[Investment Management
Report on Wal-Mart]


Akshay Ajmani
ID- 11182861
Contents
Investment Summary and Recommendation...............................................................................
Ratio analysis...............................................................................................................
Investment Summary and Recommendation
 In spite of the economy slowdown, I expect Wal-Mart to still gain market share as c...
Systematic Risks (The Retail Industry)

The systematic risks for Wal-Mart are the risks associated with the Retail industr...
2. Most of the retailers these days indulge in online operations which allow the customers to
   purchase goods available ...
Background

 It started in 1945 when Sam Walton decided to start a variety store. With a loan of $20, 000,
 he purchased a...
“Sam’s Club”. In 1984, to make the environment at all stores customer friendly and to attract
more customers, Wal-Mart imp...
Major Competitors

Although Wal-Mart is the biggest retail force in the world, its competitors are not just limited to
the...
The other Key Executives of the company are:

   •   Leslie A. Dach, Executive Vice President.
   •   Thomas M.Schoewe, Ch...
Primary and Secondary Markets / Products

Markets and Locations

Wal-Mart serves customers through the following segments:...
Market           Units              Year of entry
Mexico           1118               1991
Puerto Rico      55            ...
like apparels, homelines etc.These private brands resulted in sales of 64% versus 30% for major
label competitors as was f...
Business model
Wal-Mart's business model is selling a wide variety of general merchandise at "always low
prices, keeping e...
Safety, Quality and Usability of the product: As customers faced certain issues in terms of
safety in using certain produc...
Revenue drivers
Wal-Mart’s revenue drivers are expanded domestic supercenters (converting discount stores to
supercenters)...
6. Technology, Logistics related expense: These are the expenses that help to make the company
 more productive.

 Margin ...
the quality and the price of perishables. Performance in China specially Sam’s club lead to an
   increase in comparable s...
Operating Income growth was greater than the growth in sales in the Wal-Mart US and
International segments. There was an i...
Previous five years:
From the year 2003 to 2008, Wal-Mart’s performance has been on a high and is continuously
increasing ...
Peer group analysis
Comparative data (Product differentiation, Market Share etc)

Product Differentiation:

Wal-Mart’s maj...
The graph above shows percentage of sales of different commodities at both the stores in fiscal
year 2007. From the graph ...
Stock Performance:




The above graph shows the stock performance of Wal-Mart with its competitors over the past
one year...
Ratio analysis
Financial ratios are used by managers within a firm, by current and potential stockholders
(owners) of a fi...
Wal-Mart has been performing extremely well in making sure that all its inventories are getting
used up at a faster rate a...
There is an increase in the earnings per share over the last 5 years. The book value per share is
continuously increasing ...
Analysis of the company’s future performance
Projected Income Statement, Balance Sheet and Cash Flow Statement

I feel tha...
Analysis of the company’s weighted average cost of capital
(Market Capitalization, Long term debt, Short term debt in mill...
Dividend Discount Model

According to dividend discount model the value of a stock is all the future cash flows expected
t...
Conclusion and Recommendation

                Recommendation- Short Term               Buy
                Recommendation...
Bibliography
          a.   www.sec.gov
          b.   finance.yahoo.com
          c.   www.investopedia.com
          d. ...
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[Investment Management Report on Wal-Mart]

