This post explains how we modeled Wal-Mart's Income Statement for the January quarter. When the actual results are published, we will compare them to the model to identify the extent to which sales, expenses and other gains/losses differed from our expectations. GCFR estimates are derived from trends in the historical financial results and guidance provided by company management.
We will get much-needed opportunities to refine the model when Wal-Mart reports monthly sales data for December 2008 and January 2009.
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).
Mike Duke, vice chairman of Wal-Mart International, will take over as CEO from Lee Scott on 1 February 2009. He will grab the reins when retails everywhere are struggling. Holiday sales were down, and one corporate adviser that tracks these sorts of things has warned that many large retailers "are at significant risk of filing for bankruptcy or facing financial distress in 2009 or 2010."
Wal-Mart, on the other hand, sells the merchandise shoppers can't do without, even during tough times. Efficient operations allow Wal-Mart to keep prices at levels too low for competitors, such as Target (NYSE: TGT), Kohl's (NYSE: KSS), and Sears Holdings (NASDAQ: SHLD), to match.
The company certainly has its share of critics, some of whom have commented on GCFR analyses.
Wal-Mart announced on 23 December 2008 the settlement of 63 wage and hour class action lawsuits. The agreement will cost the company between $352 million and $640 million. It will account for this obligation by recording an after-tax charge of approximately $250 million in the January 2009 quarter.
In the third quarter of fiscal 2009, which ended October 2008, the GCFR Overall Gauge of Wal-Mart slipped from 32 to 27 of the 100 possible points. Our initial and updated analysis reports explained the score in some detail.
Earnings in the third quarter were a little better than we expected. However, three of our four component gauges fell as momentum from the strong July quarter waned. Since Wal-Mart is better insulated from the credit crisis and the ensuing economic decline than most firms, its share price is actually higher now than it was 12 months ago. As a result, our contrarian Value gauge for Wal-Mart, which tends to move in the opposite direction of the share price, hasn't jumped like it has for so many other companies.
When the third quarter results were announced, Wal-Mart provided the following guidance for the fourth quarter and fiscal year:
For the fourth quarter of fiscal year 2009, the Company estimates the comparable store sales increase in the United States to be between one and three percent, according to Tom Schoewe, Wal-Mart Stores, Inc. executive vice president and chief financial officer.
“We estimate diluted earnings per share from continuing operations for the fourth quarter will be between $1.03 and $1.07,” Schoewe said. “The rapid changes in currency exchange rates during the last few weeks are projected to negatively affect this year’s fourth-quarter results by approximately six cents per share. In U.S. dollar terms, strong operating performance in International may be overshadowed by these currency fluctuations.
“For the full year, ending January 31, we have tightened and modestly reduced our guidance and now forecast diluted earnings per share from continuing operations to be within a range of $3.42 to $3.46,” he said.
Note that the guidance related to Revenue is limited to comparable sales (sometimes called same-store sales) in the U.S. For international sales (about 25 percent of the company's business), the guidance is silent on Revenue, but it provides an estimate of how much the strengthening U.S. currency will cut into earnings, which are expressed in dollars.
In November, Wal-Mart's U.S. Net Sales were up 5.7 percent, but international sales were down by 11 percent. The brisk rise in the U.S. dollar reduced Wal-Mart's international sales by 18.7 percent.
Until the economic and currency situation becomes clearer, we're going use November's overall growth in Net Sales, 1.6 percent, as a proxy for the entire quarter. Since Revenue in the January 2008 quarter was $106.3 billion, this sets our target for the current quarter at $108.0 billion.
Wal-Mart's Gross Margin has been 23.7 percent in the last four quarters. Additional discounting in the January quarter would be normal, so we expect the margin to be about 23.5 percent in the current period. With this assumption, our estimate for Cost of Goods Sold (CGS) is (1 - 0.235) * $108 billion = $82.6 billion.
Sales, General, and Administrative (SG&A) expenses are typically around 19 percent of Revenue, but they are usually less proportionately in the high-Sales January period. Our estimate for the current quarter is 18 percent. Therefore, we expect this expense to be 0.18 * $108 billion = $19.4 billion.
Until more specific accounting guidance is offered, we will assume the settlement charge will be recorded as a special operating expense. Given typical tax rates, the pre-tax amount will be about $385 million to result in an after-tax value of approximately $250 million.
These expense estimates would lead to an Operating Income of $5.55 billion, which would be down 3 percent from the January 2008 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 $575 million estimate for Net Interest and other income. These non-operating values set our estimate for pre-tax income to $6.0 billion.
If we project an Income Tax Rate of 35 percent, the provision for income taxes would be $2.1 billion and Net Income would be $3.9 billion ($0.99 per share). If these figures are true, Net Income will be 4.7 percent below that in year-earlier quarter.
It is important to note that our estimate includes the class-action settlement charge, which was not an element of the company's guidance. If we back out the charges, our estimate of Net Income rises to $4.15 billion ($1.05 per share). This happens to be right in the middle of the company's guidance.
Please note that the tabular format in the embedded spreadsheet, 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.