19 May 2009

WMT: Financial Analysis through April 2009

Wal-Mart Stores, Inc. (NYSE: WMT) earned $0.77 per share in the three months that ended 30 April 2009, up from $0.76 last year.  The latest results were announced in this press release.

This post provides the GCFR analysis for the period, which was the first quarter of the company's fiscal 2010.

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.   We're hoping the 10-Q will shed some light on the reclassification of certain revenue and expense items that Wal-Mart implemented for fiscal 2010.

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 year that ended in January 2009.  Wal-Mart held the top spot on the 2008 edition of the Fortune 500 list of America's largest corporations, but it fell to Number 2 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.  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. 

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.

Looking back at the January 2009 quarter, we are reminded that Revenue grew by 1.7 percent.  Net Income from continuing operations, which was adversely affected by the class action settlement charge, fell 7.4 percent.  Nevertheless, Wal-Mart's earnings in that challenging period matched our expectations, which few companies did.  

The GCFR Overall Gauge jumped from 28 to 44 of the 100 possible points when January's results were evaluated.  Value increased the most, rising from 4 to 13 of 25 possible points.   Growth, with 14 points, maintained the best score.  Cash Management and Profitability did well to hold steady in a tough economic climate.

Now, with the available data from the April 2009 quarter, our gauges display the following scores:

  • Overall: 38 of 100 (down from 44)

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.


Revenue in the recent quarter was 0.6 percent less than in the same quarter of 2008.   Revenue would have increased by 4.5 percent if there had been no variations in currency exchange rates.  All year-to-year comparisons in this report use restated values for the April 2008 quarter.

Our estimate, which was calculated after sales data for February and March were published, proved too optimistic by 2.2 percent.  This suggests that sales in the month of April weakened, or the exchange rate situation worsened.

The Cost of Goods Sold (CGS) was 75.3 percent of Revenue, which translates into a Gross Margin of 24.7 percent.  The margin increased from 24.1 percent in the April 2008 quarter.  Our target for the margin in the latest quarter was 23.5 percent of Revenue.  Therefore, on a Gross Margin basis, Wal-Mart was 1.2 percent more profitable than we expected. 

Sales, General, and Administrative (SG&A) expenses in the quarter were 19.9 percent of Revenue, up from 19.4 percent last year.  We had estimated that these expenses would be 19 percent of Revenue. 

Operating Income, as we define it, eked out a 0.6 percent gain.  Our estimate was 3.3 percent too low, with lower-than-expected CGS have a greater effect than lower-than-expected Revenue. 

Other income, which in our approach includes membership income, was 24 percent less than last year's result, and it was much about half of our target.

The Income Tax Rate was 33.7 percent, which was a little less burdensome than the predicted 34.2 percent. 

Net Income attributable to Wal-Mart was exactly unchanged from April 2008.  This Net Income value was a 2.5 percent below our forecast.  EPS fell $0.01 short of our prediction.

Now for the gauges:
Cash ManagementApril 2009
3 months prior12 months prior
Current Ratio0.8
1.7 years
1.7 years
2.0 years
41.9 days41.6 days44.1 days
Finished Goods/Inventory
Days of Sales Outstanding (DSO)3.0 days
3.4 days
2.9 days
Working Capital/Invested Capital -8.9%
Cash Conversion Cycle Time10.3 days
9.6 days
11.8 days
Gauge Score (0 to 25)

The two-point increase in the Cash Management score was mostly the result of the Cash Conversion Cycle Time, relative to last year.  Lower durations indicate greater efficiency.  The leaner inventory in April 2009 than April 2008 also helped.

The negative Working Capital ratio was a downward force on this gauge.

GrowthApril 20093 months prior12 months prior
Revenue growth4.6%
Revenue/Assets 243%
CFO growth
Net Income growth 1.7%
Gauge Score (0 to 25)11
Growth rates are trailing four quarters compared to four previous quarters.

The rapidly contracting growth rates -- Cash Flow from Operations especially -- hurt the Growth gauge.   The increase in Revenue relative to Assets softened the decline.

ProfitabilityApril 20093 months prior12 months prior
Operating Expenses/Revenue 95.3%
ROIC 12.8%
Free Cash Flow/Invested Capital
Accrual Ratio
Gauge Score (0 to 25)9

It's remarkable that Wal-Mart has been able to keep Operating Expenses so steady when the economy is so weak.  ROIC and FCF have also held up nicely. 

We would like to see the Accrual Ratio decrease, which would signal improved Earnings Quality.  However, weak CFO has precluded this result.

ValueApril 20093 months prior
12 months prior
P/E 14.8
P/E vs. S&P 500 P/E 86%80%96%
Price/Revenue 0.5
Enterprise Value/Cash Flow (EV/CFO)
Gauge Score (0 to 25)9

Wal-Mart's share price increased 7 percent during the quarter, from $47.12 to $50.40.  The combination of this rise with signs of a slowdown caused the Value metrics to become relatively less appealing.

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

OverallApril 20093 months prior
12 months prior
Gauge Score (0 to 100)38

Wal-Mart's Operating and Net Income figures were nearly unchanged in the April 2009 quarter, when compared to the April 2008 quarter.  Revenue was a little lighter than we expected, but the Gross Margin was higher.

Flat performance weakened the Growth gauge score directly.  When this performance is juxtaposed with the rising share price, the Value gauge took a hit.  The Overall gauge reflects these results.

Full disclosure: Long WMT at time of writing.

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