10 January 2010

WMT: Look Ahead to January 2010 Quarterly Results

Wal-Mart Stores (NYSE: WMT) earned $0.84 per share in the third quarter of fiscal 2010, which ended on 31 October 2009, up from $0.80 in the same quarter of last year.  Sales at the company's eponymous U.S. stores increased 1.2 percent, but same-store sales slipped 0.5 percent.

In November, we examined Walmart's Income Statement for the October quarter and compared the entries on each line to our "look-ahead" estimates.  One month later, we performed a financial gauge analysis of Walmart, which determined that the GCFR Overall gauge rose from 25 to 32 of the 100 possible points. (Year-end adjustments added a point to the results.)

We have now modeled Walmart's Income Statement for the fourth quarter of fiscal 2010, which will end on 31 January.  The intent of this exercise was to produce a baseline for identifying deviations, positive or negative, in the actual data that the company will announce on 18 February.  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 Walmart and the business environment in which it is currently operating. 

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).

Retailers suffer when consumer confidence is weak, which was the case in 2009 as a result of rising unemployment and lower home values.  A list of retailers that have filed for Chapter 11 protection in the last couple of years contains many familiar names.

Year-on-year comparisons are now getting more favorable because the economy was at its worst in late 2008 and early 2009.   Holiday sales edged up slightly, and the U.S. Census Bureau estimated that U.S. retail and food services sales, in November, which was the first month of the fiscal fourth quarter, were 1.9 percent higher than in November 2008. 

Walmart has fared better than other retailers because it sells consumer staples that customers will buy even during tough times.  For example, Walmart can lure customers with generic drugs for $4Economies of scale and ruthless efficiencies enable Walmart to keep most prices lower than competitors, such as Target (NYSE: TGT), Kohl's (NYSE: KSS), and Sears Holdings (NASDAQ: SHLD). 

Walmart now intends to cut its costs by purchasing more goods directly from their manufacturers.

Critics of Wal-Mart abound.

We are now ready to look specifically at the current quarter.

When third-quarter results were announced on 12 November, Walmart provided the following guidance for the fourth quarter:

Earnings Guidance

“We continue to operate in a very challenging economy and remain dedicated to provide the lowest prices to our customers around the world,” said Tom Schoewe, Walmart executive vice president and chief financial officer. “We believe Walmart is positioned better than any other retailer to succeed with customers this holiday season.

“Based on our view of the business, we expect diluted earnings per share from continuing operations for the fourth quarter of fiscal year 2010 to be between $1.08 and $1.12,” Schoewe said. “As a result, we are raising the range of our guidance for diluted earnings per share from continuing operations for the full fiscal year to $3.57 to $3.61, from $3.50 to $3.60.”

[emphasis added]

Wal-Mart's Revenue in January quarters is typically 27 to 29 percent of the annual total.  If we take the actual Revenue amounts for the first three quarters of fiscal 2010, and assume the fourth quarter will be 28 percent of the total, we come up with $114.6 billion for the fourth quarter estimate.

For the Gross Margin, we are using 24.3 percent of Revenue.  This ratio was the Gross Margin in the January 2008 and January 2009 quarters.  Our Revenue and Gross Margin estimates lead to a predicted Cost of Goods Sold (CGS) of (1 - 0.243) * $114.6 billion = $86.75 billion.

We expect, based in historical results, that Sales, General, and Administrative (SG&A) expenses will be 18 percent of Revenue.  Therefore, we expect this item to be 0.18 * $114.6 billion = $20.6 billion.

These expense estimates would lead to an Operating Income of $7.22 billion, which would be up 13.2 percent from the weak January 2009 quarter.

We extrapolated past results to estimate net interest expense of $500 million.

If we project a tax rate of 34.3 percent, the provision for income taxes would be $2.3 billion.  We also need to make an adjustment, estimated at $120 million, for the portion of net income attributable to noncontrolling interests.  Another $7 million adjustment is for estimated loss on discontinued operations. 

The bottom-line estimate for Net Income is $4.4 billion ($1.10 per share).  If these figures are realized, Net Income will have risen 13 percent and earnings per share will be increased 14.5 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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