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Business risks:

1. Economic factors such as interest rates, energy costs, decline in the


housing market, inflation, higher unemployment rate, saturation of consumer
credit, higher consumer debt levels, higher tax rates result in economic
slowdown which in turn affect the consumer demand thus affecting the
performance of the retail industry.
2. Economic conditions specific to international markets such as political
instability, rules and regulations specific to that country, foreign currency
exchange rates and fluctuations, intellectual property rights impact a great
deal on the cash flows from the International operations.
Operational risks:
1. Various legal proceedings involving consumers, employers if decided
adversely will be incurred as a liability and will affect financial conditions
and liquidity.
2. The retail industry sells products that are made available from variety of
domestic and international suppliers. The major risk or challenge is involved
in finding reliable suppliers from whom raw materials are readily available;
provide transport availability and security at a reliable rate.
3. The retail industry needs to deal with other operational factors which are
not in their control such as the limitation on the importation goods from
other countries.
4. Quality of the goods purchased from the suppliers is of utmost
importance Concerns regarding the quality of products from customers will
result in a decline in future purchases and thus affect the financial
performance.
Technological Risks:
1. Any compromise in security systems resulting in unauthorized access of

customers personal information will affect the reputation.


2. Most of the retailers these days indulge in online operations which allow
the customers to purchase goods available through the internet. This requires
secure transmission of confidential data such as customer credit card number
etc. Any security lapses will affect the reputation.
Company description and background
Wal-Mart Stores is a retail force that is not only bigger than Europe's
Carrefour, Tesco, and Metro AG combined but is also bigger than
ExxonMobil, General Motors, and General Electric. It is the world's number
1 retailer, with more than 7,250 stores, including about 975 discount stores,
2,800 combination discount and grocery stores and 590 warehouse stores
(SAM'S CLUB). About 55% of its stores are in the US, but Wal-Mart is
expanding internationally with operations in Argentina, Brazil, Canada,
China, India, Costa Rica, El Salvador, Guatemala, Honduras, Japan, Mexico,
Nicaragua, Puerto Rico, and the U.K. it is the number 1 retailer in Canada
and Mexico. It also owns a 95% stake in Japanese retailer SEIYU.
Background
It started in 1945 when Sam Walton decided to start a variety store. With
a loan of $20, 000, he purchased a Ben Franklin variety store in Newport,
Arkansas. During the period of 1960s and 1970s based on the success of
various other discount department store chains, Walton realized that he could
obtain higher sales volume by passing on the savings to his customers. He
with his assistant Bob Bogle started a discount chain in Rogers, Arkansas
and thus evolved the name Wal-Mart.
By 1967, the company grew to 24 stores across the state of Arkansas, and
reached $12.6 million in sales. As time passed by and based on the current
revenue generation, Wal-Mart opened its first stores outside of Arkansas in
Sikeston, Missouri and Claremore, Oklahoma.
In 1972, Wal-Mart got listed on the New York Stock Exchange and started
operating in various states across the US such as Arkansas, Kansas,
Louisiana, Missouri and Oklahoma. By 1977, Wal-Mart made its first
corporate acquisition in Mohr-Value stores in Michigan and Illinois. This
was followed by the acquisition of the Hutcheson Shoe Company in 1978.

