19 January 2008

WMT: Look Ahead to January 2008 Quarterly Results

Wal-Mart (WMT) will report on 19 February its results for the holiday-driven November-through-January quarter. While waiting, we have produced an estimate of the Income Statement that will be included in the report. As explained below, the calculations rely on publicly available data, extrapolations of past results, and what we hope proves to be common sense. Once the actual data becomes available, we will compare the estimated and actual data and note the deviations.

Company-provided revenue data for the first two months of the quarter gives us a leg up for this exercise. In November, sales were up 8.4 percent over the equivalent year-earlier period, but sales were down 0.7 percent when the comparison is limited to the same or comparable set of stores. In the December period, which includes the first few days of January, total sales were again up 8.4 percent. Comparable-store sales reversed course and were up 2.6 percent.

Sales data for January will be made public on 7 February.

When reporting third-quarter results last October, Wal-Mart management issued some guidance about the top-line sales and bottom-line earnings for the fourth quarter:

For the fourth quarter of fiscal year 2008, the Company estimates the comparable store sales increase in the United States to be between flat and 2 percent, according to Tom Schoewe, Wal-Mart Stores, Inc. executive vice president and chief financial officer.

“We expect earnings per share from continuing operations for the fourth quarter to be between $0.99 and $1.03, resulting in the full year Company forecast for earnings per share from continuing operations of $3.13 to $3.17,” said Schoewe. “This guidance includes an anticipated restructuring charge for Seiyu of approximately $40 million after tax in the fourth quarter.”

We want to figure out the numbers between the top and bottom lines. By estimating these values, we gain some insight into the operational and non-operational factors that might cause the company to surpass or fall short of Net Income expectations.

Given the November and December sales results cited above, it seems reasonable to project the quarter's Revenue at 8.4 percent above the $99.1 billion figure achieved in the January 2007 quarter. This would be $106.3 billion. It's possible, of course, that the slowing economy might trim January's growth rate below that achieved in the earlier two months.

Wal-Mart's steady, unheralded progress at improving their Gross Margin as a percentage of Revenue is clear from the first figure. It's also obvious that the Gross Margin is purposely lowered, by about one percent, in the fourth quarter to attract high-volume holiday sales. (An alternative explanation would be that the mix of goods sold in the holiday period is less profitable than the mix sold in the other three quarters.) Using this information, we will look for a Gross Margin of 23 percent in the current quarter. Given the revenue forecast above, our estimate for Cost of Goods Sold (CGS) in the January quarter is 0.77 * $106.3 billion, or $81.9 billion.

We see from the second figure that Sales, General, and Administrative (SG&A) expenses as a percentage of Revenue have been creeping up and show an even greater seasonal pattern. Since the Revenue level in the fourth quarter is so much greater than the other quarter, SG&A expense in the fourth quarter as a percentage of Revenue is 1.5 to 2 percent below the rate in the other quarters. This is because SG&A expenses are relatively more fixed and less variable with Revenue than the CGS. Based on the figure, we're expecting SG&A expenses to be 17.5 percent of $106.3 billion, or $18.6 billion.

We'll also assume, in accordance with management's guidance, a non-recurring, special operating charge of $40 million to account for the Seiyu restructuring.

Our estimates for Revenue and Operating Expenses would result in an Operating Income of $5.8 billion.

Net interest and other income has recently been about $600 million per quarter. We also need to deduct about $100 million for minority interests. These values would increase pre-tax income to $6.3 billion.

Wal-Mart estimated that the average income tax rate for the current fiscal year would be between 34 and 35 percent with some quarter-to-quarter volatility. If we assume the higher rate, the provisions for income taxes will be $2.2 billion, and net income will be $4.1 billion ($1.01 per share, if the number of shares outstanding hasn't changed much from the October quarter).

Please note that the tabular format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.

($ M)

Jan 2008
Jan 2007

Op expenses

CGS (81874)

SG&A (18608) (17080)

Operating Income
Other income


Interest, etc.
Pretax income

Income tax

Net Income


1. Revenue "predictions" for Wal-Mart are based on the company's publicly announced monthly sales reports.
2. The company includes some income in operating income that we treat as non-operating income.

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