  1. 1. [Investment Management Report on Wal-Mart] Akshay Ajmani ID- 11182861
  2. 2. Contents Investment Summary and Recommendation..................................................................................4 In spite of the economy slowdown, I expect Wal-Mart to still gain market share as consumers will avoid higher cost competitors and take advantage of Wal-Mart’s pricing policy, though lower consumer confidence and rising unemployment may hinder Wal-Mart’s growth and affect company’s results. Because of not so good performance in the international segment especially Germany and South Korea, I feel Wal-Mart will try to increase its comparable sales by focusing more on the local market rather than expanding to totally new stores worldwide. Hoping to improve its performance internationally, Wal-Mart may participate in various acquisitions and joint ventures for example it has already started in China under the name Trust-Mart and in India with Bharti enterprises. With cut down on opening new stores resulting in decrease in capital expenditure, I feel Wal-Mart will use this excess cash to repurchase more shares, increase dividends. Since all these factors augur well for the share holders, I would recommend holding on to Wal-Mart shares in the long run and buy their shares for the short term. This is well supported by the fact that based on my projections made for future Wal-Mart’s growth, the share value(NPV) should be around $65with Wal-Mart share currently trading at $52 .........................4 Systematic Risks (The Retail Industry)..........................................................................................5 Business risks:..............................................................................................................................5 Operational risks: ........................................................................................................................5 Technological Risks:...................................................................................................................5 Company description and background.............................................................................................6 Headquarters..............................................................................................................................6 Background.............................................................................................................................7 Major Competitors.......................................................................................................................9 Management Structure.................................................................................................................9 Primary and Secondary Markets / Products...............................................................................11 Business model..............................................................................................................................14 SWOT analysis..........................................................................................................................14 Revenue drivers.........................................................................................................................16 Expense Drivers and Margin Discussion...................................................................................16 Analysis of the company’s recent financial performance..............................................................17 Most recent quarter ......................................................................................................................17 Most recent year .......................................................................................................................18 Previous five years:....................................................................................................................20 Peer group analysis........................................................................................................................21 Comparative data (Product differentiation, Market Share etc) ................................................21
  3. 3. Ratio analysis.............................................................................................................................24 Liquidity Ratios.........................................................................................................................24 Asset Utilization Ratios.............................................................................................................24 Profitability Ratios.....................................................................................................................25 Market Ratios.............................................................................................................................25 Debt Ratios.................................................................................................................................26 Analysis of the company’s future performance.............................................................................27 Projected Income Statement, Balance Sheet and Cash Flow Statement...................................27 Forecast for next Ten Years.......................................................................................................27 Analysis of the company’s weighted average cost of capital........................................................28 Valuation of the company’s common shares.................................................................................28 Discounted Cash Flow (including the forecast for terminal or horizon value)........................28 Dividend Discount Model..........................................................................................................29 Relative P/E and PEG Ratio......................................................................................................29 Conclusion and Recommendation................................................................................................30 Bibliography..................................................................................................................................31 1.Tables & spreadsheets, including projected financial statements...............................................31
  4. 4. Investment Summary and Recommendation In spite of the economy slowdown, I expect Wal-Mart to still gain market share as consumers will avoid higher cost competitors and take advantage of Wal-Mart’s pricing policy, though lower consumer confidence and rising unemployment may hinder Wal-Mart’s growth and affect company’s results. Because of not so good performance in the international segment especially Germany and South Korea, I feel Wal-Mart will try to increase its comparable sales by focusing more on the local market rather than expanding to totally new stores worldwide. Hoping to improve its performance internationally, Wal-Mart may participate in various acquisitions and joint ventures for example it has already started in China under the name Trust-Mart and in India with Bharti enterprises. With cut down on opening new stores resulting in decrease in capital expenditure, I feel Wal-Mart will use this excess cash to repurchase more shares, increase dividends. Since all these factors augur well for the share holders, I would recommend holding on to Wal-Mart shares in the long run and buy their shares for the short term. This is well supported by the fact that based on my projections made for future Wal-Mart’s growth, the share value(NPV) should be around $65with Wal-Mart share currently trading at $52
