13 October 2007

WMT: Looking forward to 3Q results

For the quarter that will end on 31 October 2007, Wal-Mart (WMT) will report its earnings on 13 November.

Sales growth for the world's largest retailer has been, as they say, tepid for some time. The weakness continues. In a recent announcement, Wal-Mart stated that it "expects the comparable store sales of its U.S. operations for the October four-week reporting period to be between flat and 2 percent." Total sales growth will be somewhat higher because of new stores and much faster growth in some of the overseas markets in which Wal-Mart operates.

For the four weeks ending 31 August and the five weeks ending 5 October, Wal-Mart's total sales were up 9.3 and 9.7 percent, respectively, over the equivalent periods in 2006. Since third quarter revenues last year were $83.543 billion, it seems reasonable to expect revenues in the current quarter to be about 9.5 percent greater, or about $91.5 billion.

The company, already renowned for efficiency, is apparently becoming more so. The announcement cited above, issued on 11 October, included this market-moving information:

“We estimate that earnings per share from continuing operations for the third quarter of fiscal year 2008 will change from within our previously stated guidance of $0.62 to $0.65 to a range of $0.66 to $0.69,” Schoewe said. “For the first two months of the quarter, we have seen improvement in initial margin and expense leverage at the Wal-Mart Stores division, which is driving this change.”

Wal-Mart's Gross Margin has been around 23 percent of revenue for the last several years. But, it has been marginally better recently, and the statement above mentions improved efficiencies. Therefore, we will look for a Gross Margin of 23.2 percent in the current. Given the revenue forecast above, Cost of Goods Sold (CGS) in the October quarter should be 0.768 * $91.5 billion, or $70.3 billion.

Wal-Mart's Sales, General, and Administrative (SG&A) expenses as a percent of revenue have crept up to about 18.5 percent of revenue, and we don't have any evidence of a reversal. Thus, we're expecting SG&A expenses to be 18.5 percent of $91.5 billion, or $16.9 billion.

These assumptions would result in an Operating Income of $4.3 billion.

As for non-operating expenses, we'll extrapolate on recent trends and assume $550 million net interest and other income, and a $110 million deduction for minority interests. These values would bring pre-tax income to $4.74 billion.

Wal-Mart estimated that the average income tax rate for the current fiscal year will be between 34 and 35 percent. If we assume the higher rate, the provisions for income taxes will be $1.66 billion, and net income will be $3.1 billion ($0.75 per share).

Note that this figure is well above the $0.66-$0.69 earnings per share guidance reported above for continuing operations. We've scrubbed our numbers, ensured they were prudent, and yet we can't explain the discrepancy. One possibility is that sale of some of the company's businesses in South Korea and Germany have moved revenues and expenses to discontinued operations. We'll continue to research this point.

($ M)

October 2007
October 2006

Op expenses

CGS (70256)

SG&A (16924) (16237)

Operating Income
Other income


Interest, etc.
Pretax income

Income tax

Net Income

Discontinued ops


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