Wal-Mart Wants to Become Amazon.com, Inc. -- but Not Really

By Markets Fool.com

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Source: Flickr userMike Mozart, from JeepersMedia.

For Wal-Mart investors, the past half-decade has been one of underperformance. Compared with the greater S&P 500's 80% return during this timeframe, shares of the megaretailer have disappointed investors by returning only 49%.

Last fiscal year, the company's top line grew only 2% from the prior year's total -- after a paltry 1.6% increase in the year prior.

More recently, however, company CEO Doug McMillon appears to understand Wal-Mart's growth issues. At last year's shareholder meeting, he outlined a three-pronged approach to return Wal-Mart back to its former glory: a consumer-driven focus, investments in human capital, and a technology and innovation focus. And earlier this year, the company announced an entry-wage increase to $9 per hour to bolster his second principle.

As for his first and third, a new report shows that Wal-Mart is taking cues from online retailer Amazon.com . The Information's Amir Efrati (by way of Business Insider) reports that Wal-Mart is launching a subscription service much like Amazon Prime to compete for shoppers.

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Code-name Tahoe
According to Efrati's report, things haven't gone swimmingly with the project. The service was supposed to be launched last year before the heavily trafficked holiday season but has been delayed several times as a result of technical and other issues. Of course, this is par for the course for Wal-Mart's Internet efforts; the company famously conceded this market by not focusing on it, allowing Amazon and other nimble Internet-focused competitors to thrive.

While the annual fee hasn't been disclosed, it appears the company isn't putting all its chips into this project. A company source told Efrati, "It's not a bet-the-company thing, something that we think will change everything." And while I commend Wal-Mart for experimenting with new monetization models, copying Amazon will be more difficult than merely starting a subscription-based delivery service.

Loving shareholders to death
Using a simplified example, as a business you have to balance the needs of your stakeholders -- shareholders, employees, suppliers, and customers. To run a successful, long-term business, you have to ensure that all of them are satisfied. While there appears to have been a focus change recently, Wal-Mart has been hyperfocused on shareholders. As an example, consider the percentage of free cash flow the company has returned to shareholders during the past three fiscal years:

Metric FY 2015 FY 2014 FY 2013
Free cash flow $16,390 $10,731 $12,693
Dividends $6,185 $6,139 $5,361
Share buybacks $1,015 $6,683 $7,600
Dividends and buybacks as % of FCF 44% 119% 102%

Source: Wal-Mart's annual report. Free cash flow calculation = cash from operations-capex. Figures in millions.

In two of the last three years, Wal-Mart has returned more cash to shareholders than the company has generated from operations after paying for capital expenditures. While this is sustainable in the long run, as cash on the books and debt can be used to pay shareholders, it's generally not a prescription for growth -- especially coupled with the fact that last fiscal year, Wal-Mart spent less on capital expenditures than in each of the past two years.

And while nobody expects megaretailer Wal-Mart to suddenly grow like Amazon, or cut its dividend to match Amazon's lack of payout, the comparison is eye-opening. Amazon increased its capital expenditures 13.6% over the past two years, with no dividends over the past three years and no buybacks in the past two years. In the end, Amazon seems to focus on the customer by spending to improve the user experience, not just by Wal-Mart's relentless focus on price at the expense of understaffed, understocked stores.

If last year is any indication, it appears Wal-Mart got the memo. The company slowed the growth rate of dividends it paid out and significantly cut back on its buybacks. I think Wal-Mart should spend some of that money to improve the customer experience -- that's how the company should emulate Amazon, not by a feigned effort to copy its Amazon Prime program.

The article Wal-Mart Wants to Become Amazon.com, Inc. -- but Not Really originally appeared on Fool.com.

Jamal Carnette owns shares of Apple. The Motley Fool recommends Amazon.com and Apple. The Motley Fool owns shares of Amazon.com and Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.