Warren Buffett probably knows what he is doing when it comes to the world's largest retailer, Walmart (WMT) .
Berkshire Hathaway (BRK.A) , (BRK.B) cut its stake in Walmart by 27% to about 40.23 million shares from 55.24 million, according to the firm's latest disclosures. Owning Walmart has worked out well for Buffett. The Oracle of Omaha began acquiring Walmart in the second quarter of 2005 when the stock was hovering around the high $40s. Today, shares have busted out to over $73 and change. Back in 2005, Buffett likely saw some key things in Walmart's story aside from durable competitive advantages in terms of supply chain speed, ruthless attention to cost management and buying power with large suppliers.
First was a runway in which hourly wage growth would stay benign for Walmart. After all, the outcries for higher minimum wage by Walmart and fast food chains such as McDonald's (MCD) have been very much a phenomenon of the rise of social media in recent years. Moreover, Walmart has always dealt very well with attacks from outside forces, from politicians to large union organizers, that it doesn't pay its workers enough.
Second, Buffett's wager with Walmart was likely a bet on a debilitating U.S. recession within the next 10 years that would materially alter how people consume goods and services. That obviously happened and caused massive deflation across classes of goods, including the products that are stuffed on Walmart's vast shelves.
Further, the aftershocks of the Great Recession are still playing out in the malls and discounts across the country, and Walmart and its dollar store rivals are now viewed more as trusted places to do weekly shopping. And finally, Buffett probably bet that Walmart would continue to open hundreds upon hundreds of stores in the U.S. in an array of sizes.
By and large, all of these things have transpired, and along with aggressive share repurchases, Walmart has managed to increase its stock price nicely since Buffett first entered the scene.
But I think Buffett senses a sea change at Walmart looking out to the year 2026. I find it interesting news of Buffett's stake reduction in Walmart comes just days after the $3 billion Jet.com deal was announced. Personally, I believe Buffett caught wind of the Jet deal and reasoned Walmart was signaling its in for a big-time fight with Growth Seeker portfolio name Amazon (AMZN) over the next 10 years.
He could also sense that the acquisition of Jet signaled Walmart's online sales continue to slow, and that Wall Street could penalize the company for that this year (especially considering Amazon's impressive year so far). Aside from Buffett perhaps frowning upon the optics of the Jet acquisition, he probably isn't too keen on some other things happening right now in the land of retail.
Macy's M mass store closure plan really makes one wonder how much longer Walmart can continue to open tons of stores each year. I think the world's largest retailer will dramatically slow down its pace of openings over the next two years, in a bid not to get swept into a Macy's situation of having too many stores in the age of digital commerce and population shifts back to urban areas. Plus, I think Walmart needs to reinvest more of its money in digital, and that could come out of the store opening budget.
If I was making bets on retail stocks, I would have to be frustrated how the U.S. consumer continues to act conservatively despite consistent job gains and home price appreciation. Sure, people are out there buying appliances from Home Depot (HD) and spending on cruises from Royal Caribbean (RCL) , but U.S. consumers are not consistently out there buying stuff that warrants having outsized exposure to Walmart right now.
As a result, Walmart is having to give more of its slim margins away to lure in consumers. Moreover, the very low-end consumer remains under an absurd amount of stress, and is now a regular dollar store shopper as opposed to a Walmart shopper. Once again, another unfavorable risk when assessing a Walmart priced over $70 a share.
Hillary Clinton could be unfriendly to Walmart due to her calls for $15 an hour minimum wages. Is it a coincidence that Buffett's reduction in his Walmart stakes comes as Clinton has opened a commanding lead over Republican rival Donald Trump? Probably not.
Or hey, I could be wrong on all of these things and Buffett wanted to free up cash to fund a monster bid for Hershey (HSY) . Time will tell!