Keep Sam's in the Wal-Mart Club: Tara Lachapelle

Wal-Mart gave a profit outlook this week that disappointed some shareholders, and so, naturally, the conversation has turned to what the company can do to get out of investors’ dog house. A spinoff of Sam’s Club isn’t the answer.

The retail giant predicts earnings will decline as much as 12 percent next year as it increases wages and improves its website and app, moves it says will help drive sales in the future. But stockowners want to see costs being cut -- not added. And so the stock plunged 12 percent this week, the most since 2008.

Chief Executive Doug McMillon also has been reviewing Wal-Mart’s portfolio, looking for stores to shut down and units to sell off. Cue the breakup talk. Analysts are wondering how aggressive McMillon will get in these efforts and if a spinoff of Sam’s Club might even be on the table, Bloomberg’s Shannon Pettypiece reported Thursday.

At first blush, sure, why not spin it off? Sam’s Club is a membership wholesale retailer akin to Costco -- but its trapped within the corporate confines of Wal-Mart, which trades at a much lower valuation. Wal-Mart’s enterprise value is equal to 6.7 times its Ebitda from the past 12 months, while Costco’s multiple is more than twice as high at 14.

For those who give any credence to revenue multiples, the disparity isn’t quite so large: Costco fetches a 43 percent discount to its revenue while Wal-Mart trades at a 52 percent discount to sales, according to data compiled by Bloomberg. (That’s right, Wal-Mart’s vow of "low prices" followed it right into the stock market.)

But since Ebitda multiples are the favorite for sum-of-the-parts models, let’s go with that and test it out. The idea is that Sam’s Club would fetch a valuation on par with Costco if it were a separate entity instead of being dragged down by Wal-Mart. Assuming this were the case, the potential upside would be decent. (We’d also have to assume, of course, that the controlling Walton family would even agree to a spinoff, but let’s go with it for the purposes of this exercise.)

Say Wal-Mart’s remaining U.S. and international retail business, along with its unallocated corporate Ebitda, got a small valuation boost to 7 times Ebitda (based on financials reported for fiscal 2015). And say Sam’s Club were able to trade in line with Costco at 14 times Ebitda. This implies a combined enterprise value of about $271 billion, 15 percent above Wal-Mart’s current enterprise value.

Now for the snag: Does Sam’s Club really deserve as high a valuation as Costco? Costco is growing faster. Its stores also may be better situated to cater to bulk shoppers willing to pay the $55 annual membership fee. The Wall Street Journal noted in August that many Sam’s Clubs are next door to Wal-Marts, which may often cause them to compete for the same customers. On top of that, a deep-discount chain like Wal-Mart tends to be in less affluent neighborhoods, which may not be the ideal spot for a Sam’s Club charging members $45 a year.

So it’s hard to see how Sam’s Club shares would command the same multiples as Costco, making that 15 percent hypothetical breakup gain unrealistic. And is a breakup worth it for anything less than 15 percent upside? Probably not.

(This column does not necessarily reflect the opinion of Bloomberg LP and its owners.)

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