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Walmart is a good example of a pullback from the work-from-home trend that became a feature of the pandemic, with many viewing this as a return to the company’s roots. This is seen favourably against a backdrop of improved performance at Walmart.

Under Armour is also going back to its roots, more out of necessity than by design. Founder Kevin Plank is back in the CEO role and has a very tough road ahead, with the company experiencing a sharp drop in sales and needing to reposition its products as premium.

Episode 175 of Magic Markets is brought to you by Future Forex. Listen to Episode 170 for a detailed discussion with co-founder and CEO Harry Scherzer on why South Africans shouldn’t allow their annual offshore investment allowances to go to waste, with crypto arbitrage offering an interesting boost to returns. In Episode 173, you can learn about how Future Forex is disrupting the mainstream banks by making international money transfers simpler and more affordable for forex clients.

 Future Forex SA (Pty) Ltd is a registered financial services provider, FSP number 51884.


Full transcript:

The Finance Ghost: Welcome to episode 176 of Magic Markets, brought to you by our friends over at Future Forex. Go back and check out some of the recent shows if you want to learn more about their crypto arbitrage offering or how they help people with their forex needs as well. Today, Moe, we’re not talking about financial services at all. We are, in fact, talking about retail. And you’ve covered Walmart, which is an absolute behemoth of a thing. And I have covered Under Armour, which is a bit of a mess, really.


Mohammed Nalla: Yeah, Ghost, I mean, a very nice contrast there. I mean, we covered both of these stocks in Magic Markets Premium some time back. Walmart, indeed a behemoth. It’s that retail, the quintessential kind of retail OG, all the way back to when Sam Walton effectively started the business and created this iconic brand. Under Armour, a lesser known brand. 

I’m going to jump in first with Walmart, maybe just because it’s probably more familiar to our listeners. Some of our listeners might not be familiar with Under Armour, so I’ll let you build that up a little bit later on. But let’s jump into Walmart because I’m quite excited about what’s come through in the latest set of earnings. And maybe by way of a bit of a recap, Walmart’s a stock we covered in Magic Markets Premium back in May 2022. And then we also did a free show in around November 2023 where we recapped and we looked at both Walmart as well as Home Depot, which is effectively a DIY hardware type of retail business. And that was a nice contrast.

But I’m going to unpack some of the key things that we’ve seen in the most recent results. But before that, a very important point for those of you that do have access to Magic Markets Premium, and it’s only R99 a month, an extensive library, you can go and have a look at that historic report on both of these companies. When we looked at Walmart all the way back in May 2022, the stock was trading at what looked to be higher levels than we are at today. But it’s important to note that there’s been a three-to-one stock split in February of this year. So when you’re looking at any levels we’ve referenced in the old report, just bear in mind that you’ve gotta 3x the current pricing in order for it to actually be comparable. So back then, when you’re looking at the stock was around 52, and that’s around 160-ish, if you want to really compare that to a like-for-like, we’d actually expected the stock to pull back to around $90 a share at the time, which would be around 30 today. And we also then had these extended levels to the upside and the downside, support and resistance. We include that in our full reports. 

We thought we’d actually pull down to a lower support level. Well, we didn’t get that. We actually saw the stock stabilise after quite a bit of a downturn preceding our report, and then it actually bounced quite strongly. Now, that’s been interesting because that’s not the only reversal that you’ve seen in Walmart. Let’s bring it back to the more recent news flow. The interesting thing for me coming out of the recent earnings, before we even get into the numbers, is that Walmart seems to be reversing its work from home policy. And this was fresh news. It came out just last week where they said they were laying off hundreds of workers and they were actually encouraging people – remember, these are predominantly the corporate jobs – they were encouraging them to come back into Bentonville. That’s where the headquarters of Walmart’s actually situated in the US, or into some of the core East and West Coast cities. 

Now, this reversal, yes, it’s going to earn the angst of a lot of people who have gotten used to working from home, but a lot of people in the market and analysts saying it actually is going back to Walmart’s roots. And the reason for that is because Walmart really differentiated itself in the early days by being very centralised. That centralisation, allowing them access at that stage to significantly better data. Again, we covered this in our full report all the way back in May 2022. A lot of better data, quicker decision-making and management citing some of those key points in the most recent decision, they’re saying, we find we’re a lot more nimble when people are in the office. We can make decisions a lot faster, a lot more efficiently. So let’s see how that plans out. But it’s just another one in a long list of large companies that are actually dialling back on the work from home and hybrid and actually moving back into a work in the office type of scenario. 