  5. 5. Systematic Risks (The Retail Industry) The systematic risks for Wal-Mart are the risks associated with the Retail industry. The following risks are the most common and important: Business risks: 1. Economic factors such as interest rates, energy costs, decline in the housing market, inflation, higher unemployment rate, saturation of consumer credit, higher consumer debt levels, higher tax rates result in economic slowdown which in turn affect the consumer demand thus affecting the performance of the retail industry. 2. Economic conditions specific to international markets such as political instability, rules and regulations specific to that country, foreign currency exchange rates and fluctuations, intellectual property rights impact a great deal on the cash flows from the International operations. Operational risks: 1. Various legal proceedings involving consumers, employers if decided adversely will be incurred as a liability and will affect financial conditions and liquidity. 2. The retail industry sells products that are made available from variety of domestic and international suppliers. The major risk or challenge is involved in finding reliable suppliers from whom raw materials are readily available; provide transport availability and security at a reliable rate. 3. The retail industry needs to deal with other operational factors which are not in their control such as the limitation on the importation goods from other countries. 4. Quality of the goods purchased from the suppliers is of utmost importance Concerns regarding the quality of products from customers will result in a decline in future purchases and thus affect the financial performance. Technological Risks: 1. Any compromise in security systems resulting in unauthorized access of customer’s personal information will affect the reputation.
  6. 6. 2. Most of the retailers these days indulge in online operations which allow the customers to purchase goods available through the internet. This requires secure transmission of confidential data such as customer credit card number etc. Any security lapses will affect the reputation. Company description and background Headquarters Wal-Mart Stores is a retail force that is not only bigger than Europe's Carrefour, Tesco, and Metro AG combined but is also bigger than ExxonMobil, General Motors, and General Electric. It is the world's number 1 retailer, with more than 7,250 stores, including about 975 discount stores, 2,800 combination discount and grocery stores and 590 warehouse stores (SAM'S CLUB). About 55% of its stores are in the US, but Wal-Mart is expanding internationally with operations in Argentina, Brazil, Canada, China, India, Costa Rica, El Salvador, Guatemala, Honduras, Japan, Mexico, Nicaragua, Puerto Rico, and the U.K. it is the number 1 retailer in Canada and Mexico. It also owns a 95% stake in Japanese retailer SEIYU. Wal-Mart is headquartered at: 702 S.W. Eighth Street Bentonville, AR 72716 United States Phone: 479 273-4000 Fax: 479 273-1986 http://www.walmart.com/ http://walmartstores.com/
  7. 7. Background It started in 1945 when Sam Walton decided to start a variety store. With a loan of $20, 000, he purchased a Ben Franklin variety store in Newport, Arkansas. During the period of 1960’s and 1970’s based on the success of various other discount department store chains, Walton realized that he could obtain higher sales volume by passing on the savings to his customers. He with his assistant Bob Bogle started a discount chain in Rogers, Arkansas and thus evolved the name “Wal-Mart”. By 1967, the company grew to 24 stores across the state of Arkansas, and reached $12.6 million in sales. As time passed by and based on the current revenue generation, Wal-Mart opened its first stores outside of Arkansas in Sikeston, Missouri and Claremore, Oklahoma. In 1972, Wal-Mart got listed on the New York Stock Exchange and started operating in various states across the US such as Arkansas, Kansas, Louisiana, Missouri and Oklahoma. By 1977, Wal-Mart made its first corporate acquisition in Mohr-Value stores in Michigan and Illinois. This was followed by the acquisition of the Hutcheson Shoe Company in 1978. In 1978, in order to increase its versatility and to improve its profit margin, Wal-Mart ventured into several new markets such as pharmacy, auto service center, and jewelry divisions. By 1979, Wal-Mart reached $1.248 billion in sales with 276 stores and 21,000 associates. During the period of 1980‘s and 1990’s, the company opened its first membership based discount store named after Sam Walton called as the
  8. 8. “Sam’s Club”. In 1984, to make the environment at all stores customer friendly and to attract more customers, Wal-Mart implemented “people greeters". These are the people who greet people, identify items that need to be returned, give directions, help the disabled find electric carts, checks items purchased by shoppers exiting the stores and puts stickers on returned items. By the company’s 25th century, Wal-mart had completed their satellite network, a $24 million investment, linking all operating units of the company with their Bentonville Office via two- way voice, data, and one-way video communication. This helped to track inventory, sales, and send instant communication to their stores. During the year 1988, Wal-Mart opened a Supercenter that contained everything contained in a standard Wal-Mart discount store, along with additions such as tire and oil change shop, optical center, one-hour photo processing lab, portrait studio, and numerous alcove shops such as banks, cellular telephone stores, hair and nail salons, video rental stores, and other fast food outlets. By the end of 1990’s, there were 1,198 stores with sales of $15.9 billion and 200,000 associates. During the period of 1990’s, Wal-Mart made various acquisitions such as The McLane Company , Western Merchandisers, Inc , PACE Membership Warehouse and also to moved to various states such as Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey and New York markets. It was during this period that Wal-mart entered the international markets with the opening of stores in Mexico City, Canada, Hongkong. By 1995, Wal-Mart had 1,995 discount stores, 239 Supercenters, 433 Sam’s clubs and 276 international stores with sales at $93.6 billion (including US sales of $78 billion) and 675,000 associates. With good response from customers towards their pricing policy and sales touching sky high, Wal-mart was able to replace Woolworth (one time largest retail company) on the Dow Jones Industrial Average. In the year 1997, with the sales touching a record $100 billion, Wal-Mart introduced a concept of neighborhood markets that are primarily grocery stores and attract customers with easier parking and quicker checkouts. During the 21st century Wal-mart was ranked as the most admired company in America. By the end of 2005, Wal-Mart had $312.4 billion in sales, more than 6,200 facilities around the world, including 3,800 stores in the United States and 3,800 international units, and employing more than 1.6 million associates worldwide. Wal-Mart introduced new advertising with the slogan, "Save Money Live Better," instead of "Always Low Prices, Always" and launched Wal-Mart Television Network, a advertising network showing commercials for products sold in the stores, concert clips and music videos for a recording artist's media, trailers for upcoming movie releases, and news.
