What was Sam Saying in 1977?

Over the last couple weeks, I’ve spent some time getting acquainted with the “young” Sam Walton. Walmart’s website reproduces annual reports going back to 1972, and some of the early ones include letters from the entrepreneurial Chairman. Let’s take 1977 as a case study.

In their fiscal year 1977, Wal-Mart increased its store count from 125 to 153 (or 22.4%), while at the same time growing sales from $340 million to $479 million (40.9%) and earnings from $11.5 million to $16.5 million (43.5%)—more stores, producing even more sales, and even better earnings.

If those look like outstanding numbers, you need not make an appointment with your optometrist. As Walton narrates, “your Company again achieved record highs…” [notice the possessive] Comparable same store sales increased 19%–“to my knowledge, no other general merchandise retailer in the United States came close to equaling this figure.” And expenses remain low, “… classified as one of the lowest in the industry.” Since 1974, the total expense structure fell from 21.1% of sales to 20.8%.

Yet, even with Wal-Mart’s rapid growth, dividends increased 25%, from .08 to .1 per share. And this should be the norm, for “our Board of Directors has a stated policy of continuing to increase dividends proportionate to our increase in earnings.”

Rest does not find the able though, for ambition demands activity. In the year ahead, Wal-Mart “will be striving to achieve our sales goal of $100 per square foot of gross store space. Last year, we hit a new high of $88 a square foot in sales, which was well above the industry average.” So continues the challenge of “developing Wal-Mart into one of the leading retailers in the United States.” I wonder whether Sears Roebuck got a copy of the letter?

Of course, the investor’s question remains. Would you want to be partners in the discount retail business with the ambitious Arkansan? The trends look promising—consistently selling more, and earning more, with relatively meager capital investments. If you’re game, what would you pay to partner with Walton? By January 1977, he’s using assets with a book value of $66.2 million and earning $16.5 million. For an average business, one might pay 10x earnings plus book value. But a discount retailer who just grew earnings 43.5%?

In early 1977, that partnership would have cost you less than $12 per share—a price that implied Walmart’s value to be $163 million. More recently, the market values the founder’s business near $188 billion.

Disclosure: No position

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Finding the Next Sam Walton

We’ve banked a few posts for the upcoming week, so expect a more regular schedule again for a while.

For today, enjoy some of Charlie Munger, discussing “The Art of Stock Picking.”

There he provocatively highlights the stunning success of one Sam Walton:

“It’s quite interesting to think about Wal-Mart starting from a single store in Bentonville, Arkansas against Sears, Roebuck with its name, reputation and all of its billions. How does a guy in Bentonville, Arkansas with no money blow right by Sears, Roebuck? And he does it in his own lifetime ‑ in fact, during his own late lifetime because he was already pretty old by the time he started out with o­ne little store….

He played the chain store game harder and better than anyone else. Walton invented practically nothing. But he copied everything anybody else ever did that was smart ‑ and he did it with more fanaticism and better employee manipulation. So he just blew right by them all.

He also had a very interesting competitive strategy in the early days. He was like a prizefighter who wanted a great record so he could be in the finals and make a big TV hit. So what did he do? He went out and fought 42 palookas. Right? And the result was knockout, knockout, knockout 42 times.

Walton, being as shrewd as he was, basically broke other small town merchants in the early days. With his more efficient system, he might not have been able to tackle some titan head-on at the time. But with his better system, he could destroy those small town merchants. And he went around doing it time after time after time. Then, as he got bigger, he started destroying the big boys.

Well, that was a very, very shrewd strategy.”

Later Munger opines that “were [he] a young man,” he might concentrate his investing energies of finding great companies with stellar management when they are just starting out.  In that vein, we’ll be doing a little research on the young Sam Walton and his retailing tricks over the next few weeks.  If you have any resources you’d recommend, or would like to contribute, please pass them along.

Disclosure: I, or persons whose accounts I manage, own debt of Sears at the time of this writing.