23 February 2008

WMT: Financial Analysis through January 2008

We have analyzed Wal-Mart's (WMT) preliminary report on the quarter that ended 31 January 2008. This post reports our results.

The financial statements in Wal-Mart's report include enough data to estimate the GCFR gauge scores. We will scrutinize the company's future 10-K submission to the SEC to determine if the additional data in the formal report would alter the scores.

With annual sales over $350 billion, or about 10 percent of U.S. retail sales, Wal-Mart squeezed ahead of Exxon Mobil (XOM) to garner the top spot on the 2007 edition of the Fortune 500 list of America's largest corporations. Wal-Mart transformed retailing (for better or for worse, depending on your perspective) by using information technology to manage its supply chain and by pressuring manufacturers to squeeze every penny out of their costs. Wal-Mart's visibility and role in advancing globalization have made it a lightning rod for criticism.

All retailers are challenged by the slowing U.S. economy, in which consumers weakened by high food and energy prices are nervous about their jobs and homes. In this environment, super-efficient Wal-Mart has something of a competitive advantage. The company sells the merchandise consumers can't do without and it does so at prices hard for competitors to match. To bolster store traffic, Wal-Mart has shown it is willing to implement price reductions that trim already razor-thin profit margins.

When we analyzed Wal-Mart after the October quarter, the Overall score was 29 points. Of the four individual gauges that fed into this composite result, Value was the strongest at 12 points. Profitability was weakest at 3 points.

Now, with the available data from the January 2008 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. Wal-Mart's performance matched our estimates almost exactly. Please note that the presentation 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 2008
Jan 2007

Op expenses

CGS (81323)

SG&A (19224)
(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.

Revenue in the January quarter was less than 1 percent below the predicted value, and it was 8.3 percent higher than in the January 2007 quarter. Year-over-year revenue growth is now 8.6 percent.

We thought the Cost of Goods Sold (CGS) would be 77.0 percent of Revenue, and the actual value was 76.5 percent. In other words, the Gross Margin, at 23.5 percent, was a 0.5 percent better than our expectation. Lower CGS were balanced out, however, by higher Sales, General, and Administrative (SG&A) expenses. SG&A costs in the quarter were 18.1 percent of Revenue, compared to our forecast of 17.5 percent.

We had set aside $40 million, per company guidance, for a special operating charge related to the restructuring of the Seiyu operations. We suspect Wal-Mart included this in SG&A costs, but we don't have any definitive information.

Operating Income was 5.1 percent above the value in the January 2007 quarter. However, Operating Income was 1.5 percent below the forecast value because of the slightly lower than expected Revenue and the higher SG&A expenses

Non-operating income was a tiny $17 million greater than expected. The Income Tax Rate was 34.3 percent, instead of the predicted 35 percent. As a result, Net Income matched the prediction almost exactly. Earnings per share were $0.01 better than estimated because there were fewer shares outstanding.

Cash Management. This gauge didn't change from 7 points in October.

The following measures pushed the score up the most:
  • Cash Conversion Cycle Time (CCCT) = 10.0 days, down from 11.7 days in January 2007, for this measure of efficiency
  • LTD/Equity = 46.1 percent, a manageable figure but up from 44.2 percent in one year
  • Debt/CFO = 2.0 years; compared to 2.3 and 1.7 years 3 and 12 months ago, respectively
  • Inventory/CGS = 43.9 days, compared to 50.8 and 45.3 days 3 and 12 months ago, respectively
The following measures held the score down:

Growth. This gauge increased from 4 points in October to 5 points now.

The following measure pushed the score up the most:
  • Revenue/Assets = 2.292, up slightly from 2.282 in a year; sales efficiency improved by a tiny amount.
The following measures held the score down:
  • Net Income growth = 5.8 percent year-over-year, down from 7.5 percent a year ago.
  • Revenue growth = 8.6 percent year-over-year, down from 11.0 percent
  • CFO growth = 2.0 percent year-over-year, down from 13.2 percent

Profitability. Encouragingly, this gauge increased from 3 points in October to 6 points now.

The following measures pushed the score up the most:
  • FCF/Equity = 8.4 percent, up from 7.0 percent in a year
  • ROIC = 11.6 percent, not bad but down from 12.4 percent in a year.
The following measures held the score down:

Value. Wal-Mart's stock price rose over the quarter from $45.21 to $50.74. The Value gauge, based on the latter price, decreased to 7 points from 12 points three months ago.

All of the following measures made small positive contributions to the score:
  • Enterprise Value/Cash Flow = 11.7, up from 11.3 in January 2007, but significantly below its five-year median of 13.7.
  • P/E = 15.7, down from 16.3 a year ago, and below its five-year median of 18.5.
  • P/E to S&P 500 average P/E = 8 percent discount, much lower than its five-year median of a 12 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 15.6. The average Price/Revenue for the industry is currently 0.56.

Now at a weak 26 out of 100 possible points, the Overall gauge fell back a couple of point with the fourth quarter results. This was mostly consequence of the run up in the share price during the last three months, which took a slice out of the double-weighted Value gauge. Growth is positive, but tepid. Profitability is somewhat encouraging.

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