  9. 9. Major Competitors Although Wal-Mart is the biggest retail force in the world, its competitors are not just limited to the retail industries. With extremely diversified product range, Wal-Mart faces competition from the international, national markets and from industries such as Drugstores, Gas Stations, Grocery stores and super markets, Internet & Catalog retailers, Warehouse clubs & Superstores etc. Wal-Mart competes on the basis of price, convenience (location- for the customers in reaching to the nearest grocery stores), variability & quality in goods available, ambience and service. Due to a weak housing market, and increased job concerns the people have cut down on eating and out and are prepared to have food at home. To take advantage of this, Wal-Mart is trying to increase the offering of prepared foods to gain market share from food service business and is thus facing competition from named brand products. Wal-Mart is increasingly targeting its pharmacy department by offering low-priced generic drugs. Wal-Mart hopes these customers will shop the rest of the store when they come in to pick up their prescriptions. This policy has been fruitful for Wal-Mart as the sales from pharmacy was $13.7 billion in 2007 with only Walgreen Co, CVS, Rite Aid Corp being ahead of it. Indirectly Wal-Mart is giving stiff competition to Mc Donald’s. Subway has quickly overtaken McDonald's Corp. as Wal-Mart's primary fast-food concessionaire across the United States. Subway is in 1,419 Wal-Marts compared with 1,021 McDonald's In the super market chains, major competitors of Wal-Mart are Target, Costco. Management Structure Lee Scott Jr. will retire as president and CEO of Wal-Mart Stores, Inc on the 1 st February 2009. He will continue to serve as chairman of the executive committee of the board. Scott joined Wal- Mart in 1979 as an assistant director in the Logistics division and became president and CEO in 2000. During his tenure, the company emerged as the world’s largest retailer with more than 2 million associates, 180 million customers and 7,300 retail operations in 14 markets across the globe. His replacement is Mike Duke who has successfully led Wal-Mart’s Logistics Division, U.S. operations, and International operations. This has also led to Eduardo Castro-Wright being promoted to the position of Vice Chairman of the group.
  10. 10. The other Key Executives of the company are: • Leslie A. Dach, Executive Vice President. • Thomas M.Schoewe, Chief Financial Officer • Rollin L Ford, Chief Information Officer Some of the other directors are: • AidaM.Alvarez • JamesW.Breyer • M.MicheleBurns • James I. Cash • John Walton • Jim Walton From the graph above, the directors hold a high percentage in the company stock which augurs well for the shareholders as the directors have ample incentives to increase shareholder value. Most of the directors are compensated heavily in the form of restricted stock options. From the management’s perspective it is a good option to motivate directors as they get the right to vote in the annual meetings once vested.
  11. 11. Primary and Secondary Markets / Products Markets and Locations Wal-Mart serves customers through the following segments: 1) The Wal-Mart Stores segment includes supercenters, discount stores and Neighborhood Markets. 2) The Sam’s club segment includes the warehouse membership clubs in the United States as well as samsclub.com. 3) The International segment consists of operations in Argentina, Brazil, Canada, China, Costa Rica, El Salvador, Guatemala, Honduras, Japan, Mexico, Nicaragua, Puerto Rico and the United Kingdom. Wal-Mart Store Segments Size (Square Feet ) Super-Centers 187000 Discount-Centers 108000 Neighborhood Markets 42000 Sam’s Club 132000 From the table above, it is clear that Super centers are largest area wise as they offer wide variety of general merchandise and a full line super market. Wal-Mart Store Segments 2008 2007 2006 (Number. of stores) Super-Centers 2447 2256 1980 Discount-Centers 971 1075 1209 Neighborhood Markets 132 112 110 Sam’s Club 591 579 567 International Segments 3121 2757 2181 From the above table, it is evident that Wal-Mart is trying to capture and build up on the international market by increasing its operations worldwide. There is a decrease in discount centers as higher % of discount centers are being converted to super centers. This indicates that Wal-Mart is concentrating on increasing its comparable sales across already existing stores. As of November 2008, Wal-Mart has 3242 units internationally with Mexico topping the list with maximum number of stores.
  12. 12. Market Units Year of entry Mexico 1118 1991 Puerto Rico 55 1992 Canada 310 1994 Brazil 328 1995 Argentina 24 1995 China 215 1996 United Kingdom 351 1999 Japan 393 2002 Costa Rica 160 2005 El Salvador 76 2005 Guatemala 154 2005 Honduras 48 2005 Products Wal-Mart has a varied list of product categories ranging from clothes, books, apparels, toys, electronics, grocery, healthcare, pharmacy etc. In addition to this, since Wal-Mart is geographically diversified with operations all across the globes, it also boasts of products that are confined to that region and various communities. This is illustrated by the fact that Wal-Mart opened its first supercenter that targets Hispanic shoppers in May 2008 in Texas. The new store offers products that appeal specifically to this group (fresh tortillas and corn chips, Hispanic-oriented fresh fruits and vegetables, and ice cream and juices popular among Latinos).To promote sales at such centers, Wal-Mart is targeting customers by hiring bilingual cashiers and stockers, and featuring whole aisles devoted to regional foods. Wal-Mart also offers various low priced alternatives (to named brand products) such as Equate, Sam’s choice, Great Value, beverage products such as Gravette and Orangette which give good completion to other soft drink beverages companies like Coca-Cola, product in other sections
  13. 13. like apparels, homelines etc.These private brands resulted in sales of 64% versus 30% for major label competitors as was found in by a survey conducted this year. This survey has prompted Disney to join hands with Kroger chain to launch more than 100 Disney-branded products to be sold as Kroger's kid-focused private label. Waddoups, senior director says that Wal-Mart is promoting products that benefit waste reduction and recycling, natural resources and energy. According to him the company highlighted more than 50 products, including T-shirts made from recycled plastic bottles, fair trade coffee, recycled-tire mulch, CFLs and Clorox's Green Works cleaners. Wal-Mart is also specializing in pet food products by investing $43 billion as it guarantees continued consumer spending regardless of how tight the household budget gets. Outstanding Litigation Wal-Mart is involved in a number of legal issues. 1) Dukes vs. Wal-Mart Stores: The suit was filed by the former and current female employees across its US retail store operations. These employees totaling to 1.6 million alleged that the company shows gender discrimination at the time of promotions, pay, and training and job assignments. 2) In another suit, the company was accused of violating California labor law with respect to provision of lunch and meal breaks to employees working over six hours in a shift. The court in April 2008.It declared a compensation of more than $170 million. Such proceedings may adversely affect the financial performance of the company in future and spoil the company’s brand image.