Now, another important point, again, a structural point, is the company also disclosed plans last month to close all of their 51 healthcare clinics that they had opened after entering the space in 2019. Remember, there was a pandemic and they were just basically saying that this business isn’t financially viable. So whilst healthcare has been a reasonably strong trend, it certainly doesn’t seem like Walmart’s gotten that to work. And so that’s come through as a key differentiating point. 

The last few differentiating points I want to add in just from a structural perspective. And then my second point, I’ll get into the numbers, is that interesting trends are the rise of advertising within Walmart, the rise of a subscription based program that’s called Walmart+ – sounds a lot like Amazon Prime – and also the rise of Walmart as a marketplace for third party sellers. Now, if you’ve been listening closely to Magic Markets and Magic Markets Premium, a lot of these are trends that we’ve picked up in other companies that we’ve covered very recently. We’ve covered Amazon. We touched on some of these points. It’s really symbolic of the trends, the mega trend that is e-commerce and these particular segments have contributed to significant growth in those particular verticals for Walmart. Wait for it – if you are a Walmart+ member, you now also get access to Paramount Plus. So certainly taking the fight to players like Amazon that have been eating into the space here, it’s resulted in some pretty interesting numbers, and I’ll get into that as my next talking point, Ghost.


The Finance Ghost: So Moe, we recently covered Under Armour in Magic Markets Premium, and what we really highlighted there was just how poor the underlying performance in the business has been. And the culture from the top seemed to be a major part of the issue, with founder Kevin Plank now parachuting himself back in basically as the CEO. He’s still been involved there over the past four years as executive chair, and maybe he’s taking this Walmart approach now of getting back into the office and kicking out the old CEO in the process because he is now firmly back in the operations. 

Now, it’s quite funny to see him talking in the latest transcript about changes to CEOs and heads of product marketing in North America and how that’s been a challenge for stability. Meanwhile, he’s pretty much been there in the background the whole time playing a role in these changes. Now, strategic execution and stability, both of those things are desperately needed here. Under Armour is still what they refer to as a podium brand, which means one of just a few worldwide brands that can be recognised around the world as a performance brand for what they do. And this is despite their recent efforts rather than because of their recent efforts. They really are relying on the legacy here, but they can’t rely on it forever because consumers are a lot smarter than that. 

So at Under Armour, for example, they expect the 2025 financial year to be a double-digit drop in revenue, including a 15% to 17% decline in North America. They expect a low single digit decline in the international regions. It’s going to be ugly across wholesale and direct to consumer, both down double digits. As a small mitigating factor, they think gross margin will be 75 to 100 basis points better off because of reduced promotional activity and discounting. Now this is the key point to remember here. The plan is to make Under Armour more premium again. So that means they will take some sales pain and they are going to reset the way this thing is sold to consumers and what the pricing looks like. Now, this is not going to be easy and I’ll touch on how they’re going to do this in my latter point, but that’s the key thing to remember right now.


Mohammed Nalla: Yeah, Ghost, when I hear those numbers, I’m grimacing. I mean, our listeners can’t see my face, but I’m grimacing because it means Under Armour actually needs the armour because it’s really a tough, tough space to be in. But it’s been tough across a lot of its value chain. If you go and have a look at Nike, for example, their performance has also not been fantastic. 

Let’s move back to Walmart because I indicated some very interesting and exciting things that were changing at Walmart. Subscription business, the advertising business. And let’s maybe start off there. When we have a look at the subscription business, independent research shows Walmart+ is having around eleven and a half million members. Now why do I say independent research, is the company doesn’t put that number out. Now, again, by contrast, I think the growth in Amazon’s numbers just in the last quarter, around 40 million. So definitely a very different kettle of fish, but certainly showing that Walmart has woken up to the potential that exists in that subscription model. And again, if we have a look at that, like I say, it’s not just the subscription side of the business that’s growing. We’ve got an advertising business and some numbers on that before we get into the actual earnings and revenue. 

