10 June 2010

WMT: Financial Gauge Analysis for the April 2010 Quarter

Wal-Mart Stores (NYSE: WMT) earned $0.88 per diluted share on a GAAP basis in fiscal 2011's first quarter, which ended on 30 April 2010.  Earnings per share were 14 percent more than the $0.77 Walmart made in the same quarter last year.

In our earlier review of Walmart's Income Statement, we compared the actual results to our "look-ahead" estimates.  Reported earnings were $0.02 better than the $0.86 per share we had forecast.

We have now updated the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value for Walmart.  This post reports on the metrics and the associated financial gauge scores.  The metrics were calculated using data from Walmart's current and historical financial statements, including the latest 10-Q report.

A retailing behemoth, Wal-Mart Stores, Inc., earned $14 billion on net sales of more than $400 billion in the fiscal year that concluded January 2010.  Walmart regained from Exxon Mobil (NYSE: XOM) the top position on the Fortune 500 list of America's largest corporations.   Additional background information about Walmart and the business environment in which it is currently operating can be found in the look-ahead.

In summary, Walmart's latest quarterly results produced the following changes to the gauge scores:

The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary.  Readers are encouraged to verify these figures and calculate others as they see fit using the filings available at the SEC's web site and elsewhere.

Cash Management30 Apr 201031 Jan 201030 Apr 20095-Yr Avg
Current Ratio0.
Debt/CFO (years)
Inventory/CGS (days)41.541.943.445.7
Finished Goods/InventoryN/AN/AN/AN/A
Days of Sales Outstanding (days)
Working Capital/Revenue-2.1%-1.8%-1.9%-2.1%
Cash Conversion Cycle Time (days)9.69.710.912.4
Gauge Score (0 to 25)1312811

Some of Walmart's famed efficiency can be seen in how the company manages its cash and other financial assets.  For one thing, it functions with negative Working Capital.  This is equivalent to saying that its Current Liabilities are more than its Current Assets.  When a smaller company has negative Working Capital, we worry about their creditworthiness.  However, for powerhouse Walmart, it's a sign that the company doesn't keep more funds than necessary idling in low-interest bank accounts or sitting on the shelf as inventory.

The low Cash Conversion Cycle Time is also a sign of efficiency with cash flow.  The company is still finding ways to reduce the cycle time.  The trend towards a leaner Inventory helps with CCCT.

We would rather see Days of Sales Outstanding trending lower, but 3.4 days is extremely low.

Walmart issued $2 billion of long-term securities on 1 April 2010.  However, as a result of other financing activities, Walmart's Long-term Debt was $1.7 billion lower on 30 April 2010 than six months before.  The decrease in Long-term Debt was mostly balanced a similar rise in short-term debt (commercial paper and maturing long-term securities), keeping the company's total debt level stable.

For the last several years, Long-term Debt has generally been between 45 and 50 percent of Shareholders' Equity.

Total debt related to Cash Flow from Operations has also been stable for some years.

Growth30 Apr 201031 Jan 201030 Apr 20095-Yr Avg
Revenue growth2.5%0.9%4.3%6.6%
Operating Profit growth6.2%5.7%5.8%6.7%
CFO growth3.1%13.4%1.6%59.1%
Net Income growth10.9%8.5%1.7%7.4%
Gauge Score (0 to 25)77108
Revenue, CFO, and Net Income growth rates compare the last four quarters to the four previous quarters.  The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters.

Walmart had little to no Revenue growth relative to the year-earlier period in the first three quarters of 2009, but the company achieved growth of 4.5 percent and 5.9 percent during the two most recent quarters (January and April 2010).  These results brought the trailing-year growth rate up to 2.5 percent, tepid but improving.

Cash Flow from Operations staged an encouraging rebound in the January 2010 holiday quarter.  However, even by seasonal standards, Cash Flow was weak in the April 2010 quarter: $973 million, down from $3.57 billion in the April 2009 quarter.

On the other hand, it's commendable that the company has been to expand the Net Income growth rate when Revenue growth has been mediocre.

Profitability30 Apr 201031 Jan 201030 Apr 20095-Yr Avg
Operating Expenses/Revenue94.1%94.1%94.4%94.2%
Free Cash Flow/Invested Capital11.5%14.0%11.4%7.9%
Accrual Ratio1.2%-0.2%1.0%3.1%
Gauge Score (0 to 25)101187

Walmart stated that Operating Expenses grew at a slower rate than Revenue during the latest quarter "primarily due to increased labor productivity and organizational changes ... designed to strengthen and streamline our operations."

The earnings-driven Return on Invested Capital has improved nicely in the last year.  On the other hand, the recent weakness in Cash Flow, mentioned above, reduced the FCF/Invested Capital ratio.  It also led to a rise in the Accrual Ratio, which is not positive because it signals potential earnings quality concerns.

It may not mean anything because Walmart's Cash Flow tends to be volatile from quarter to quarter, but it bears watching.

Value30 Apr 201031 Jan 201030 Apr 20095-Yr Avg
P/E vs. S&P 500 P/E
Enterprise Value/Cash Flow (EV/CFO)10.18.910.111.2
Gauge Score (0 to 25)79911
Share Price ($)$53.64$53.43$50.40-

Walmart's shares began and ended the last quarter at about the price.  Since earnings increased modestly, the P/E multiple was reduced a notch.

Moving with the overall market, the share price since the quarter ended has fallen to about $50. 

The Price/Sales has been flat.

The increase in the EV/CFO ratio is responsible for the score losing two points.

Overall30 Apr 201031 Jan 201030 Apr 20095-Yr Avg
Gauge Score (0 to 100)36393538

April's results did not lead to any significant changes in the gauge scores, which are weak to moderate.  However, Walmart's last two quarters were certainly better than the two before.  With one more good period, many of the trailing-year metrics that drive the scores should become more appealing.  Since the share price is now lower, about $51, the Value gauge is positioned to respond well to an upturn in profitability.

Full disclosure: Long WMT at time of writing.

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