  14. 14. Business model Wal-Mart's business model is selling a wide variety of general merchandise at "always low prices, keeping employee costs down, and investing in modern and more efficient technology. Because of Wal-Mart’s commitment to offering low prices to its customers, although Wal-Mart is the number one company in total annual sales in the World, its profit dollars don’t even rank the company in the top 10. The area where Wal-Mart beats its competitors is its focus on technology, logistics, distribution and transportation (Supply Chain Management) which has resulted in massive reduction in shipping costs. The other factor distinguishes Wal-Mart from its peers is that the management gives responsibilities to the store managers and makes them feel like an entrepreneur and gives them ample leeway in improving the operations of individual stores. SWOT analysis Strengths: Strong Market Position in US: The Company earns almost 75% of its revenues from the US. This has resulted in Wal-Mart moving in the Fortune 500 list from second largest company in 2006 to the largest company in 2007 in terms of revenues. Brand Mix: Wal-Mart has a balanced and versatile brand mix with private label products and external brands. This balanced mix allows customer that much more variety in goods and thus increases the customer loyalty. The brand mix also at times increases the amount of time customers spend at a store which is utilized by Wal-Mart as it has many food courts such as Subway and Mac Donald’s which cater to customer’s hunger while shopping. Marketing Capabilities: Wal-Mart exhibits good marketing capabilities by employing Everyday Low Prices (EDLP), Rollbacks, Store within a Store, and Store of the Community. In all these promotions or techniques, cost saving is continuously passed on to the customers by lowering prices on selected goods. . Weakness: Numerous Legal Issues: Wal-Mart future financial performance may be adversely affected by various outstanding legal issues against it as mentioned before. Adaptability to various market segments: Wal-Mart recently has faced severe competition from local retailers in countries like Germany and South Korea. Due to its in ability to cater to the needs of customers, the company had to shut down its operations in Germany and South Korea.
  15. 15. Safety, Quality and Usability of the product: As customers faced certain issues in terms of safety in using certain products bought from Wal-Mart, the company had to recall certain products such as “Holiday Times” candle holders in April 2008. Opportunities: Wal-Mart is trying to increase the comparable sales by renovating its already existing stores by providing better ambience to the customers, by increasing the ease with which customers can find goods easily. At the same times it is expanding in other regions but making sure that these expansions don’t have a major impact on the comparable sales. As a result of growing customer interest in natural and organic foods, Wal-Mart is increasing square footage within stores devoted to this category. Since the prescription drug spending in the US is estimated to increase in the upcoming years, another area that Wal-Mart can expand and is expanding is the drugs, pharmacy industry. In fact, Wal-Mart has announced plans to expand its in-store clinics from 78 clinics in 2007 to 400 by 2010.Wal-Mart is also implementing category management which is employing marketing, promotion, pricing strategies which help to know which item sells the most, the fastest or the both. Threats: Opposition from communities: Wal-Mart’s opening of stores in other countries is hindering the growth opportunities of local retailers. In India, number of shopkeepers opposed by gathering outside Chandi chowk and protested against its entry in Indian retail market. Opposition from the New US Government: Wal-Mart is known for opposing attempts made by its employees to form unions. Victory of Obama is a concern for Wal-Mart because Obama has been a strong supporter of implementing Employee Free Choice Act which allows workers to form unions without a secret ballot election. The formation of union would give the works a platform to fight for their rights and for better and improved standard of living. Decline in Housing Market: Homeowners in the US have more debt than their homes are worth. This has caused a great decrease in consumer spending which have affected the % change in retail industry sales being only 3.5% in 2008 as compared to 6.3% in 2007
  16. 16. Revenue drivers Wal-Mart’s revenue drivers are expanded domestic supercenters (converting discount stores to supercenters) resulting in increase in comparable sales and international stores. Food prices are set to rise in the upcoming years. The food at home sales is expected to increase more than the food away from home sales .This means that more number of people are going to save money by eating at home. Thus Wal-Mart is remodeling its stores, as a result of which food sales should increase as a percent of total sales, resulting in lower gross margins but higher sales per customer. Wal-Mart’s low pricing strategy is drawing customers from moderately price chains such as Kohl’s corp., JC. Penney. Wal-Mart outplays its rivals by introducing right mix of merchandise and good marketing strategies like “save money, live better”. Wal-Mart has put a great deal of emphasis on inventory management and making sure that inventory is growing less than half the pace of sales. Internationally Wal-Mart has joined hands with China’s Trust–Mart and India’s Bharti to take to improve its performance outside the US. Expense Drivers and Margin Discussion Expense Drivers: The following are the major expense drivers: 1. Product Costs: Almost all in the retailing industry pay 70 cents to 73 cents in product costs for every dollar of their sales. The search for lower product costs is always on in the retail industry as retailers try to increase their purchasing power over suppliers. 2. Labor costs: Retailing is a labor-intensive business, and employee costs are the greatest operating expense, accounting for roughly 50% of total operating expenses. Any increase in minimum worker’s page would affect the profit as it would be difficult to pass on this increase to the customers. 3. Other operating expenses: Marketing and advertising, rent, transportation, and utilities are other cost that is incurred by retailers. 4. Store Renovation, New store opening costs: These are the expenses encountered in opening and maintaining new stores. 5. Administrative expense: These include costs related to executive compensation as well as payroll as well as other employee related expenses.
