks & Mitigants

• Grocery Delivery Success • Emergence of Amazon
• Leverage distribution channels
• Customer Service Investments • Match e-commerce shipping policies
• Future Earnings Reports • Offer lower prices
Appendices
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