Walmart CEO reflects on five years, says growth requires risk and change

by Kim Souza ([email protected]) 2,783 views 

Walmart Inc. CEO Doug McMillon answers media questions June 1, 2018, after the retailer's shareholders meeting.

Doug McMillon, CEO of Walmart, recently shared revelations with shareholders about his five years in the job, underlining the importance of staying true to lessons and principles left by founder Sam Walton. He said there will be wrong turns amid the rapid pace, but it’s important to remember it’s a long ride.

While McMillon’s predecessor Mike Duke spent just five years as CEO, retail insiders believe McMillon is just getting started in what could be a decade of leadership through the most volatile time in retail history. McMillon said the past five years brought constant change to the massive company.

“It has been an exciting time to be at Walmart. Looking back, I’m not sure I could have imagined some of the things we’re doing in our business today but, at the same time, it feels like we’re just getting started,” McMillon noted.

He said five lessons and revelations over the past five years have been key to the retailer’s success. Top of the list is the role of leadership.

“You can’t push a rope, but you can pull it. In other words, sometimes you just can’t lead from behind. You can’t muscle or push things along. As a leader during transformation, you have to be out in front — show that you want to learn, be curious, introduce new ideas, ask questions. Our people are talented, competitive and have a sense of urgency. When they hear about a better way of doing things, they engage, learn and act,” he noted.

McMillon also said Walmart has taken more risks in the past few years which is necessary to carry out meaningful change.

“There is no growth without change, and there is no meaningful change without risk,” he said.

Some of the risks Walmart has taken that makes him most proud include investments in wages, growing eCommerce, the acquisitions of Flipkart, Jet and others, and partnering with global technology companies in China and Japan.

“We don’t know what Sam would have done in these moments, but we know he would have been adapting — and he would have been aggressive. We’re drawing on that legacy today and tapping into that DNA,” McMillon said.

Walmart CEO Doug McMillon

While Walmart is moving with speed, McMillon said the retailer is also playing the long game.

“Our priority is to position our company for long-term success. History has shown us that companies that focused too much on the short term were doomed to fail. Managing our business on a daily basis is important, but our most important strategic decisions are made in light of what we want our company to become for the next generation,” he noted.

Tommy Barnes, founder of Chicago-based Project 44, praised McMillon and his leadership at Walmart. He said taking the long view while also being nimble and taking risks are necessary for retailers trying to remain relevant. He said a retailer the size of Walmart can make fatal mistakes by staying siloed and not investing in technology from the top down. McMillon has said Walmart is in the midst of transforming itself into a technology company. Barnes said companies that don’t remain nimble with a shared vision from the top will cease to exist. He said McMillon has been able to successfully share his vision with his massive army of employees, which is not an easy feat.

In his letter, McMillon praised his team saying he’s been “inspired to see their ingenuity” and willingness to take risks around the world. Core to McMillon’s vision is to become the world’s most trusted retailer.

“It’s a challenge to have the broader world know the Walmart we know. As we strive to make our company better, we will also look for ways to build trust by communicating the good work our people are doing and its impact. Included is the work we are doing to strengthen our culture of integrity and improve our compliance talent, processes and systems,” he noted.

McMillon said this is a period of significant change at Walmart and the pace and multitude of changes are critical to the company’s future. He said the mission calls for employees to continue changing how they work and what they do without changing the Walmart purpose and core values.

FINANCIAL TRACK RECORD
Revenues have grown 5.9% over five years, eclipsing a half trillion dollars for the first time in fiscal 2018 when reaching $514.405 billion. Top-line sales increased to $510.329 billion, climbing 5.82% over the past five years, according to Walmart’s annual report.

While gross profit margin has remained steady at about 24.5%, operating income has fallen 19% over the past five years. Much of that is the result of technology investments and keeping prices low to remain competitive.

During McMillon’s term as CEO, Walmart has continued to wind down some of its lackluster operations in Brazil. The plan to merge Asda with Sainsbury’s in the United Kingdom hit a roadblock and the retailer is now exploring other options for this business unit. Store counts around the world for Walmart have also declined to 11,361 units, down 92 units over the past five years. The scale-up for Walmart U.S has stalled with the retail giant adding a net eight stores last year. Sam’s Club reduced its store count to 599 clubs down from 647 in 2015. The International segment has also seen its store count reduced to 5,993 sites, down from 6,290 stores in 2015.

With fewer stores being added, the role of the existing stores continues to become more important as it also pays the bills for the company’s massive investments in e-commerce, a division that is still not cash positive. Leon Nicholas, vice president of retail solutions at WestRock, said recently Walmart will have to squeeze more out of the stores it has while also trying to grow online sales and propping up that digital commerce business.

STOCK PERFORMANCE
Walmart’s stock performance has been solid over the past five years with overall price appreciation up 54% since McMillon took over as CEO on Feb. 1, 2014. At that time, Walmart shares (WMT: NYSE) closed at $65.26 per share. On Friday (April 26), Walmart shares closed at $101.53. Price appreciation is just part of the growth story as the retail giant pays a quarterly cash dividend which has been increased annually for the past 46 consecutive quarters.

A $100 investment in Walmart stock on Feb. 1, 2014, with all the dividends reinvested, would have grown to $146.06 on Jan. 31, 2019, a return of 46.08% over the five year period, or an annual rate of return of 9.12%. Walmart has underperformed the S&P 500 Index that has a 5-year return of 68.19%, or an annual rate of return of 13.64%. The S&P 500 Retailing Index is the best performer of the three increasing 156.26% over the five years with an annual rate of return of 31.26%.

Wall Street seems somewhat mixed about Walmart as an investment with 14 analysts ranking it a “buy” and 16 analysts sitting on the sidelines with a neutral position saying at $101, the stock is likely overvalued relative to earnings. The biggest worry from the sidelines is the razor-thin margins amid massive investments in e-commerce and technology innovations.

Ben Bienvenue, an analyst with Stephens Inc., has a bullish sentiment toward Walmart. He rates the stock “overweight” or a “buy” position saying there is still upside for growth despite some turbulence and risk to earnings in the near-term. Following Walmart’s strong fourth quarter report, Bienvenue reiterated his position as “overweight” on the stock, but he also reduced earnings estimates for this year to $4.72, down from $4.74, reflecting higher expenses which could be partially offset by improved sales. He said next year Walmart should begin to see improvement in its eCommerce profitability and begin to glean some financial benefit from the Flipkart deal, which resulted in softer earnings this year.