12 July 2009

WMT: Look Ahead to July 2009 Quarterly Results

Wal-Mart (NYSE: WMT) earned $0.77 per share in the three months that ended 30 April 2009, up from $0.76 last year.  The results caused the GCFR Overall Gauge to fall from 43 of the 100 possible points to 37.

Our initial and updated analysis reports examined the April quarter, which was the first of fiscal 2010, in some detail.  In summary, Revenue fell 0.7 percent, but it would have increased a healthy (for this economy) 4.5 percent if variations in currency exchange rates were excluded.  The Gross Margin rose from 24.8 percent in the April 2008 to 25.3 percent.

Three of our four category-gauge scores fell when the first quarter results were assessed.  Value took the biggest hit, decreasing from 12 to 8 of the 25 possible points.  Cash Management was the one riser, moving up from 7 to 9.

We have now modeled Wal-Mart's Income Statement for the quarter that will end on 31 July 2009.  The intent of this exercise was to produce a baseline for identifying deviations, positive or negative, in the actual data that the company is scheduled to announce on 13 August 2009.  GCFR estimates are derived from trends in the historical financial results and guidance provided by company management.

First, we set the stage with some background information about Wal-Mart and the business environment in which it is currently operating. Readers that keep close tabs on the company are invited to skip ahead

Discounter Wal-Mart Stores, Inc., had sales over $400 billion, nearly 10 percent of U.S. retail sales, last year.  This earned Wal-Mart the number 2 position on the Fortune 500 list of America's largest corporations, behind Exxon Mobil (NYSE: XOM).

Many retailers are struggling because high unemployment and lower home values have cut consumer confidence and spending.  The International Council of Shopping Centers announced that "U.S. chain store sales for June 2009 were down 5.1 percent on a year-over-year, same-store basis."  A list of retailers that have filed for Chapter 11 protection in the last couple of years contains many familiar names.

Wal-Mart has fared better than other retailers because it sells consumer staples that customers will buy even during tough timesEconomies of scale and ruthless efficiencies enable Wal-Mart to keep most prices lower than competitors, such as Target (NYSE: TGT), Kohl's (NYSE: KSS), and Sears Holdings (NASDAQ: SHLD). 

For example, Wal-Mart can lure customers with generic drugs for $4.

Critics of Wal-Mart abound.  They claim, for example, that an Indian manufacturer with a questionable reputation produces some of those low-price drugs.  In addition, after years of complaints from employees, 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. 

Wal-Mart recently endorsed a White House proposal to require large companies to offer health insurance to their workers.

We are now ready to look ahead.

The July quarter is the first period in which Wal-Mart has not issued monthly sales data.  The lack of real data adds considerable uncertainty to our estimates.

When the first-quarter results were announced on 14 May, Wal-Mart provided the following guidance for the second quarter:

“We expect earnings per share from continuing operations for the second quarter of fiscal year 2010 to be between $0.83 and $0.88,” said Tom Schoewe, Wal-Mart Stores, Inc. executive vice president and chief financial officer. “Our guidance takes into account Wal-Mart’s strong underlying performance and the difficult economic environment. Plus, our U.S. businesses will be up against the economic stimulus checks in the second quarter last year.


Walmart U.S. and Sam’s Club each expect their comparable store sales during the 13-week period from May 2 through July 31 to be between flat and three percent. Wal-Mart will report each operating segment’s comparable store sales result and the total U.S. aggregate comparable store sales result for that period when it reports second quarter earnings on Aug. 13.

To estimate Wal-Mart's Revenue in the current quarter, we should start with the zero-to-three percent sales growth estimate for U.S. stores.   We should then make adjustments to reflect sales at new stores, sales outside the U.S., the effect of foreign exchange rates, and changes to economic conditions since the company issued its guidance.

This is more than we can handle, so we will settle for a rougher estimate.  In the last five years, Wal-Mart's Revenue in the July quarter has been consistently 7 to 8 percent more than in the preceding April quarter.  The increase might be a little less this year, for all the reasons outlined above, but not a whole lot less given Wal-Mart's steady performance.  If we assume July's Revenue will be 5 to 6 percent greater than April's $94.24 billion, we get figures around $99 billion.  Let's just say $100 billion even.

In the last four quarters, Wal-Mart's Gross Margin averaged 24.7 percent.  We will use 24.5 percent as our estimate for the July quarter.  Our Revenue and Gross Margin estimates lead to a predicted Cost of Goods Sold (CGS) of (1 - 0.245) * $100 billion = $75.5 billion.

We expect, based in historical results, that Sales, General, and Administrative (SG&A) expenses will be around 19 percent of Revenue.  Therefore, we expect this item to be 0.19 * $100 billion = $19.0 billion.

These expense estimates would lead to an Operating Income of $5.5 billion, which would be down 5.4 percent from the stimulus-aided July 2008 quarter.

We will also extrapolate past results to produce a $470 million estimate for net interest expense.

If we project a tax rate of 34 percent, the provision for income taxes would be $1.7 billion.  We also need to make one more adjustment, $115 million in this case, for the portion of net income attributable to noncontrolling interests.  The bottom-line estimate for Net Income is $3.2 billion ($0.82 per share).  If these figures are realized, earnings will be down 7.4 percent.

Our EPS estimate is a penny below the lower end of company's guidance range.  We might have been over-conservative in our estimates.  Perhaps recently high gas prices will lift Revenue more than we figured.  We will find out in another month.

Please click here to see a full-sized, normalized depiction of the projected results next to Wal-Mart's quarterly Income Statements for the last couple of years.  Please note that our organization of revenues, expenses, gains, and losses, which we use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

Full disclosure: Long WMT at time of writing. No position in any other company mentioned.

1 comment:

  1. they don't have their Global Procurement in China to buy American made.

    and Sam Walton didn't put tat STAR in the name.

    oh! and RETAIL makes nothing...so! if the American consumer doesn't wake up and start to think about American made....tis gr8 union we the people call the United States of America will never get those 6 million jobs back cause in order for a country to survive it has to make stuff not jus buy foreign crap.