  17. 17. 6. Technology, Logistics related expense: These are the expenses that help to make the company more productive. Margin Discussion Retail is a low profit margin business and as a result of this Wal-Mart tries to increase its margins by selling goods at lower price which in turn result in higher volumes of goods sold. Due to the current economic slowdown, Wal-Mart low prices are hurting its gross margins. Wal-Mart is trying to better its gross margin by concentrating more on groceries, daily consumables rather than on higher margin goods like trendy clothes, home décor etc.If you compare Wal-Mart average gross margin over the last 5 years, it is same as the industry’s with value as 23.1% Analysis of the company’s recent financial performance Most recent quarter Amidst the worst ever economic recession, Wal-Mart had a very strong quarter with sales being $97.6 billion, an increase of 7.5% over the same period last year. Operating income was up 6.7% with diluted shares per earning being $0.77 as compared to $0.70 reported in the same period last year. One of Wal-Mart financial performance highlights has been to ensure that inventories grow at the half pace of sales. This was yet again highlighted this year with inventories growing at 2.2% as compared to sales growth of 9.6% relative to the start of the year. Now considering the financial performance at all the 3 segments: a. Wal-Mart US segment: Total sales increased by 6.1% with comparable sales increasing by 2.7%.Operating income for this segment grew faster than sales indicating efficient management control in handling operating expenses. This was all the more commendable considering that $176 million was spent related to hurricane Gustaf. In addition 20 new stores were opened this quarter bringing year to date total of 102 new stores,Wal-Mart’s Win-Play- Show merchandising strategy went a great way in improving the sales particularly in apparels, electronics such as Flat TV,GPS units etc. b. International Segment: Sales in this segment increased to $24.9 billion with an increase of 11.2% compared to prior year. Strongest sales performances in the quarter came from China and Brazil. Operating income for the third quarter was approximately $1.2 billion up 10.6%. Due to currency fluctuations and the strengthening of US dollar, the operating income grew slower than the sales. The strongest sales were in food products such as meat, chilled foods, rice, pasta and wine.Wal-Mex, Wal-Mart’s segment in Mexico also benefited by improving
  18. 18. the quality and the price of perishables. Performance in China specially Sam’s club lead to an increase in comparable sales by 11.9% c. Sam’s Club: Sales grew by 7.4% with comparable sales increasing by 4.5%. Sales growth was influenced by impact of higher fuel prices .There was healthy sales in apparel section as the members responded to new fall items. Food and consumable categories dominated Sam's comparable sales growth for the quarter. Highlights included strong sales in grocery, fresh, pets, and baby care. Operating income increased by 1.7% to $365 million. Most recent year Wal-Mart delivered strong financial 2008 results with annual revenues of $374.52 billion, an increase of 8.5% from 2007. Net Income from continuing operations and before minority interests after tax was $13.29 billion.Wal-Mart total net sales increased by 8.6% with comparable sales growth in U.S being 1.6%. From the above graph, it is evident that there was a decrease in sales in Sam’s club segment due to rapid development of new stores in the International and Wal-Mart stores segments. The major increase in sales is attributed to inflation in food prices which led to people spending less on eating out and concentrating more in eating at home. This is observable in the graph below with sales in grocery (food products) outnumbering all others.
  19. 19. Operating Income growth was greater than the growth in sales in the Wal-Mart US and International segments. There was an increase in diluted earnings per share from $2.92 in 2007 to $3.16 in 2008. There was an increase in free cash flow from $4331 in 2007 to $5417 in 2008.This increase is attributed to decrease in capital expenditures. Gross Margin was 23.5% in this year with Wal-Mart US and International segments yielding higher gross margin as compared to Sam’s club. The company paid a dividend of $0.88 per share in this fiscal year an increase of 31.3% with respect to previous year. The company has approved of an increase of 8 % in dividend for the coming fiscal year. There is a continuous increase in the corporate expense due to Wal-Mart’s investment in “transformation programs”. This program is used to improve the information systems for merchandising, finance and human resources.
  20. 20. Previous five years: From the year 2003 to 2008, Wal-Mart’s performance has been on a high and is continuously increasing compared to previous years. The average growth of sales has been 10.5% in the past five years. There is an increase in the earnings per share from 2.03 in 2004 to 3.16 in 2008. There is an increase in the return of equity from 20.1 in 2003 to 20.4 in 2008. Wal-Mart has been utilizing its assets to their full capacity as been evident from the return on assets which has increased from 8.3% to 8.4%. The company has maintained strong dividend payout ratio between 21%-23% in the last 5 years. The company’s dividend yield has increased from 0.9% to 1.7% in 2008. The company hopes to drive comparable-store sales by focusing on local market share positions by continuing expansion of its supercenter format. Wal-Mart operates over 869 million square feet globally and has historically grown square footage of at least 8% per year. Wal-Mart has tried to increase its international presence by making various acquisitions and joint ventures. In December 2007, the company acquired a 35% interest in BCL, an operator of 101 hypermarkets in China under the banner Trust-Mart. The company also had to face some stiff competition in countries like Germany and South Korea where it had to eventually stop its operations. The stock price has moved from $47.8 to $50.4 in the last five years. Increase in stock price over the last five years reflects Wal-Mart’s stability and well being. Wal-Mart has emerged the strongest amongst all its competitors in this economic recession period only because of its pricing strategies. The most recent example of Wal-Mart’s pricing strategy is to sell T-mobile G1 powered by Google for $30 less than T-Mobile.
  21. 21. Peer group analysis Comparative data (Product differentiation, Market Share etc) Product Differentiation: Wal-Mart’s major competitors include Costco stores and Target. Costco offers fewer brands of each item, keeps infrastructure costs low and does not spend much on advertising. On the other hand Wal-Mart & Target sell the same kinds of products; Wal-Mart has captured a much bigger market share in the fast food sector by effective pricing of commodities. Though there are certain sections such as advertising in which Target spends a lot more money than Wal- Mart. The difference between a Target and a Wal-Mart store is the ease in shopping that the customers experience. For ex: Finding a short checkout line at Wal-Mart is much tougher where as Target has zigzagged checkout lines that are easy to get through. Due to some other differences in customer experience at the two stores, Wal-Mart is spending a lot of money to make sure that their customers have a good time while shopping at Wal-Mart. Most of these stores make money from the sales of household products. Wal-Mart does better here because the household items are much cheaper there as compared to its competitors. But for section like clothing, Target scores over Wal-Mart, as clothes there are renowned to be much more stylish while clothes at Wal-Mart are said to be very dull. Items like tops, jeans, jewellery, shoes have got a major overhaul at Target. A Target outlet would normally contain banks, Starbucks, and Pizza Hut Express outlets where as Wal-Mart favors McDonald’s and Subway.
