Walmart Makes Adjustments to its International Strategy in its Battle with Amazon

The sun never sets on Walmart’s empire, thanks to its network of stores across five continents. But in the span of 10 days, Chief Executive Doug McMillon has begun dramatically redrawing the retailer’s map, and there is likely more to come as it places bets to remain on top. “All of a sudden, everything is in play,” said Dave Marcotte, an analyst at Kantar Retail. In less than two weeks, Walmart has agreed to cede control of its British business to a competitor and spend $16 billion to acquire India’s e-commerce leader in its biggest-ever deal, fending off Amazon. The wheeling and dealing shows how McMillon is focusing on high-potential markets like China and India, finding partners to help it battle online, and cutting loose middling businesses. He has got more work to do, though, and subpar markets like Brazil and Japan might be next on his list.

Walmart’s far-flung international units do not get much attention, but they are important as a source of cash, management talent and ideas that percolate into its core U.S. operations. Sales growth outside the U.S. once topped more than 10% annually, adjusted for currency moves, but it is less than half that now as sluggish economies, store closures and fierce competition have taken their toll. Those pressures—combined with a U.S. e-commerce business that continues to spill red ink and higher labor expenses from this year’s wage hike—have forced McMillon into hard choices. Some, like selling the British Asda stores, were welcomed by Wall Street, but the Flipkart deal got a rude welcome from investors, who raised concerns about its steep losses and asked whether Walmart’s cash would be better spent elsewhere. S&P Global Ratings said the heavy spending to compete with Amazon could threaten Walmart’s pristine credit rating.

McMillon defended the Flipkart deal to analysts, saying it was a unique opportunity. He is certainly mindful of past missteps abroad, such as his 2011 decision to buy an unprofitable, second-tier online marketplace in China that has forced the company to play catch-up to Alibaba—the Amazon of China—ever since. Walmart’s international reach sprawls across 6,360 stores in about two dozen countries from Argentina to Zambia. Many were acquired during a buying spree from 1999 to 2009, but that era of aggressive flag-planting is long over. Today the international business accounts for less than one-quarter of Walmart’s total revenue, down from nearly 30% five years ago. That share will decline further after Walmart’s decision to merge its Asda business in the U.K. with Sainsbury Plc, retreating from a market that was once its shining star abroad. Other moves are expected to follow, as the Asda sale “was the first volley” in a broader reshuffle of Walmart’s global holdings, said Mark Stoeckle, Portfolio Manager of the Adams Diversified Equity Fund, which owns Walmart shares.

Stoeckle and other investors were encouraged when Walmart’s Finance Chief, Brett Biggs, said in October that he is “open to taking action” to simplify operations. Getting leaner should help Walmart devote more focus and firepower to its escalating battle with Amazon, which is trying to crack categories like food and apparel, long Walmart strongholds. Acquiring e-commerce startup Jet.com two years ago has helped, but the Flipkart deal suggests that future moves will likely come outside the U.S.

In Brazil, a nation just coming back after a two-year recession and political unrest, Walmart has already closed stores, overhauled management and wound down its e-commerce platform. It is now reportedly considering selling a majority stake in the unit, which includes a dozen different store types that could easily get broken up by a new owner. “Would I prefer they take capital out of Brazil and put that toward battling Amazon? Sure,” Stoeckle said.

Japan is another potential trouble spot. Walmart’s big-box, one-stop shopping model has never caught on there, and today its Seiyu chain sits far behind leaders Seven & i Holdings Co. and Aeon Co., according to data tracker Euromonitor. As with other Asian markets like China and India, success in Japanese retail is more about clicks than bricks. Walmart has taken steps to improve its digital business, teaming with local player Rakuten earlier this year to revamp its online grocery service. “The only route they have to grow that market is online,” Kantar’s Marcotte said.

Walmart could go further, cutting a deal with Rakuten or another Japanese company that allows it to focus on the online business and lessen its exposure to capital-gobbling traditional stores. “There’s certainly going to be a bright-light audit on Japan,” said Bill Dreher, an analyst at Susquehanna International Group. “The growth and margins of Seiyu are underwhelming and we could see something smart being done there.” With Walmart’s shares down about 16% this year, after two straight years of increases, McMillon needs to cast a bright light across Walmart’s entire map.

Citations

1. https://for.tn/2Iwl2EJ – Fortune
2. https://bit.ly/2jMyAhp – Forbes

Milk Futures Boom in Today’s Riskier Global Dairy Business

Doug Block, a dairy farmer for 45 years, says he grew up in an era when the price of corn feed for cows fluctuated by just 6¢ a bushel. The U.S. did not ship much cheese and butter overseas, and the government often bought cheese to buoy the market when prices sagged. Those days are gone. Block’s business depends on pasture conditions in New Zealand, Europe’s inventories, and China’s milk consumption. He also has to deal with wild swings in the market after the U.S. government scaled back support over the last decade.

