Warren Buffett’s First Mistake of 2017

Caldor, Service Merchandise, Gaylords, Gimbels, Montgomery Ward, W.T. Grant, Woolworth. What do the aforementioned names have in common?Wal-Mart earnings
They were all once market-dominating retailers that went bust. Former retailing powers Sears and K-Mart, both owned by Sears Holdings (NASDAQ: SHLD), could soon follow. J.C. Penney (NYSE: JCP) and Macy’s (NYSE: M) struggle to update their business model by downsizing the number of stores they operate. Downsizing has its limits.
Retailing is a tough racket. Decades of getting it right hardly ensures survival. Newcomers continually nip at your heels, and every few years or so, a legitimate game-changer emerges to upset the industry paradigm and force the establishment to adapt or perish. Size fails to impart immunity.

Warren Buffett and Wal-Mart

No retailer is bigger and more established than Wal-Mart Stores (NYSE: WMT). These facts haven’t shielded Wal-Mart from a growing horde of detractors. The detractors were given a reload on their detracting when news hit that Warren Buffett raised a white flag on his Wal-Mart investment.
In the fourth quarter, Berkshire Hathaway (NYSE: BRK.b) unloaded 89% of its Wal-Mart holdings. Upon hearing the news, Business Insider, a business website prone to hyperbolic rants, ranted about Wal-Mart’s fate in an article titled “Warren Buffett Just Dropped Walmart and Signaled the Death of Retail as We Know It.”
But did he really?
Our intrepid Business Insider reporter highlighted the obvious retail game-changer Amazon.com (NASDAQ: AMZN). In the past two years, Amazon.com’s shares are up 120%, while Wal-Mart’s are flat. Our Business Insider reporter also referred to Buffett’s 2005 ominous prediction of the downfall of Sears and K-Mart. Given Buffett’s directive to unload Berkshire’s Wal-Mart investment, we could extrapolate that Warren Buffett foresees a similar future of dissipation for Wal-Mart.
We could, but I won’t.
Yes, we all know what a great investor, apotheosis of investing acumen, and fount of investing aphorisms that is Buffett. That said, the Warren Buffett of today frequently fails to adhere to his own famous aphorism: “Our favorite holding period is forever.” Upon even a cursory inspection, you’ll find the aphorism is more myth than reality, particularly when you vet Buffett’s recent investing history.
In just the last quarter, shares of Deere (NYSE: DE), Verizon (NYSE: VZ), Kinder Morgan (NYSE: KMI), Liberty Media Group (NASDAQ: FWONK), Lee Enterprises (NYSE: LEE), NOW Inc. (NYSE: DNOW) were all sold in addition to Wal-Mart. And let’s not forget Buffett sold Exxon Mobil (NYSE: XOM) shares after owning them for little more than a year.
Sometimes your experience and intuition serve as your best guide.
I shop at Wal-Mart — regularly. In fact, I spend more money at Wal-Mart than any other retailer. I shop mostly at their brick-and-mortar stores, but I also shop at Walmart.com and Wal-Mart’s recent e-commerce acquisition Jet.com. I associate Wal-Mart with value, and Wal-Mart delivers with quality merchandise at a price that produces value for me. (BTW, I never shop the dollar stores. You’ll find low prices, but you’ll also find inferior wares. The dollar stores deliver price, but not value, at least in my universe.)

Watch Wal-Mart’s Growth

What’s more, unlike other former retailing greats, Wal-Mart continues to grow. Total revenue grew 3% in the latest reported quarter. In Amazon.com’s domain, cyberspace, Wal-Mart delivered an impressive 29% year-over-year increase in e-commerce sales during the important holiday shopping season. Wal-Mart’s e-commerce growth was better than Amazon.com, which posted a 25.2% increase in North American sales. (Yes, Wal-Mart is starting from a smaller e-commerce base than Amazon.com, but the trend shows Wal-Mart is taking meaningful strides to catch up.)
In total for fiscal-year 2017, Wal-Mart’s EPS posted at $4.32; revenue posted at $485.9 billion. (Had the U.S. dollar not appreciated so strongly over the past year, revenue would have posted at $496.9 billion in constant dollars.) Wal-Mart management expects EPS to range between $4.20 and $4.40 for fiscal-year 2018. As for the dividend, it was increased for a 44th consecutive year. This is a retailer with a future.
Warren Buffett began accumulating Wal-Mart shares in 2005. Given the scarcity of opportunities for an investor who must invest in billion-dollar increments, maybe he should have heeded his “forever” aphorism regarding Wal-Mart a bit longer. Recent financial results point to Wal-Mart successfully adapting to e-commerce retailing while continuing to dominate brick-and-mortar retailing.
As a veteran Wal-Mart shopper, I’m not surprised.

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