14 November 2008

WMT: Financial Analysis through October 2008

Wal-Mart recently announced its earnings for the three months ending on 31 October 2008.  This post provides the GCFR analysis for the period, which was the third quarter of the company's fiscal 2009.

When Wal-Mart files a 10-Q, with more complete financial statements and notes, we will re-examine the analysis and make any necessary adjustments.

Discounter Wal-Mart Stores, Inc. (NYSE: WMT) had sales of $400 billion, nearly 10 percent of U.S. retail sales, in the last 12 months.  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.

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

Three months ago, the GCFR Overall gauge rose 10 points, to 32 of the 100 possible points, when we analyzed Wal-Mart's second quarter.  Among the individual gauges, Growth's 18 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.

Now, with the available data from the October 2008 quarter, our gauges display the following scores:
  • Overall: 27 of 100 (down from 32)

Before we examine each gauge, we will compare the latest quarterly Income Statement to our previously announced expectations

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) October 2008
October 2008
October 2007
(actual) (*)
Revenue (1) 97,63496,696 90,826
Op expenses
CGS  (74,114)(73,973) (68,251)
SG&A  (19,236)(18,614) (17,653)
Other (0)(0)
Operating Income 42844,110 3,922
Other income
Investments (2) (113)(125) (99)
Interest, etc. (3) 552615 579
Pretax income 4,7234,600 4,402
Income tax (1,690)(1,610)
Net Income from continuing operations 3,033
Discontinued operations105
Shares outstanding394439504056
*. Restated
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.

Revenue was 7.5 percent greater than in the October 2007 quarter.  Revenue was 1.0 percent of above our target that was based on actual data for the first two months of the quarter.  Year-over-year Revenue growth is 9.1 percent.

The Cost of Goods Sold (CGS) was 75.9 percent of Revenue, which translates into a Gross Margin of 24.1 percent.  Our target for the margin was 23.5 percent of Revenue, so Wal-Mart was more profitable than we expected by this measure. 

Sales, General, and Administrative (SG&A) expenses in the quarter were 19.7 percent of Revenue.  Our forecast was 19.25 percent.

Operating Income, as we define it, was a healthy 9.2 percent more than in the October 2007 quarter.  Operating Income exceeded our forecast by 4.2 percent because both Revenue and the Gross Margin were a little better than the predicted values.

Non-operating Income was about 8.5 percent less than last year's result, and it was $50 million less than we expected.  The Income Tax Rate was 35.8 percent, which was a little more burdensome than the predicted 35.0 percent. 

The lower Non-Operating Income brought growth in Net Income from continuing operations down to 6.6 percent.  This Net Income value just slightly exceeded our forecast.  The income surplus was greater if discontinued operations are included.  EPS beat our forecast by either a penny or by 4 cents.

Cash ManagementOctober
3 months
12 months
Current Ratio0.90.90.8
LTD/Equity 47.0%51.2%44.7%
Debt/CFO 2.1 yrs1.7 yrs2.2 yrs
Inventory/CGS 47.8 days42.3 days50.8 days
Finished Goods/Inventory N/AN/AN/A
Days of Sales Outstanding (DSO)2.9 days2.8 days2.8 days
Working Capital/Market Capitalization  -2.9%-2.0%-4.2%
Cash Conversion Cycle Time13.6 days10.2 days14.2 days
Gauge Score (0 to 25)8107

The changes in the Cash Management metrics are most minor.  The decrease in Inventory from the comparable period last year is welcome, given that the slow economy could easily lead to a backup of unsold goods.  The rebound in the CCCT is a little disappointing; super-efficient Wal-Mart is becoming more so, just not as much as we had hoped last quarter.

3 months
12 months
Revenue growth9.1%9.4%9.0%
Revenue/Assets 240%243%231%
CFO growth7.1%27.8%-0.4%
Net Income growth 6.5%7.2%7.5%
Gauge Score (0 to 25)14173
Growth rates are trailing four quarters compared to four previous quarters.

Cash Flow from Operations surged dramatically three months ago, but it wasn't sustained.  CFO was barely above water in the October 2008 quarter.  The faster growth in Revenue relative to Assets is encouraging.  In the current environment, any increases in Net Income are welcome, but a 6.5 percent rate is modest at best.

3 months
12 months
Operating Expenses/Revenue 95.3%95.3%95.2%
ROIC 11.9%12.0%11.3%
Accrual Ratio2.3%1.3%4.9%
Gauge Score (0 to 25)9113

It's remarkable that Wal-Mart has been able to keep Operating Expenses so steady when prices for many goods are rising and other retailers have to cut prices to stimulate sales.

The data here show that the October quarter was good, but not as good as the July period.

3 months
12 months
5 year
P/E 16.317.414.417.4
P/E to S&P 500 average P/E 116%95.6%83.2%105.2%
Enterprise Value/Cash Flow (EV/CFO)12.311.011.412.4
Gauge Score (0 to 25)2213N/A

Wal-Mart's stock price slipped over the quarter from $58.62 to $55.81.  The shares are up from $45 just a year ago.  This increase explains why the Value gauge is stagnant at only 2 points.

Wal-Mart's valuation ratios can be compared with other Discount and Variety Retailers.

3 months
12 months
Gauge Score (0 to 100) 273230

Earnings in the third quarter were a little better than we expected, which is admirable in the current environment.  However, three of our four component gauge scores fell as some of momentum from the strong July quarter waned.  Since Wal-Mart has been better insulated from the broad economic decline than most other companies, we haven't seen the major drop in the share price and the concomitant spike in the always-contrary Value gauge.

1 comment:

  1. Walmart executives have likely been thanking their lucky stars for the economic downturn we're experiencing; they're reaping all the benefits. Not only have they been draining our economy for years, but now they're benefiting from our economic loss.

    From a Wall Street Journal article today:

    "Behind the figures is a confluence of trends fueled by the downturn. As strapped consumers look for cheaper goods, and weaker retailers go out of business, Wal-Mart is using its unmatched economies of scale to drive down prices, undercut competitors and squeeze costs out of suppliers ever more dependent on the Bentonville, Ark., behemoth."

    All these companies must now pray at the altar of Walmart; to borrow a phrase, they are suppliers at the hands of an angry retail giant.