14 August 2007

WMT: Financial Analysis through July 2007

We have analyzed Wal-Mart's (WMT) preliminary financial results for the quarter that ended on 31 July 2007. Our evaluation will be updated after the company formally submits a complete 10-Q report to the SEC.

Wal-Mart is the world's largest retailer. With annual sales of about $350 billion, Wal-Mart holds the number 2 spot on the Fortune 500 list of America's largest corporations. Wal-Mart's disruptive cost-cutting strategies have revolutionized the marketplace for better and for worse, depending on your point of view. Its visibility and role in advancing globalization have made Wal-Mart a lightning rod for criticism. Wal-Mart transformed retailing by using information technology to manage its supply chain and by pressuring manufacturers to squeeze every penny out of their costs. Rival discounters fell by the wayside, and manufacturers with higher costs suffered mightily. On the other hand, Wal-Mart's discounting is responsible for lower inflation (and thus interest rates), although this effect might not have been reflected fully in the published statistics.

When we analyzed Wal-Mart after the April quarter, the Overall score was 26 points. Of the four individual gauges that fed into this composite result, Value was the strongest at 11 points. Profitability was weakest at 2 points. [Note that recent algorithm tweaks led to minor changes in the previously reported scores.]

Now, with the available data from the July 2007 quarter, our gauges display the following scores:

Before we examine the factors that affected each gauge, let's compare the latest quarterly Income Statement to our previously announced expectations.

($ M)

July 2007
July 2007
July 2006
Revenue (1)

Op expenses

CGS (70589)

SG&A (17130)
(17020) (15741)

Operating Income (2)
Other income


Interest, etc.
Pretax income

Income tax

Net Income

Discontinued ops

1. Revenue for the July 2007 quarter was not a prediction.
2. The company includes some income in operating income that we treat as non-operating income.

Wal-Mart, in its most recent monthly sales report, previously reported that total net sales in the July 2007 quarter were approximately $92 billion. The exact number was $91.99. This figure is 8.8 percent above the sales in the July 2006 quarter, and it equates to year-over-year sales growth of 9.7 percent.

We thought the Cost of Goods Sold (CGS) would be 77 percent of Revenue, and the actual value was 76.7 percent. Sales, General, and Administrative (SG&A) expenses were 18.6 percent of Revenue, compared to our forecast of 18.5 percent.

Operating Income was 3.2 percent above the forecast value because of the slightly lower (as a percent of revenue) CGS.

Non-operating income was a trivial $10 million greater than expected. The Income Tax Rate was 35.1 percent, instead of the predicted 34.5 percent. As a result, Net Income exceeded our prediction by 2.2 percent.

Cash Management. This gauge increased from 4 points in April to 6 points now.

The measures that helped the gauge were:
  • Cash Conversion Cycle Time (CCCT) = 11.2 days, down from 12.9 days, for this measure of efficiency
  • LTD/Equity = 44.8%, up from 42.7 percent in July 2006, down from 49 percent three months ago
  • Inventory/CGS = 43.9 days, compared to 45.5 and 45.6 days 3 and 12 months ago, respectively
The measures that hurt the gauge were:

Growth. This gauge increased from 4 points in April to 9 points now.

The measures that helped the gauge were:
  • Revenue/Assets = 2.287, up from 2.26 in a year; sales efficiency is improving
The measures that hurt the gauge were:
The income tax rate was steady at 34.4 percent

Profitability. This gauge increased from 2 points in April to 3 points now.

The measures that helped the gauge were:
  • ROIC = 11.7 percent, down from 12.3 percent in a year
The measures that hurt the gauge were:

Value. Wal-Mart's stock price inched up over the quarter from $47.69 to $47.92. The Value gauge, based on the latter price, didn't change from 11 points three months ago (and 17 points twelve months ago).
  • Enterprise Value/Cash Flow = 11.4, down from 11.7 in July 2006, and much below a longer term median value over 14
  • P/E = 15, down from 16 a year ago, and (again) much below longer-term values
  • P/E to S&P 500 average P/E = 5 percent discount, lower than its five-year median of a 13 percent premium
  • Price/Revenue ratio = 0.5, lower than its five-year median of 0.7
The average P/E for the Retail - Department and Discount industry is currently a more expensive 16. The average Price/Revenue for the industry is currently 0.65.

Now at a so-so 30 out of 100 possible points, the Overall gauge rebounded a few points from April's below-the-zone 26 points. However, the increase is certainly not enough to cause any excitement. Wal-Mart needs to reverse the upward drift in its SG&A expenses and improve Cash Flow to stir any optimism. The recent earnings numbers were in-line with historic averages and previously reported data, which some analysts seem not to have considered.

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