  22. 22. The graph above shows percentage of sales of different commodities at both the stores in fiscal year 2007. From the graph it is clear that Wal-Mart is the way ahead of target in selling daily needed consumables (in fact target sales are negligible as compared to Wal-Mart’s) while target beats Wal-Mart in Electronics, apparels and home furnishes items. Market Share: The table below gives all financial ratios related to Wal-Mart’s competitors. WMT COST TGT Industry Market Capitalization 208.03 B 20.20 B 21.14B 1.95 B Employees 2100000 75000 366000 14.11K Quarterly Revenue Growth 7.30% 13.30% 1.90% 6.50% Revenue 404.16B 72.48 B 65.26B 4.70 B Gross Margin 24.54% 12.39% 31.11% 31.54% 341.56 EBITDA 30.24 B 2.65 B 6.88 B M Operating Margin 5.82% 2.75% 7.80% 3.93% Net Income 13.59 B 1.28 B 2.63 B N/A EPS 3.455 2.89 3.304 2.05 P/E 15.32 16.16 8.5 15.32 PEG 1.34 1.16 0.72 1.16 P/S 0.49 0.27 0.32 0.28 Comparing the data above, it is evident that Wal-Mart is the biggest retailer. It has a far bigger market capital and a much bigger employee structure than any of its competitors. It is also more profitable as is evident by the higher earnings per share value as compared to its competitors.
  23. 23. Stock Performance: The above graph shows the stock performance of Wal-Mart with its competitors over the past one year. In the start of this fiscal period, due to economic recession and decrease in consumer spending, there was a drop in the stock price of all the three retailers but the drop in Wal-Mart’s share price was less as compared to the others. Comparing stock prices over a year period we observe that Wal-Mart has performed better than the others with its stock price increasing by 10% as compared to last year. In the fiscal year 2008 Wal-Mart has outperformed the S & P index with the index dropping at a much lower level as compared to Wal-Mart.
  24. 24. Ratio analysis Financial ratios are used by managers within a firm, by current and potential stockholders (owners) of a firm, and by a firm's creditors. Values used in calculating financial ratios are taken from Wal-Mart’s balance sheet, income statement, cash flow statement and statement of equity. Liquidity Ratios 2003 2004 2005 2006 2007 2008 Current Ratio 0.98 0.91 0.90 0.90 0.90 0.81 Quick Ratio 0.14 0.17 0.17 0.19 0.20 0.16 Cash Ratio 0.09 0.14 0.13 0.13 0.15 0.10 If you look at the liquidity, they have all gone down this year as compared to previous years. From the graph, the increase in current liabilities by far exceeds the increase in current assets. This means a deficit in net working capital. The main reason for this being efficient use of cash and issuance of short term long term debt, commercial papers in funding their operations and in providing returns to shareholders in the form of dividend payments. The –ve working capital is not a worrying factor for Wal-Mart as this has been the trend for the past 5 years and will continue to do so for future years. Asset Utilization Ratios They measure the firm's efficiency in utilizing their assets to generate sales. 2004 2005 2006 2007 2008 Total Assets Turnover 2.58 2.55 2.42 2.41 2.40 Days Receivables 1.99 1.88 2.56 2.88 3.13 3.8303 3.7841 3.5534 3.5045 Fixed Asset turnover 3 4 1 8 3.43529 Inventory Turnover Ratio 7.79 7.80 7.67 8.02 8.32
  25. 25. Wal-Mart has been performing extremely well in making sure that all its inventories are getting used up at a faster rate as compared to previous years. The reason for this can be attributed to Wal-Mart’s policy to ensure that inventories are always increasing at half pace of sales. There is a slight decrease in Fixed Asset turnover and Total asset turnover ratio because of Wal-Mart’s ongoing expansion in new territories i.e. opening of new stores. These new stores have not yet reaped the amount of sales as forecasted by them but have a slightly –ve effect on the comparable sales. Days Receivables is continuously increasing which is a good sign considering that sales is also increasing continuously. Profitability Ratios It measures how well the firm controls its expenses to generate an acceptable rate of return or profit. 2004 2005 2006 2007 2008 Gross profit margin 23.17 23.72 23.86% 24.24 24.36% % % % Operating Margin 5.81% 5.93% 6.00% 5.88% 5.81% Return on Equity 21.85 22.61 22.88 21.97 21.06% % % % % Return on Assets 15.17 15.33 14.67% 14.34 14.15% % % % There is an increase in Gross Profit margin % which means that the management has been efficient in maintaining the cost of goods sold at a reasonable level, which is commendable as retail is a low profit margin business. This can also be attributed to the increase in the volumes of goods sold. Although there is an increase in gross profit margin, there is decrease in operating margin indicating that other operating, administrative expenses have been on a rise. The reason for this being that Wal-Mart is engaged in a transformation programs as mentioned before. Wal- Mart has been repurchasing its stocks for a while now but in spite of this, there is a slight decrease in the Return on Equity for the last couple of years. This is due to lower levels in consumer spending because of recession. But these ratios are still much higher than the industry average of 19.9 %. Market Ratios These are the ratios used by the investor in determining that whether he should buy the company’s stock or not. 2004 2005 2006 2007 2008 Market to Book 5.40 4.53 3.63 3.23 3.20 P/E 26.01 21.77 17.19 17.62 16.23 EPS 2.1 2.4 2.7 2.7 3.1 Book Value per share 9.98 11.58 12.70 14.77 15.87
  26. 26. There is an increase in the earnings per share over the last 5 years. The book value per share is continuously increasing and market to book value is decreasing. This indicates that share price of Wal-Mart is decreasing. Book value per share is decreasing as number of outstanding shares has declined over the period as company is repurchasing its stocks. The slowdown in share price is attributed to the current economic slowdown. In spite of this, Wal-Mart is still performing better than the industry as whole as its P/E is 16.23 which is higher than industry P/E of 14.3. Thus investors are willing to pay more for a Wal-Mart share thus anticipating a growth in the company. Debt Ratios It measures the firm's ability to repay long-term debt. 2004 2005 2006 2007 2008 Interest Burden Ratio 0.952 0.946 0.938 0.925 0.9165 0 0 2 4 Interest Coverage Ratio(Times 20.84 18.51 16.19 13.41 11.97 Interest Earned) Debt Ratio 0.59 0.59 0.62 0.59 0.60 The interest burden ratio is not very low and is close to 1 indicating that Wal-Mart generates enough income before tax and interest expense to pay off its interest expense. The debt to ratio is also on a decline indicating better financial health for the company and lower levels of risks for the investors.
