06 October 2009

WMT: Look Ahead to October 2009 Quarterly Results

The GCFR Overall Gauge of Wal-Mart (NYSE: WMT) fell from 36 to 29 of the 100 possible points in July when the second quarter of fiscal 2010 ended.  Our income statement, financial gauge, and gauge update analyses explained in some detail how the score was attained.

Walmart earned $0.88 per share in the July quarter.  Although Net Income did not change significantly from the comparable period last year, earnings per share increased by $0.01 because fewer shares were outstanding.

Sales at the company's eponymous U.S. stores increased just slightly, 0.3 percent, relative to the second quarter of last year.  Same-store sales fell 1.5 percent.  Reported Revenue at international stores declined 5.1 percent, but Revenue at these stores increased 11.5 percent on a constant currency basis.  Sam's Club sales slipped 3.2 percent.

We have now modeled Wal-Mart's Income Statement for the quarter that will end on 31 October 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 12 November 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).

U.S. retail sales rose in the summer, aided by the cash for clunkers program.  However, unemployment continues to rise, and home values remain a concern, which diminishes consumer confidence and the prospects for holiday spending.

Wal-Mart has fared better than other retailers because it sells consumer staples that customers will buy even during tough times.  For example, Wal-Mart can lure customers with generic drugs for $4Economies 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). 

A list of retailers that have filed for Chapter 11 protection in the last couple of years contains many familiar names.

The company, according to the WSJ, intends to hold onto customers it gained during the recession.

Critics of Wal-Mart abound.  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. 

We are now ready to look ahead.

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

When the second-quarter results were announced on 13 August, Wal-Mart provided the following guidance for the third quarter:

“Based on our view of the economy and our continued focus on managing expenses and productivity, we are updating our guidance for earnings per share from continuing operations this year to a range of $3.50 to $3.60, from $3.45 to $3.60,” Schoewe added. “We expect earnings per share from continuing operations for the third quarter of fiscal year 2010 to be between $0.78 and $0.82, including a three-cent negative impact from currency exchange rates.”

Walmart U.S. expects comparable store sales during the 13-week period from Saturday, Aug. 1 through Friday, Oct. 30 to be between flat and two percent. Sam’s Club expects comparable club sales during the same period to be flat, plus or minus one percent.

[emphasis added]

In the last five years, Wal-Mart's Revenue in the October quarter has been, on average, 1.7 percent greater than the mean Revenue in the two previous quarters.  If the pattern were to continue in the current fiscal year, then Revenue in the third quarter would be about $99.2 billion.  Recent U.S. retail sales data might suggest a slightly higher number, but we have decided to stick with $99.2 billion as our estimate.

In the last five non-Holiday quarters, Wal-Mart's Gross Margin averaged 25.0 percent.  We are using this ratio as our estimate for the October quarter.  Our Revenue and Gross Margin estimates lead to a predicted Cost of Goods Sold (CGS) of (1 - 0.25) * $99.2 billion = $74.4 billion.

We expect, based in historical results, that Sales, General, and Administrative (SG&A) expenses will be 19.4 percent of Revenue.  Therefore, we expect this item to be 0.194 * $99.2 billion = $19.25 billion.

These expense estimates would lead to an Operating Income of $5.56 billion, which would be up 5 percent from the weak October 2008 quarter.

We extrapolated past results to estimate net interest expense of $475 million.

If we project a tax rate of 34 percent, the provision for income taxes would be $1.7 billion.  We also need to make an adjustment, estimated at $115 million, for the portion of net income attributable to noncontrolling interests.  Another $10 million adjustment is for estimated loss on discontinued operations. 

The bottom-line estimate for Net Income is $3.23 billion ($0.83 per share).  If these figures are realized, Net Income will have risen 3 percent and earnings per share will be increased 4 percent.

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.

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