So in the past decade or so, Block and others in the dairy business have increasingly been doing what corn farmers have done since at least the late 1800s. They are hedging with futures, essentially locking in a price down the road. “More and more dairy farmers will participate, because it’s a needed form of risk management,” Block says. And it has become a booming business: Outstanding futures and options contracts for butter as well as nonfat dry milk reached a record in April, according to CME Group.

Risks and volatility continue to mount for all farmers, especially in the dairy industry, according to Dave Kurzawski, a senior broker at INTL FCStone in Chicago. U.S. farmers are producing record amounts of milk even as Americans drink less of it. Many farmers faced losses during the first quarter, and while milk futures prices have been rising recently, that does not necessarily indicate profit this year given that feed and labor costs are also increasing, Kurzawski says. And prices are constantly shifting.

“The way to manage that is to use hedging,” says Kevin Ellis, chief executive officer of Cayuga Milk Ingredients, a processor based in Auburn, N.Y., that sells cream and dairy powders for domestic use and export. The CME initiated dairy derivatives in 1996 with contracts for milk used to make cheese. Futures for other products followed over the years, including nonfat dry milk, butter, and cheese. Still, there are fewer than 250,000 futures and options contracts on the market for all dairy products. That is small compared with corn, at about 1.7 million contracts for futures alone. And trading in dairy remains relatively less liquid, making it hard for speculators to get large transactions done, says Ari Officer, a Chicago-based trader and partner at a firm called Tres Leches.

But the market is growing globally. New Zealand’s exchange began offering whole milk powder futures contracts in 2010 and butter futures in 2014. Euronext’s dairy market started after the European Union abolished its milk quota system in the spring of 2015. Proprietary trading firms are stepping into dairy futures and options, increasing the number of speculators participating in the market, says Kurzawski. Volume traded on exchanges will equal total milk production by 2025 as more farmers, processors, and speculators jump into the market, according to data from brokerage Rice Dairy LLC. That compares with about 23 percent today.

Although futures can offer farmers some predictability, smaller operations are struggling to keep afloat. Low milk prices have accelerated industry consolidation. Dairies with at least 8,000 cows, once a rarity, are more common because the riskier environment favors operations with economies of scale, says Marshall Hansen, senior vice president for agribusiness finance at Farm Credit Services of America. And those big players are increasingly sophisticated about financial markets. Land O’Lakes Inc., the largest U.S. dairy cooperative, has been steadily increasing its hedging activity, says Beth Ford, a chief operating officer.

Such growth recently prompted Rabobank, the largest agricultural lender, to start its own risk-management desk for dairy. Demand for help with hedging is coming in particular from mega-dairies with thousands of cows. “We’ve got growing supplies and more demand. The highs are getting higher and the lows are getting lower, and costs of production aren’t going down,” says Ryan Yonkman, a broker at Rice Dairy who works with farmer clients. “Every year, we get new customers, and it’s for those reasons.” Milking cows, it turns out, is no work for the fainthearted.

Citations

1. https://bloom.bg/2I1Mry3 – BusinessWeek
2. https://bit.ly/2Izi2Yt – FuturesKnowledge.com

The Good News Is . . .

• The Labor Department said its Consumer Price Index rose 0.2% after slipping 0.1% in March. In the 12 months through April, the CPI increased 2.5%. Excluding the volatile food and energy components, the CPI edged up 0.1% after two straight monthly increases of 0.2%. The so-called core CPI rose 2.1% year-on-year in April, matching March’s increase. Rising costs for gasoline and rental accommodation were tempered by a moderation in health-care prices, pointing to only a moderate rise of inflation, despite the nation’s robust employment picture.
• Duke Energy Corp., one of the nation’s largest energy holding companies, reported earnings of $1.28 per share, an increase of 23.1% over year-earlier earnings of $1.04 per share. The firm’s earnings topped the consensus estimate of analysts by $0.13. The company reported revenues of $6.1 billion, an increase of 7.1%. Management attributed the results to greater demand and better pricing in its retail energy segment, improved margins and lower income tax expense.
• Walmart has agreed to a deal to buy a majority stake in Indian e-commerce giant Flipkart for $16 billion. The U.S. retail giant said that it would acquire an initial stake of roughly 77% in Flipkart. The remainder of the business will be held by existing investors, including Flipkart’s co-founder Binny Bansal, Tencent, Tiger Global and Microsoft. Walmart said in a statement that its long-term aim would be to support Flipkart’s transition into a publicly-listed subsidiary. The retailer said it expects India’s e-commerce market to grow at four times the rate of the overall retail industry. Flipkart has 100 million users signed up to its platform, according to the company’s website. India, which has a population of 1.3 billion, is seeing rapid growth in its digital economy with the emergence of e-commerce start-ups like Snapdeal and Paytm.

