19 April 2010

WMT: Look Ahead to April 2010 Quarterly Results

This post describes our model of Wal-Mart's (NYSE: WMT) Income Statement for fiscal 2011's first quarter, which will end on 30 April.

The purpose of the model is to establish a baseline for identifying surprises, positive or negative, in the quarterly results the company will report.  Estimates for each line of the Income Statement are derived from management's guidance, the company's historical financial results, and other publicly available data.

We begin by reviewing background information about Walmart and the business environment in which it is currently operating.

A retailing behemoth, Wal-Mart Stores, Inc., earned over $14 billion on net sales of $405 billion in the fiscal year that concluded last January.  The Revenue figure enabled Walmart to regain from Exxon Mobil (NYSE: XOM) the top position on the Fortune 500 list of America's largest corporations. 

Although net sales for the year increased by only 1.0 percent, income from continuing operations attributable to Walmart shareholders increased by 8.8 percent.

Walmart's current market capitalization is about $200 billion.

Economies of scale and ruthless efficiencies enable Walmart to keep many prices lower than competitors, such as Target (NYSE: TGT), Kohl's (NYSE: KSS), and Sears Holdings (NASDAQ: SHLD).  Walmart is cutting its costs even more by purchasing more goods directly from manufacturers.

Critics of Wal-Mart abound.

Walmart's business is divided into three operating segments for financial data reporting: Walmart U.S., International and Sam’s Club.  Walmart U.S. had net sales of $258 billion in fiscal 2010, or nearly 64 percent of the overall amount.  The International segment had sales of $100 billion, and sales at Sam's Club totaled nearly $47 billion.  At last count, Walmart operated 4304 stores in the U.S. (including Sam's Club) and 8416 in other countries.

A graph of U.S. retail sales in the last decade, created from the U.S. Census Bureau's Monthly Retail Trade Report, illustrates the slump that began in mid-2008 and from which the country has been recovering.  A better-than-expected report on retail sales from the Commerce Department has fueled recent optimism.  However, a decline in the University of Michigan's Consumer Sentiment index paints a mixed picture.

High unemployment and the housing market remain concerns for consumers.

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

When Walmart, in February 2010, reported results for the fourth quarter of fiscal 2010, it provided the following outlook for the new year and its first quarter:

Earnings Guidance
The company expects diluted earnings per share from continuing operations attributable to Walmart for fiscal year 2011 to be between $3.90 and $4.00. For the first quarter of this fiscal year, the company forecasts earnings per share from continuing operations attributable to Walmart to range from $0.81 to $0.85. Earnings guidance assumes that currency exchange rates will remain where they are today.

Unfortunately, the guidance is silent on sales expectations, and Walmart no longer issues monthly sales reports.  To estimate the company's Revenue for the February-March-April quarter, we have looked at government reports, competitor news, and seasonal patterns.

Census Bureau data indicate that U.S. retail and food services sales in February and March 2010 were 4.4 percent and 7.6 percent (estimated) greater than the sales figures for the year-earlier periods. 

Target (NYSE: TGT) reported that its sales in the five weeks that ended on 3 April 2010 were 12.5 percent greater than in a similar period in 2009.  Same-store sales rose 10.3 percent.
We also know that Walmart's first-quarter sales are typically 12 to 14 percent less than sales in the holiday-fueled fourth quarter of the previous year.

It appears that U.S. retail sales began the quarter in typical fashion, but they were much more robust in the second month.  There's no way to know if April's sales will be as rosy as March's, but we are cautious after a single measurement of strength.  It's also unlikely that the strength in the U.S. retail market was experienced to the same degree in international markets.  Balancing these various considerations, we are estimating Revenue for the April quarter will be $101 billion.  This value translates into a forecast for 7.2 percent Revenue growth.

For our Gross Margin estimate, we are using 25 percent of Revenue.  The margin was near 25 percent in each quarter of 2009.  Our Revenue and Gross Margin estimates lead to a predicted Cost of Goods Sold (CGS) of (1 - 0.26) * $101 billion = $75.8 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 * $101 billion = $19.6 billion.

Subtracting the estimated costs from the Revenue target, and assuming no special operating charges, yields a projection for Operating Income of $5.66 billion.  This figure is 8.4 percent greater than Operating Income in the weak April 2009 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 $1.76 billion.  We also need to make an adjustment, estimated at $125 million, for the portion of net income attributable to non-controlling interests.  Another $10 million adjustment is for estimated loss on discontinued operations. 

The bottom-line estimate for Net Income is $3.28 billion ($0.86 per share).  These figures would represent an 8.7 percent increase in Net Income and a 12 percent rise in earnings per share.

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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