09 October 2008

WMT: Look Ahead to October 2008 (3Q FY09) Results

The GCFR Overall gauge of Wal-Mart rose to 32 of the 100 possible points, from 23 points the previous quarter, when we analyzed the company's 10-Q report for the three months that ended 31 July 2008.

Among the individual gauges, Growth's 16 of 25 points was the best performer. A dramatic increase in Cash Flow from Operations propelled the Growth gauge upward. CFO in the last four quarters was 28 percent more than in the previous four quarters.

The double-weighted (and highly contrarian) Value gauge achieved only 2 points of its 25 possible points. This weak score was a consequence of Wal-Mart's share price rising from about $45 to about $58 in one year. Wal-Mart's operating performance was commendable over this period, but the Value gauge indicates the share price increased at a faster rate.

Shares of Wal-Mart have been less affected by the credit crisis than the shares of many other companies.

Discounter Wal-Mart Stores, Inc. (NYSE: WMT) has sales of almost $400 billion, close to one-twelfth of U.S. retail sales, in the last four quarters. It garnered the top spot on the 2008 edition of the Fortune 500 list of America's largest corporations, edging ahead of Exxon Mobil (NYSE: XOM). In today's slow U.S. economy, consumers are worried about their jobs, homes, and by high food and energy prices. Super-efficient Wal-Mart has the advantage of selling the merchandise shoppers can't do without, and it does so at prices difficult for competitors, such as Target (NYSE: TGT), Kohl's (NYSE: KSS), and Sears Holdings (NASDAQ: SHLD), to match.

Wal-Mart is scheduled to announce its third-quarter results on 13 November 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.

Wal-Mart has reported sales for the months of August and September 2008, which are the first two months of the third quarter. [Sales months are not identical to calendar months, but they provide a reasonable approximation.] Sales across the Wal-Mart U.S., Sam's Club, and International business segments in these two months totaled $66.896 billion, compared to $62.453 billion, an increase of 7.1 percent.

On a same-store sales basis, the rate of growth was much lower.

For October, Wal-Mart provided the following guidance

The Company expects U.S. comparable store sales for the October four-week period to be between one and two percent ... . We maintain our current estimate for earnings per share from continuing operations for the third quarter ending Oct. 31, 2008 to be in the range of $0.73 and $0.76 per share ... .

Given the actual sales data for August and September, and the guidance for October, we estimate that Revenue in 2008's third quarter will increase by 6.4 percent over the third quarter of 2007. Applying this growth rate to last year's $90.88 billion Revenue in the third quarter gives us a Revenue estimate of $96.7 billion for the quarter ending 31 October 2008.

Wal-Mart's Gross Margin in the previous three October quarters has been 23.8, 23.7, and 23.2 percent of Revenue. We, therefore, feel quite comfortable setting the target for the October 2008 quarter at 23.5 percent. With this target, our estimate for Cost of Goods Sold (CGS) for the quarter is (1 - 0.235) * $96.7 billion = $74.0 billion.

Sales, General, and Administrative (SG&A) expenses have been around 19 percent of Revenue. The expenses are usually a little higher than average in October quarters, so we'll set 19.25 percent as the target for the October 2008 quarter. Therefore, our estimate for this expense is 0.1925 * $96.7 billion = $18.6 billion.

These expense estimates would lead to an Operating Income of $4.1 billion, which is 5.3 percent greater than the value in the year-earlier quarter.

We will assume, based on the recent history, a deduction for Minority interests of $125 million. Similarly, historical data are the basis for our $615 million estimate for Net Interest and other income. These non-operating values would increasepre-tax income to $4.6 billion.

If we project an Income Tax Rate of 35 percent, the provision for income taxes will be $1.6 billion. Net Income will be $3.0 billion ($0.76 per share), a 4.7 percent increase over the October 2007 quarter. Our estimate matches 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)

October 2008
October 2007
Revenue (1)

Op expenses

CGS (73,973)

SG&A (18,614) (17,685)

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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