21 April 2009

WMT: Look Ahead to April 2009 Quarterly Results

The GCFR Overall Gauge of Wal-Mart Stores, Inc. (NYSE: WMT) jumped from 28 to 44 points of the 100 possible points in the three months that ended on 31 January 2009, which was the fourth quarter of the company's fiscal 2009.  Our initial and updated analysis reports explained in some detail how this score was attained. 

We have now modeled Wal-Mart's Income Statement for the quarter that will end on 30 April 2009.  The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data that the company is scheduled to announce on 14 May 2009.  GCFR estimates are derived from trends in the historical financial results and guidance provided by company management.

First, we present some background information.

Discounter Wal-Mart Stores, Inc. had sales over $400 billion, nearly 10 percent of U.S. retail sales, in fiscal 2009.  It held the top spot on the 2008 edition of the Fortune 500 list of America's largest corporations, but it fell to number two behind Exxon Mobil (NYSE: XOM) in 2009.

Nevertheless, Wal-Mart investors can take solace knowing that the company's share price rose 18 percent in calendar year 2008.  CNNMoney.com reported "only 24 of the 500 companies generated a positive return" in 2008.

Mike Duke, former vice chairman of Wal-Mart International, took over as CEO from Lee Scott in February 2009.  He grabbed the reins when most retailers are struggling.  Holiday sales were down, and one prominent corporate adviser 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, is relatively well insulated from the ongoing credit crisis and economic decline. It sells consumer staples that customers will buy even during tough timesEconomies of scale and ruthless efficiencies allow Wal-Mart to keep prices so low that competitors, such as Target (NYSE: TGT), Kohl's (NYSE: KSS), and Sears Holdings (NASDAQ: SHLD), find it difficult to match them. 

Critics of Wal-Mart abound.  A few have commented on GCFR analyses.

Wal-Mart announced on 23 December 2008 the settlement of 63 wage and hour class action lawsuits at a cost to the company between $352 million and $640 million.  The results for the January 2009 quarter included a $255 million after-tax charge ($352 million pre-tax) to account for this obligation.

During fiscal 2009, Wal-Mart closed 23 stores in its struggling Seiyu unit in Japan, and it sold the Gazeley Limited Group property development organization in the U.K.

Revenue in the January 2009 quarter grew by 1.7 percent, which beat our expectation of a small sales drop.  On a year-over-year (i.e., trailing twelve months) basis, Revenue increased by 7.2 percent.  Net Income from continuing operations, which was adversely affected by the class action settlement charge, ended up 7.4 percent less than in January 2008.  Nevertheless, Wal-Mart's earnings in the fourth quarter matched our expectations, which few companies did in that challenging period.  

Of the four GCFR individual gauges, Value's rise from 4 to 13 points was the biggest change in the fourth quarter of 2008.  However, Growth held on to the top spot with 14 of the 25 possible points.  Cash Management and Profitability did well to hold steady in a tough economic climate.

When the fourth-quarter results were announced on 17 February, Wal-Mart provided the following guidance for the first quarter of fiscal 2010 and for the full fiscal year:

The company expects reported EPS to be between $0.72 and $0.77 for the first quarter of fiscal year 2010, and between $3.45 and $3.60 for the full year.

“Our guidance reflects the strength of our underlying business and global economic conditions,” said Tom Schoewe, Wal-Mart Stores, Inc. executive vice president and chief financial officer. “It assumes that currency exchange rates will remain relatively the same as they were at the end of our 2009 fiscal year, which would have a negative impact on our year-over-year comparison of fiscal 2010 EPS of approximately 13 cents per share.”

On Feb. 5, Wal-Mart announced that it would provide comparable store sales guidance every 13 weeks, instead of monthly, based on the National Retail Federation’s 4-5-4 week calendar. The company said it expects U.S. comparable sales without fuel during the period from Jan. 31 through May 1 to increase between one and three percent. Wal-Mart will provide guidance for the next 13-week period on May 7.

The financial statements reflect the disposal of Gazeley, Ltd., the former U.K. property development subsidiary of ASDA, and the restructuring activities that took place at The Seiyu Ltd. in Japan during the year as discontinued operations for all periods presented.

This guidance was updated on 9 April when data on March sales [pdf] were published:

“The combined 3.1 percent comp for Walmart U.S. and Sam’s Club we reported for the past nine weeks shows the strength of our underlying operations,” said Tom Schoewe, executive vice president and chief financial officer. “We expect total U.S. comps for the 13 weeks through May 1 to be around the high end of our previously forecasted range of one to three percent.

“Wal-Mart is maintaining strong price leadership and expense management,” said Schoewe. “We believe earnings per share from continuing operations for the first quarter will be toward the high end of the range we provided in February, $0.72 to $0.77 per share.”

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 February (the first month of the first quarter), Wal-Mart's total sales were $30.018 billion, up 2.8 percent from February 2008.  In the five-week March period, total sales were $36.206 billion, down 1.9 percent from the comparable period in 2008.  The reason for the decline was that changes in foreign exchange rates reduced the reported value of international sales by a staggering 22.6 percent.

Given this information, our estimate of Revenue in the first quarter is $95.6 billion.  It is based on actual sales for the first two months of the quarter and an assumed growth rate of 0.5 percent for March 2009.  The uncertainty of this estimate is magnified by Wal-Mart's reclassification of certain Revenue components, which means the historical record has been shifted in some unknown way.

Wal-Mart's Gross Margin was 23.7 percent in fiscal 2009.  We will use 23.5 percent as our estimate for the April quarter.  Our Revenue and Gross Margin estimates lead to a predicted Cost of Goods Sold (CGS) of (1 - 0.235) * $95.6 billion = $73.1 billion.

We expect that Sales, General, and Administrative (SG&A) expenses will be around 19 percent of Revenue.  Therefore, we expect this item to be 0.19 * $95.6 billion = $18.2 billion.

These expense estimates would lead to an Operating Income of $4.3 billion, which would be up 3.7 percent from the April 2008 quarter.

We will assume, based on the recent history, Net Interest and other income of $600 million.  Please note we include in this item Membership and other income that Wal-Mart associates with Revenue.

If we project a tax rate of 34 percent, the provision for income taxes would be $1.7 billion, and Net Income would be $3.2 billion.  We will make one more adjustment, a $125 million deduction for Minority interests, to produce the bottom-line estimate of $3.1 billion ($0.78 per share).  If these figures are true, Net Income will be 2.6 percent above that in year-earlier quarter. 

Our EPS estimate is a penny above 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.


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