Citations

1. https://reut.rs/2rycenm – Reuters
2. https://bit.ly/2Iba7wN – NASDAQ
3. https://bit.ly/2jLnDNc – Duke Energy Corp.
4. https://cnb.cx/2rvsKVT – CNBC

Planning Tips

Guide to Health Savings Account (HSA) Investment Strategies

Health savings accounts (HSAs) are tax-advantaged savings accounts designed to help people with high-deductible health plans (HDHPs) pay for out-of-pocket medical expenses. These accounts offer some of the best tax breaks around. They enable you to put away pre-tax money for qualified health expenses. The investments in those accounts grow tax-free. And when you take the money out, generally those funds are not taxed if they are used for qualified medical expenses. Be sure to consult with your financial advisor to determine if these strategies are appropriate for your situation.

HSA Tax Advantages – What makes an HSA so good? Consider:

• Your contributions to an HSA can be made via payroll deductions, as well as from your own funds. If the latter, they are tax-deductible, even if you don’t itemize. If they’re made via the former, it puts them on a pre-tax basis, meaning that they reduce your federal and state income tax liability, and they are not subject to FICA taxes, either. In addition, any contributions your employer makes do not have to be counted as part of your taxable income.

• Your account balance grows tax-free. Any interest, dividends or capital gains you earn are nontaxable.
• Withdrawals for qualified medical expenses are tax-free. This is a key way in which an HSA is superior to a traditional 401(k) or IRA as a retirement vehicle: Once you begin to withdraw funds from those plans, you pay income tax on that money, regardless of how the funds are being used. Also better: Unlike a 401(k) or IRA, an HSA does not require the account-holder to begin withdrawing funds at a certain age. They can remain untouched as long as you like, although you may no longer contribute once you reach 65 and are eligible for Medicare.
What is more, the balance can be carried over from year to year; you are not legally obligated to “use it or lose it,” as with a flexible spending account (FSA). You own the account, not your employer, which means the account is fully portable and goes when and where you do.

Max out Contributions Before Age 65 – Your HSA contributions are tax-deductible before you turn 65 and become eligible for Medicare. The contribution limits of $3,450 (self-only coverage) and $6,900 (family coverage) include employer contributions. The contributions limits are adjusted annually for inflation. If you have an HSA and you are 55 or older, you can make an extra “catch-up” contribution of $1,000 per year and a spouse who is 55 or older can do the same, provided each of you has his or her own HSA account. Your family’s total annual contribution cannot exceed $8,750. You can contribute up to the maximum regardless of your income, and your entire contribution is tax-deductible. You can even contribute in years when you have no income. You can also contribute if you are self-employed.

Maximize Your HSA Assets in Retirement – Here are some options for using your accumulated HSA contributions and investment returns in retirement. Remember, distributions for qualified medical expenses are not taxable, so you want to use the money exclusively for those expenses if possible. There are no required minimum distributions, so you can keep the money invested until you need it. If you do need to use the distributions for another purpose, they will be taxable. However, after age 65, you will not owe the 20% penalty. Using HSA assets for purposes other than qualified medical expenses is generally less detrimental to your finances once you have reached retirement age because you may be in a lower tax bracket if you have stopped working, reduced your hours or changed jobs. In this way, an HSA is effectively the same as a 401(k) or any other retirement account, with one key difference: There is no requirement to begin withdrawing the money at age 70½. So you do not have to worry about saving too much in your HSA and not being able to use it all effectively.

Pay Health Expenses in Retirement – Funds captured in an HSA can help out with healthcare costs in retirement. You can also use your HSA balance to pay for in-home nursing care, retirement community fees for lifetime care, long-term care services, nursing home fees, and meals and lodging that are necessary while obtaining medical care away from home. You can even use your HSA funds for modifications that make your home easier to use as you age, such as ramps, grab bars and handrails. One strategy might be to bundle qualified medical costs into a single year and tap the HSA for tax-free funds to pay them, compared with withdrawing from other retirement accounts that would trigger taxable income.

Reimburse Yourself for Earlier Expenses – An HSA does not require you to take a distribution to reimburse yourself in the same year your incur a particular medical expense. The key limitation is that you cannot use an HSA balance to reimburse yourself for medical expenses you incurred before you established the account. So keep your receipts for all healthcare expenses you pay out of pocket after you establish your HSA. If, in your later years, you find yourself with more money in your HSA than you know what to do with, you can use your HSA balance to reimburse yourself for those earlier expenses.

Citations

1. https://bit.ly/2rv0UbA – AARP
2. https://cnb.cx/2IwdCxw – CNBC
3. https://bit.ly/2GJSPGX – Investopedia
4. https://bit.ly/2K8k3aQ – US News & World Report
5. https://bit.ly/2G5mOYa – TheBalance.com