The advertising side of the business grew 24% during the last quarter and the US advertising business grew by 26%. So certainly some very exciting growth numbers coming through there. Last point on this particular transition, as you’re seeing in terms of advertising, subscriptions and e-commerce, is that Walmart now operates as a marketplace for third party sellers. And third party marketplace sellers actually increased by 36% in the quarter. So those kind of double digit growth numbers are what’s tending to move the needle at a headline level. Now, what’s moving the broader group, what’s the performance look like? Well, on the most recent release, we had earnings per share coming through at around 60 cents. And that beat the market expectation of 52 cents quite significantly. And it’s really been led by, I would say, by the inclusion of high income customers and specifically in the grocery segment. Now, does this make sense based on what we see on a macro perspective? Yes, we know food inflation has been a story. And in fact, you were mentioning, you know, the leadership changes Under Armour. Well, we had a former CEO of Walmart, Bill Simon, he was weighing in on CNBC just a couple of days ago, and he said that he thinks once food inflation actually tails off, some of these tailwinds will actually ease back. And so he’s sounding quite cautious out there. But when we look at current management, they were certainly sounding quite bulled up, revenue up at $161.5 billion versus 159.5, and that’s 6% growth. So even though we’ve discussed this very strong double digit growth in some of the newer initiatives, at a headline level, 6% for a group the size of Walmart, that’s quite significant.

You can’t really shrug at that. Bear in mind, as well as we’ve covered with some of the other retailers, around 1% of that growth does come from an additional day in the quarter. It was a leap year. So, you know, if you take away that 1%, 6% growth now down to 5%, still very respectable. When we look then at same store sales for Walmart, because this is important, we know there are lots of growth initiatives. So you’ve got to look at what are the same store sales actually doing. Those rose by around 3.8% if you exclude fuel. Remember, they do tend to sell fuel very similar to Costco, that’s another company we’ve covered at Magic Markets Premium. So you’ve got to exclude fuel to get a real picture on what’s happening in the underlying business. 3.8%. I would say that’s respectable. It’s not fantastic, but certainly respectable. And then Sam’s Club, which is, I would say, the closest comparative to a Costco, because it’s a bigger format, tends to cater towards businesses. Sam’s Club, that’s part of Walmart, they had same store sales rising by 4.4% year over year, excluding fuel. So showing you how the big box format has worked, and that’s why you’ve got to look at a player like Costco, because that comes through very strongly as a competitor and also gives you a sense of where the market’s going.

Last few points here in the number section and also on the new initiatives is recently Walmart has launched a new private label grocery brand. And this is really an attempt to try and keep some of those higher income spenders that have now found their way into Walmart because of tough economic times. They want to try and keep them in there by going with a new private label grocery brand. And they’re also including bolder flavours, some interesting new formats coming through there. In aggregate, lots of moving parts at Walmart, which is quite surprising because at the surface, when you look at it, you’d expect it to be quite a boring old school, you know, let’s call it large, big box retailer. Well, guess what? They’re certainly not sitting still. Lots of moving parts, lots of exciting parts. And that’s coming through in the numbers, Ghost. 


The Finance Ghost: Yeah so polar opposite of Walmart which is Under Armour, which is not a big box blue chip of any kind, really. They do not have the benefit of being a startup either. And that’s the problem. They don’t have a patient shareholder register. They’re not some kind of cool cloud or AI business where they can say, well, don’t worry, guys, the numbers don’t look great right now, but I promise we’re going to do wonderful things. There really is no way of spinning the story in such a way that shareholders are going to stomach big losses while they try and reposition the brand. Now that’s not to say that Under Armour is generating necessarily big losses right now, but they do need to be careful because the trend is a big worry. And this means that restructuring is going to be required to streamline the business, which is basically a nice way of saying that layoffs have come to Under Armour. 

Now expenses are expected to be down around 2% to 4% in FY 25. And yes, this is going to help mitigate some of the pain on the financials, but there’s going to be a lot of pain in terms of culture and disruption. And it’s also worth noting that it takes time for restructuring benefits to really come through. So it’s all good and well to give an indication of what the adjusted expenses are going to look like and everything else, but the reality is they expect to incur charges of between 70 and $90 million to go and do this restructuring. If you ignore this, adjusted operating income would be $130 to $150 million. 

So just compare those two numbers. Those restructuring charges are really significant. And this is why it’s so dangerous when companies lose their way strategically and they go and ramp up their expenses when actually they have almost no business doing so. If things don’t work out for you after you’ve ramped up your staff or you’ve gone in a particular direction, trying to fix the problem is just a horrible, horrible situation to be in. You have to incur big costs. You have to deal with all the pain of the culture going in the wrong direction. And on top of that, you have to do it in public where you are actually telling everyone how it’s going every three months.


