Let's be honest with each other: There aren't any brick-and-mortar companies today that are similar to what Wal-Mart Stores Inc. (NYSE:WMT) was in 1970 -- that's just not how the world works anymore. That said, there are companies out there that have similar advantages to those Wal-Mart enjoyed in its younger days, and could provide similarly powerful long-term wealth generation to investors who buy in now.
When we asked three of our analysts to suggest companies that remind them in some ways of early-era Wal-Mart, they picked Ritchie Bros. Auctioneers (NYSE:RBA), Etsy Inc. (NASDAQ:ETSY) and Freshpet Inc. (NASDAQ:FRPT). Allow them to explain why.
Scale and convenience
Daniel Miller (Ritchie Bros. Auctioneers): One company that's been high on my list for some time shares two important qualities with Wal-Mart: It has scale in a fragmented industry, and it's a one-stop shop. For those unaware, Ritchie Bros. Auctioneers is the world's largest auctioneer of industrial and agricultural equipment through public auction sites and online bidding processes.
In fact, it's the largest auction company in the world, and dwarfs its competition, but the industry is so fragmented that RBA's sales account for only about 4% of the total. That gives RBA a massive advantage over its rivals and ample room for growth, both by acquisitions and by offering customers a better auction option.
Another way that RBA reminds me of Wal-Mart is that it has recently become a one-stop shop for its customers. Its recent acquisition of IronPlanet -- a pure online auction platform -- has turned it into a multichannel company where consumers can sell or list equipment, how and where they want, finance purchases, and reach an audience across the globe.
Those two factors create a network effect for the company and its investors. RBA is becoming the go-to option for sellers, which in turn lures in more buyers -- a virtuous cycle that should lead to years of strong top- and bottom-line growth.
It could be time for a new retail paradigm
Rich Smith (Etsy): When Wal-Mart went public on Oct. 1, 1970, I was all of 1 year old -- and honestly, I wasn't paying much attention to the stock market at the time. That being the case, I can't really speak from personal experience about how Walmart "felt" in 1970 -- but I can hazard a guess.
You see, while I wasn't really aware of stocks (or companies, or even object permanence) in 1970 per se, I became more aware of things shortly thereafter, and I remember how retail worked back then. We had a number of stores in our small town. There was the grocery store for groceries, and the drugstore for drugs. We bought our tool, nails, and screws, at the hardware store, and got our Purina for the dogs and cats, and oats for the horse at the Grain & Supply -- a store for every product, and a separate set of products sold at every store.
At the same time, and not far away, Walmart was disrupting the retail industry by putting all, or at least many, of these products under one roof. That's what people wanted, and that's what Walmart gave them. Today, it feels like times are changing once more. I get the feeling people are looking for goods that are more unusual than the mass-produced merchandise Walmart sells, and that's where Etsy (NASDAQ:ETSY) comes in.
An online marketplace for unique, often-handmade, goods set up in 2005, Etsy has been growing rapidly. From 2012 (the first year for which data is public) through 2015 (when it IPO'ed), it grew revenues 265%. Since its IPO, Etsy's annual sales have risen 39% more. Etsy is not yet profitable, but it has generated positive free cash flow in each of the past five years, and is churning out cash at the rate of about $20 million a year today.
At 81 times free cash flow, Etsy stock is not cheap. But from this point near the start of its lifetime as a publicly traded company, there's no telling how much higher its stock could rise.
Plenty of paw-tential
Sean Williams (Freshpet): Some 47 years ago, Wal-Mart went public, and no investors then could have guessed what a retail juggernaut it would become. Wal-Mart's ability to understand its consumers, to price its products so competitively, and the vastness of the retail network it has built on those foundations, have been critical components of its success.
Though it could be darn near impossible to predict the next Wal-Mart, one retailer that shares some striking similarities with that company circa 1970 is natural pet food provider Freshpet.
Wal-Mart's niche has always been to attract consumers with its low and competitive pricing. Freshpet isn't going to be able to undercut the pricing models of larger pet-food providers, but it's giving pet owners something else they're struggling to find with regularity: natural and organic pet food options for domestic pets. Just as the food industry has found that consumers will pay more for organic foods based on the perception that those products are better for them, Freshpet is capitalizing on consumers' desire to make a similar choice for their pets.
According to the American Pet Products Association, spending on domestic pets has grown from $17 billion in 1994 to an estimated $69 billion in 2017. Some $28.2 billion of that 2017 total will be on food. That's a very steady growth opportunity that Freshpet can take advantage of.
More importantly, Freshpet is just beginning to see the benefits of increasing consumer awareness and product penetration. While there are more than 16,600 Freshpet fridges in retailers nationwide, its penetration rate is a mere 1.4%, and consumer awareness 35% -- well below its peers, but also understandable considering how small the company is. New TV and digital marketing campaigns that are rolling out this year should increase sales, improve margins, and further enhance customer loyalty. Freshpet is forecasting sales of as much as $300 million by 2020 (they were just $133 million in 2016), infrastructure expenses as a percentage of sales are expected to decline from 27% to 18%.
Lastly, Freshpet is generating strong loyalty among its customers, just as Wal-Mart has done with its core consumers throughout the past four-plus decades. Consumer repeat rates for Freshpet have grown from 58% in 2013 to 71% by 2016. These repeat customers are critical for Freshpet to grow its business.
With a sustainable 15% to 20% growth rate, an adjusted gross margin expectation of approximately 52% by 2020, and free cash flow of roughly 15% of total sales (meaning perhaps $45 million in 2020 based on $300 million in sales), Freshpet looks like a niche mini-Wal-Mart in the making.