  27. 27. Analysis of the company’s future performance Projected Income Statement, Balance Sheet and Cash Flow Statement I feel that Wal-Mart's threat to US food retailers will increasingly decrease over the next three years, as the company's supercenter expansion decelerates and its food-related sales growth starts to decline. I feel that it will remain price competitive but it will slow down its expansion in square footage growth. As a result of this Wal-Mart is trying to venture into new product lines. One of the sectors that Wal-Mart is planning to target and should target is Pharmacy. According to Standard & Poor’s, demand for pharmacy services is going to increase due to aging baby boomers.Wal-Mart has taken advantage of this by offering low priced generic drugs. In order to boost its sales in the food products section, Wal-Mart is planning to take advantage of the festive seasons such as Thanksgiving and Christmas and offer roll backs on food prices and provide incredible saving deals.Wal-Mart has even started a new “Savings Alerts” by which people would be informed about food savings through free text messages. Other product line that that Wal-Mart is getting into is mp3 music by re-launching a much improved mp3 music download store. To improve its sales, Wal-Mart is renovating its already existing stores to create a comparatively easier shopping environment for the customers. This is illustrated by fact that Wal-Mart has launched a new “Wal-Mart smart Network” with an investment of $10 million that helps the customers by providing relevant and in store information via in-store TV. Forecast for next Ten Years I have forecasted Wal-Mart statements for the next ten years till the year 2018 where I feel the growth rate would become constant at 8 % as the company would get to the maturity stage. Most of the items on the Income statement, like cost of goods sold, operating, selling expenses etc, have been taken as a percentage of sales. Other items like tax rate and interest expense have been taken as per the company’s annual report. Capital expense has been increased for the initial year at a % greater than the interest expense. For the remaining years, it is kept constant. There is an increase in the treasury stocks as the Wal-Mart management has decided to buy back stocks of around 15 billion dollars. The treasury stock is projected at a percentage of 39.96% which is the average change in treasury stocks over the previous years.The items on the Balance sheet like the current assets and current liabilities have been forecasted as a percentage of sales.The projections in the Balance sheet of long term debt have been made accordingly.The retained earnings for a particular year is calculated by adding back left over net income from continuing operations before the minority interest(after paying dividends) in that year to the retained earnings of the previous year. No adjustments are made to the net income in terms of foreign currency translation loss or gain.There is a decrease in the debt to equity ratio due to reduction in Wal- Mart’s shareholder equity as they are repurchasing stocks. Also Wal-Mart is repaying off their debts.
  28. 28. Analysis of the company’s weighted average cost of capital (Market Capitalization, Long term debt, Short term debt in millions) Company Name Walmart Ticker Symbol WMT Market Capitalization 202.21 Long Term Debt 37.712 Short Term Debt 6.851 Total Capital 246.773 Wt(Long Term Debt) 0.152821 Wt(Short Term Debt) 0.027762 Wt(Common Equity) 0.819417 Beta 1 6-Month yield Rate 1.12 10 Years Yield Rate 3.93 Rs 9.93 Moody's Rating Aa2 Bond Spread 1 yr bond 55 Bond Spread 10 yr bond 105 Cost of Short Term Debt(Rstd) 1.67 Cost of Long Term Debt(Rltd) 4.98 Tax Rate 0.35 Wacc 8.661628 Thus, the Weighted Average Cost of Capital (WACC) for Wal-Mart is 8.66 %. Valuation of the company’s common shares Discounted Cash Flow (including the forecast for terminal or horizon value) DCF is used to determine a company's current value according to its estimated future cash flows. Forecasted free cash flows (operating profit + depreciation - capital expenditures - change in working capital) are discounted to a present value using the company's weighted average costs of capital. These FCF’s are obtained from the assumptions made in Wal-Mart balance sheet and income statements. These cash flows are discounted back to the present using the WACC. According to my calculations, using the WACC as 8.66%, the present value of a stock of is approx $65.
  29. 29. Dividend Discount Model According to dividend discount model the value of a stock is all the future cash flows expected to be generated by the firm discounted by an appropriate risk-adjusted rate. This model is appropriate for Wal-Mart as it has been paying dividend continuously since March 1974.For Wal-Mart based on past financial data, the % change in dividend paid per share will continuously increase but will remain constant at 9% in the later years when the company reaches its maturity stage. I have assumed the dividend payout percentage to be 25% which is the average of the dividend paid out in the last 5 years. I have considered the present values of the forecasted dividends and the terminal value of per share for Wal-Mart and calculated its present per share value to be $48.I think due to current economic slowdown ,Wal-Mart’s share is undervalued but still is far ahead that all its competitors. Relative P/E and PEG Ratio The P/E ratio for Wal-Mart in the last 5 years is as follows. P/E 26.01 21.77 17.19 17.62 16.23 As per various financial sites, the forward P/E ratio of Wal-Mart is forecasted to 13.9 with PEG ratio being 1.2.
  30. 30. Conclusion and Recommendation Recommendation- Short Term Buy Recommendation- Long Term Hold Based on an analysis of Wal-Mart for the past years it is clear that the company will be able to weather the storm in the form of economic recession and come out the strongest amongst all its competitors. With Wal-Mart investment’s in providing a better shopping experience to customers, pricing strategies ,new product lines such as energy saving products, advancements in healthcare, pharmacy and implementing an efficient IT systems to control the operations all over its stores , the company is bound to experience a sustainable growth in the future. The increase in the stock price for Wal-Mart’s shares can be attributed to a stronger growth expectation by market analysts and investors. As for the stock price, according to my analysis and from the free cash flow model, I feel it is undervalued at the moment. Though Wal-Mart‘s P/E ratio is higher than the industry ratio, I feel Wal-Mart is still underpriced. The main reason for industry’s low P/E ratio is because of underperformance of Wal-Mart’s competitors where in they have shown no signs of future growth while Wal-Mart has. Wal-Mart stocks would be a good long term investments as they have continued to pay good dividends per year for the past 30 years or more and their dividend per share is also increasing at a healthy rate since the last 5 years.
  31. 31. Bibliography a. www.sec.gov b. finance.yahoo.com c. www.investopedia.com d. www.fool.com e. findarticles.com f. www.marketwatch.com g. news.moneycentral.msn.com h. www.reuters.com i. Walmartstores.com j. Mergentonline.com k. Standard& Poors.com l. Resources.net.com m. www.corporatewatch.org n. news.bbc.co.uk 1. Tables & spreadsheets, including projected financial statements The following excel sheet has been used for all projections and valuations. walmart.xls

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