Mohammed Nalla: I keep shaking my head because I remember when we covered Under Armour, those leadership changes. I mean, it was really catastrophic if you look at it. And again, if you haven’t looked at that full report, please go and do so. I think it provides a lot of colour in terms of what happened behind the scenes. Ghost, I’m going to wrap up my final point on Walmart by doing what I always love doing, is comparing Walmart to a lot of the competitors out there. I see you smiling because you know there’s a question coming your way. Before I flick that question to you and before – I’m giving you some time to go and look it up on Google, right – but before we even go there, point I actually omitted-


The Finance Ghost: No, no, there’s no, there’s no Googling here. There’s no cheating.


Mohammed Nalla: No cheating.


The Finance Ghost: No cheating.


Mohammed Nalla: The point I actually omitted in my previous discussion here is that for the first time ever, Walmart’s delivery business surpassed its store pickup business in terms of volume. And the reason I raise this point now is that it’s so important to understand some of the mega trends when you’re looking at how the share price has done and how competitors have done, because those trends include e-commerce. We’ve discussed Amazon. Those trends include, what have we seen in terms of consumers under pressure, maybe buying into retailers that are positioned slightly lower down on that value chain just because it makes more sense. We saw that in a player like TJX, for example, we’re seeing big box formats like Costco doing quite well. 

So when you frame this competitive view and look at Walmart relative to its competitors, I’ve looked at TJX. That’s a clothing retailer, effectively, in the US. We’ve looked at this in Magic Markets Premium as well. TJX, we’ve looked at Costco, we’ve looked at Amazon, because, you know, e-commerce, you’ve got to look at Amazon. I then also included Target and I included Home Depot, because Home Depot released recently and disappointed the market. So this gives you a nice overall view of what’s been happening over the course of the last year.

Ghost, do you want to hazard a guess in that subset, in that grouping, who’s currently coming through on the podium spot?


The Finance Ghost: I want to say Amazon.


Mohammed Nalla: So that’s a reasonable guess. But surprisingly, Amazon actually coming through in the number two spot. Until recently it was in the number one spot. Subsequently, we’ve seen a little bit of a correction and remember, e-commerce making up just a portion of Amazon. We’ve got the web services, that’s the real engine in that business. But Amazon in the number two spot over the last year with around 57% gain, they are beaten by – wait for it, drumroll – we’ve got Costco at 62%. So just pipping Amazon. But again, if you really think of that, Costco, big box retailer, their e-commerce is shocking. We’ve discussed this and they’ve managed to outperform a giant, a behemoth like Amazon, then when we have a look at the number three spot that comes through as Walmart, so still getting a podium position. 

If we have a look at other retailers, let’s look at Target. They’re big in the US, but man, have they done badly. Down at 2.4% over the last year. So still a gain, but 2.4%, that’s been a significant, significant underperformer. And they were even beaten by Home Depot, which like I say, sold off quite aggressively last week. Home Depot at one stage earlier this year was up around 35% and then gave a lot of that back. So it’s only up around 15% over the last twelve months. Home Depot coming through and just really indicating this massive, massive divergence that we’ve seen. I’ve mentioned TJX almost as an afterthought. They come through in the middle of the pack there with around a 26% gain. Over five years, again, Ghost, you want to hazard a guess who comes through of that subset, who’s in the podium position?


The Finance Ghost: It’s not going to be Amazon over that period I don’t think. It’s going to be one of the other retailers. It might actually be Costco. I don’t know.


Mohammed Nalla: And you’re on the money, right? You’ve got Costco with a staggering 222% gain over that time period. They were then followed again by Amazon, 98% over that time period. And then if we have a look at Walmart, not a bad performance, 94%. So again, your podium looking exactly the same over five years as it does over one year. We’ve got significant clustering amongst the rest of the players. They all come through between 70% to 90%. So it’s been decent five years in the retail space. And again, we’ve covered how some of these macro tailwinds of the consumers, the stimulus money, inflation, that all helps the sector as a whole. Just watch that inflection point, because if the inflation story starts to cool down, it does have a bearing on retailers. 

A last point, and then I’m going to wrap this, is that some of our listeners like to know, what’s the dividend yield? You’re not buying Walmart for the dividend. It’s got around a 1% dividend yield, but very conservative on this. It’s only a 33% payout ratio. And again, that’s really aimed at being a blue chip that can sustain its dividends over the longer term. In aggregate: if you’re buying Walmart, you’re either buying it for some of those interesting and exciting initiatives that they’ve just put on the table, or you’re buying it as part of an overall retail basket simply because of its size, its scale and its delivery over the longer term, Ghost.


