06 July 2008

WMT: Look Ahead to July 2008 (2Q FY09) Results

When we analyzed Wal-Mart's 10-Q quarterly report for the three months that ended on 30 April 2008, we found the GCFR Overall gauge at 23 of the 100 possible points.  Although there is no denying the weakness of this score, the big increase in the Growth gauge from 5 to 13 of the 25 possible points was excellent news.  A strong rise in year-over-year Cash Flow from Operations propelled the Growth score.

A three-point rise in the Profitability gauge was also a plus.

The double-weighted Value gauge, which fell from 7 points to 1, help the Overall score down.  Although the company's performance improved substantially, the Value gauge reacted negatively to the even faster-paced increase in Wal-Mart shares from $50.74 to $57.98 (14 percent) during the quarter.  The share price was around $45 less than one year ago, and it is over $56 today.

Discounter Wal-Mart Stores, Inc. (WMT) has annual sales of $375 billion, close to 10 percent of U.S. retail sales.  It squeezed ahead of Exxon Mobil (XOM) to garner the top spot on the 2008 edition of the Fortune 500 list of America's largest corporations.  Many retailers are challenged by the slowing U.S. economy, in which consumers have been discouraged by high food and energy prices and are nervous about their jobs and homes.  In this environment, super-efficient Wal-Mart has the advantage of selling the merchandise shoppers can't do without, and it does so at prices hard for competitors to match.

Wal-Mart is scheduled to report its second-quarter results on 14 August 2008. In anticipation of this report, we've modeled the company's Income Statement for the quarter. The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data. GCFR estimates are derived from trends in the historical financial results and guidance provided by company management.

The first-quarter earnings report included the following guidance for the second quarter:

“For the second quarter of fiscal year 2009, we estimate the Company’s comparable store sales increase in the United States to be between flat and two percent.  As we have discussed, it is currently difficult to quantify the impact on U.S. sales from the stimulus payments,” said Tom Schoewe, Wal-Mart Stores, Inc. executive vice president and chief financial officer. “We expect the Company’s earnings per share for the second quarter to be between $0.78 and $0.81. 
When the company reported sales for May (the first month of the second quarter), this additional guidance was provided:

“Our estimate for U.S. comparable store sales, excluding fuel, for the June five-week period is between two and four percent,” said Tom Schoewe, executive vice president and chief financial officer.  “This guidance represents both the underlying strength of our existing U.S. businesses and the potential benefit from the stimulus checks.”
It would appear that the second-quarter got off to a better start than management initially anticipated.

We estimate that overall Revenue in the second quarter will increase by 9 percent if U.S. same-stores sales, excluding fuel, rise at the pace predicted by management.  Applying this growth rate to last year's $91.99 billion second-quarter Revenue gives us an estimate of $100.3 billion for the quarter ending in July 2008.  We'll refine this estimate after Wal-Mart publishes sales data for June.

Wal-Mart's Gross Margin in the previous three July quarters has been 23.3, 23.5, 23.6 percent of Revenue.  We, therefore, feel quite comfortable setting the target for the July 2008 quarter at 23.5 percent.  With this target, our estimate for Cost of Goods Sold (CGS) for the quarter is (1 - 0.235) * $100.3 billion = $76.7 billion.

Sales, General, and Administrative (SG&A) expenses as a percentage of Revenue has crept up to about 19 percent, and the ratio has been 18.6 percent in the two previous July quarters.  We'll set 18.75 percent as the target for the July 2008 quarter.  Therefore, our estimate for this expense is 0.1875 * $100.3 billion = $18.8 billion.

These expense estimates would lead to an Operating Income a little less than $4.8 billion, which is 11.5 percent greater than the value in the year-earlier quarter.

We will assume a deduction for Minority interests of $120 million, which was the figure for the first quarter.  Similarly, historical data are the basis for our $600 million estimate for Net Interest and other income.  These values would increase pre-tax income to $5.2 billion.

If we project an Income Tax Rate of 35.5 percent, the provision for income taxes will be $1.86 billion.  Net Income will be $3.38 billion ($0.85 per share), a 9 percent increase over the July 2007 quarter.  Our estimate exceeds the high end of the company's guidance.

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)

July 2008
July 2007
Revenue (1)

Op expenses

CGS  (76,706)

SG&A  (18,800) (17,130)

Operating Income
Other income

Investments (2)

Interest, etc. (3)
Pretax income

Income tax

Net Income

Shares outstanding
1. Revenue "predictions" for Wal-Mart are based on the company's publicly announced monthly sales reports.
2. Minority interests
3. Includes some income Wal-Mart considers to be operating income.

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