It appears Warren Buffett’s love affair with retail giant Wal-Mart Stores Inc (NYSE:WMT) is finally coming to a close. It has been roughly 12 years since Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) first invested in Walmart stock back in 2005. However, recent filings indicate Buffett got rid of $900 million of WMT stock in recent months, cutting his stake by about 90%.
Buffett has certainly made his fair share of profits from WMT. Shares are up 28% since the beginning of 2005.
Unfortunately, Walmart stock has severely lagged the S&P 500, which has roughly doubled since Buffett bought the stock.
The Thorn in Walmart Stock’s Side
More importantly, WMT rival Amazon.com, Inc. (NASDAQ:AMZN) is up nearly 1,800% in that time. It’s no secret that AMZN is likely the single biggest reason Buffett is now ridding himself of Walmart stock.
“It is a big, big force and it has already disrupted plenty of people and it will disrupt more,” Buffett said of AMZN at Berkshire’s 2016 shareholder meeting.
In 2015, Walmart recorded its first annual sales decline in more than 30 years. In 2016, sales have come in mostly flat in the first three quarters of the year. Online rival Amazon grew sales by an impressive 20% clip in 2015 and another 27% in 2016.
It may have seemed inconceivable back in 2005 when Buffett first bought WMT stock, but AMZN has now eclipsed Walmart as the world’s largest retailer. Buffett is a notorious value investor, and he may not see the value in Amazon and its 172 price-to-earnings ratio. However, he may see the writing on the wall for Walmart stock.
WMT Turnaround Efforts
In the last two years, Walmart has been heavily investing in growing its e-commerce business in an attempt to play catch up with Amazon.
WMT bought e-commerce newcomer Jet.com for $3 billion, doubled its investment in China’s JD.Com Inc(ADR) (NASDAQ:JD) and it roughly doubled its number of online order fulfillment centers in 2016.
Unfortunately, the online investments may be too little too late.
Walmart grew online sales by 12.3% in fiscal 2016, but growth numbers are headed in the wrong direction. The 12.3% growth number falls short of Walmart’s 22% online growth in 2015 and 30% growth in 2014. It also falls well short of market leader AMZN (+16.3%) and the growth rate of the overall e-commerce market (+15%).
Buffett’s Take on WMT Stock
While most Walmart investors are hopeful of a turnaround, Buffett is admittedly skeptical of long-term retail recoveries.
“Turning around a retailer that has been slipping for a long time would be very difficult,” Buffett once said of Sears Holdings Corp (NASDAQ:SHLD).
Buffett has always liked investing in companies that hold a durable competitive advantage over peers. In other words, Buffett likes to own the top brands in the market. WMT was once the gold standard of retail. But now that the era of online shopping has arrived, Walmart is second fiddle to AMZN.
So far, WMT stock seems to be treading water amidst the Amazon flood. But Buffett has never been one to tread water or make long-term bets on what he sees as unlikely turnaround scenarios. It seems the billionaire known for his patience has finally lost patience with Walmart stock.
If the company’s turnaround efforts don’t pay off, there’s a good chance it will follow the path of other retailers and begin shutting down stores within the next several years. With that type of headline risk hanging over WMT stock, it’s no surprise Buffett is shifting his money elsewhere.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.