The Finance Ghost: Back to Under Armour to finish off. And the reality is that cutting costs only gets you so far, of course. They really do need their top line story to come right. And that’s where this premium positioning is such a serious focus for them actually. Plank notes that they are competing far too much on price these days versus what he calls their core competency. Now, Under Armour was built based on fancy fabric technology, basically, and that’s Plank’s influence as founder coming through. So the viewpoint from him that they’ve just become a commoditised business is probably not too surprising. 

Here’s something that might be a surprise. He’s quite blunt about this: he just says men’s apparel is the highest priority, end of story. So they won’t deprioritise footwear and women’s wear, but men’s apparel, that seems to be what he understands best, and that is where he’s focusing. So this is a classic situation where you have an entrepreneur leading a business and what he thinks is right is what they are going to do. So not exactly the most inclusive policy around, but at the end of the day, inclusivity has caused some pretty bad outcomes for a few brands in the apparel space, let’s be honest. It can sometimes work, though, to have a wider appeal to consumers. So really good example is another company we’ve covered before in Magic Markets Premium, which is Abercrombie and Fitch, which turned its business around by broadening the client base and then executing really, really well. 

So Under Armour is going to do something different. Now to bring in that focus, they are going to look to tell the story of the performance element of the clothing. So if you have an Under Armour store near you, somewhere in a shopping centre, keep an eye on whether or not the marketing changes in the next few months, because I think they’re going to be focusing a lot more on what makes their clothes different. They’re also going to rationalise the product range and try and improve volumes off a smaller variety of SKUs. 

Now, if they get this right, it does really great things for the supply chain. They are looking to reduce SKUs by 25% over the next 18 months. Now, they are also looking to bring products to market a lot quicker, like the rather colourfully named StealthForm Uncrushable Hat. Now, Jordan Spieth wore that at the US Masters, so my ears pricked up accordingly, and sounds like a daft name, the StealthForm Uncrushable. But online reviews actually look quite encouraging. And this is the kind of marketing that works.

Now long story short, if Plank gets this right, it’s going to be through an approach that is the exact opposite to Abercrombie and Fitch, as mentioned. But it’s going to have something in common as well. And that will be strategic execution and consistency. And that is what has been missing so severely at Under Armour. You just cannot turn a retail or consumer business around if you’re going to be changing management team all the time. So whichever way they decide to go at Under Armour – and it seems they now have a strong direction – they’re going to have to execute to a very high level. 

Now Moe, I bought Under Armour as part of my spray and pray strategy in the pandemic when everything had gone down a lot. Somehow I’ve even managed to then lose money so far on Under Armour, despite that. But I have to say, although Plank is a very colourful character, and I fear he’s going to say lots of dumb things in transcripts from time to time, I’m kind of tempted now to actually buy this dip as a spec play and just see what happens. Because if they can get back to the core of their business and rationalise it over the next two years, then maybe, just maybe, there will be a decent share price performance here. And I’ll feel a bit annoyed if I don’t take advantage to buy in at a much, much lower price than my initial buying and then miss out on a potential upswing like we saw at Abercrombie and Fitch. 

It’s always easy to look back on these retail turnarounds and feel annoyed about missing them. But you’ve got to be prepared to then buy when the whole building is on fire.


Mohammed Nalla: Yeah Ghost. I mean, it’s an interesting approach. There is some optionality if you back Plank and his management style. I mean, he is the individual who started the business, you know? Yes, you could potentially see that reverse. I think Under Armour is missing a point. I mean, it was such a powerful brand a while ago, and maybe Plank’s playing towards, let’s go back to basics. Let’s focus on what we’re good at. 

But if I look at what’s happened over that time period, the competitive landscape has changed a lot. And despite the pressure that you’ve seen in, for example, Lululemon share price, Lululemon, for example, has been focusing on women’s athleisure wear, predominantly, and then broadening that out in terms of menswear and so forth. Whereas if we look at Plank’s current approach, the focus on just kind of, I guess, the priority of menswear, I would say maybe they’re missing a beat. We know how successful the women’s athleisure wear segment of the market has been. But again, maybe Plank sees something that we don’t see. 

I’m not brave enough to go and take a spec call on Under Armour at this stage, but that’s also because I’m not trying to defend an existing position that might have lost me a lot of money. But what do you think as our listeners? Because that’s where we’re going to leave it this week, hit us up on social media. It’s @magicmarketspod, one word, @financeghost and @mohammednalla, all on X or go and find us on LinkedIn. Pop us a note on there. We hope you’ve enjoyed this. Until next week, same time, same place. Thanks and cheers.


The Finance Ghost: Ciao. 

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