08 July 2010

WMT: Look Ahead to July 2010 Quarterly Results (Revised 14 July)

This post describes our model of Wal-Mart's (NYSE: WMT) Income Statement for fiscal 2011's second quarter, which will end on 31 July.

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, along with a drop in energy prices, enabled Walmart to regain from Exxon Mobil (NYSE: XOM) the top position on the Fortune 500 list of America's largest corporations. 

Although the discounter's net sales rose only 1.0 percent in fiscal 2010, the company achieved an 8.8-percent increase in the income attributable to its shareholders from continuing operations.

Walmart has three reportable business segments: 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.

Net sales by Walmart U.S. grew 1.1 percent last year, but comparable store sales declined 0.7 percent.  Concerned about slow sales at home, Walmart recently replaced the leader of Walmart U.S.

The recent market swoon has trimmed Walmart's market capitalization to about $180 billion, but the firm remains one of the five most valuable companies in the U.S.

Economies of scale and ruthless efficiencies enable Walmart to sell many products for prices lower than competitors, which include Target (NYSE: TGT), Kohl's (NYSE: KSS), and Sears Holdings (NASDAQ: SHLD).  Walmart is now purchasing more goods directly from manufacturers to reduces its costs.

Critics of Walmart abound.

U.S. retail sales grew for much of the last decade, as shown in the U.S. Census Bureau's Monthly Retail Trade Report.  A severe slump began in mid-2008, which was followed by a tepid recovery in 2009 and early 2010.   

Two small, but worrisome, steps backward were taken in May and June 2010 when U.S. retail sales fell.  Have consumers succumbed to high unemployment and the fragile housing market?  The indications are not yet clear:  one recent report showed consumer confidence falling, although another suggested rising consumer sentiment.

In fiscal 2011's first quarter, which ended on 30 April 2010, Walmart earned $0.88 per diluted share.  This result was 14 percent more profitable than the $0.77 Walmart made in the same quarter of the previous year.

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

When Walmart reported first quarter results in May 2010, it provided the following guidance for the May-June-July period:

Earnings Guidance
For the second quarter of this fiscal year, the company forecasts earnings per share from continuing operations attributable to Walmart to range from $0.93 to $0.98, as compared to $0.88 per share last year. Earnings guidance assumes that currency exchange rates remain at current levels.
Unfortunately, the guidance is silent on sales expectations, and Walmart no longer issues monthly sales reports.  To estimate the company's Revenue, we have looked at government reports, competitor news, and seasonal patterns.

Government-collected U.S. retail sales data for May and June 2010 are now available.  In May, U.S. retail and food services sales were 6.9 percent greater than in May 2009.  Advance estimates for June 2010 indicate that U.S. retail and food services sales in June 2010 were 4.8 percent (±0.7%) above those in June 2009.

As a point of comparison, Target (NYSE: TGT) reported net sales in the nine weeks ended 3 July 2010 increased 3.9 percent compared to the equivalent period in 2009.  Comparable-store sales rose a tepid 1.5 percent.

Other U.S. retailers reported "mixed results" for June with more sales promotions than norma

Retail sales in Europe have also been weak.  Sales across the European Union were up only 0.5 percent in May 2010 when compared to May 2009.

One benchmark is that Walmart's second-quarter sales are typically 7 to 8 percent greater than sales in the first quarter of the same year.

Balancing these various items, we have come up with an estimate of $106.5 billion for Walmart's Revenue in the July quarter.  This value translates into a forecast for 5.5 percent Revenue growth.

For our Gross Margin estimate, we are using 25 percent of Revenue.  The Revenue and Gross Margin estimates lead to a predicted Cost of Goods Sold (CGS) of (1 - 0.25) * $106.5 billion = $79.9 billion.

We expect, based on historical results, that Sales, General, and Administrative (SG&A) expenses will be 19.2 percent of Revenue.  Therefore, we expect this item to be 0.192 * $106.5 billion = $20.5 billion.

Subtracting the estimated costs from the Revenue target, and assuming no special operating charges, yields a $6.18 billion projection for Operating Income.  This figure is 5.0 percent greater than Operating Income in the July 2009 quarter.

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

If we project a tax rate of 34.3 percent, the provision for income taxes would be $1.96 billion.  We also need to make an adjustment, estimated at $150 million, for the portion of net income attributable to non-controlling interests.

The bottom-line estimate for Net Income is $3.60 billion ($0.96 per share).  In the year-earlier quarter Walmart earned $3.44 billion ($0.88 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.

Note: Revised on 14 July 2010 to address U.S. Retail Sales for June 2010.  Trimmed second-quarter Revenue estimate from $106.8 billion to $106.5 billion.

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