In 1978, in order to increase its versatility and to improve its profit margin,
Wal-Mart ventured into several new markets such as pharmacy, auto service
center, and jewelry divisions.
By 1979, Wal-Mart reached $1.248 billion in sales with 276 stores and
21,000 associates.
During the period of 1980s and 1990s, the company opened its first
membership based discount store named after Sam Walton called as the
Sams Club. In 1984, to make the environment at all stores customer
friendly and to attract more customers, Wal-Mart implemented people
greeters". These are the people who greet people, identify items that need to
be returned, give directions, help the disabled find electric carts, checks
items purchased by shoppers exiting the stores and puts stickers on returned
items.
By the companys 25th century, Wal-mart had completed their satellite
network, a $24 million investment, linking all operating units of the
company with their Bentonville Office via two-way voice, data, and oneway video communication. This helped to track inventory, sales, and send
instant communication to their stores.
During the year 1988, Wal-Mart opened a Supercenter that contained
everything contained in a standard Wal-Mart discount store, along with
additions such as tire and oil change shop, optical center, one-hour photo
processing lab, portrait studio, and numerous alcove shops such as banks,
cellular telephone stores, hair and nail salons, video rental stores, and other
fast food outlets.
By the end of 1990s, there were 1,198 stores with sales of $15.9 billion
and 200,000 associates.
During the period of 1990s, Wal-Mart made various acquisitions such as
The McLane Company , Western Merchandisers, Inc , PACE Membership
Warehouse and also to moved to various states such as Connecticut,
Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey
and New York markets. It was during this period that Wal-mart entered the
international markets with the opening of stores in Mexico City, Canada,
Hongkong.
By 1995, Wal-Mart had 1,995 discount stores, 239 Supercenters, 433 Sams
clubs and 276 international stores with sales at $93.6 billion (including US
sales of $78 billion) and 675,000 associates. With good response from
customers towards their pricing policy and sales touching sky high, Wal-

mart was able to replace Woolworth (one time largest retail company) on the
Dow Jones Industrial Average.
In the year 1997, with the sales touching a record $100 billion, Wal-Mart
introduced a concept of neighborhood markets that are primarily grocery
stores and attract customers with easier parking and quicker checkouts.
During the 21st century Wal-mart was ranked as the most admired
company in America. By the end of 2005, Wal-Mart had $312.4 billion in
sales, more than 6,200 facilities around the world, including 3,800 stores in
the United States and 3,800 international units, and employing more than 1.6
million associates worldwide.
Wal-Mart introduced new advertising with the slogan, "Save Money Live
Better," instead of "Always Low Prices, Always" and launched Wal-Mart
Television Network, a advertising network showing commercials for
products sold in the stores, concert clips and music videos for a recording
artist's media, trailers for upcoming movie releases, and news.
Major Competitors
Although Wal-Mart is the biggest retail force in the world, its competitors
are not just limited to the retail industries. With extremely diversified
product range, Wal-Mart faces competition from the international, national
markets and from industries such as Drugstores, Gas Stations, Grocery
stores and super markets, Internet & Catalog retailers, Warehouse clubs &
Superstores etc.
Wal-Mart competes on the basis of price, convenience (location- for the
customers in reaching to the nearest grocery stores), variability & quality in
goods available, ambience and service.
Due to a weak housing market, and increased job concerns the people have
cut down on eating and out and are prepared to have food at home. To take
advantage of this, Wal-Mart is trying to increase the offering of prepared
foods to gain market share from food service business and is thus facing
competition from named brand products.
Wal-Mart is increasingly targeting its pharmacy department by offering lowpriced generic drugs. Wal-Mart hopes these customers will shop the rest of
the store when they come in to pick up their prescriptions. This policy has
been fruitful for Wal-Mart as the sales from pharmacy was $13.7 billion in
2007 with only Walgreen Co, CVS, Rite Aid Corp being ahead of it.
Indirectly Wal-Mart is giving stiff competition to Mc Donalds. Subway has
quickly overtaken McDonald's Corp. as Wal-Mart's primary fast-food

concessionaire across the United States. Subway is in 1,419 Wal-Marts


compared with 1,021 McDonald's
In the super market chains, major competitors of Wal-Mart are Target,
Costco.
Primary and Secondary Markets / Products
Markets and Locations
Wal-Mart serves customers through the following segments:
1) The Wal-Mart Stores segment includes supercenters, discount stores and
Neighborhood Markets.
2) The Sams club segment includes the warehouse membership clubs in
the United States as well as samsclub.com.
3) The International segment consists of operations in Argentina, Brazil,
Canada, China, Costa Rica, El Salvador, Guatemala, Honduras, Japan,
Mexico, Nicaragua, Puerto Rico and the United Kingdom.
|Wal-Mart Store Segments
|Super-Centers
|Discount-Centers
|Neighborhood Markets
|Sams Club
|

|Size (Square Feet )


| 187000
| 108000
| 42000
| 132000
|

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|

From the table above, it is clear that Super centers are largest area wise as
they offer wide variety of general merchandise and a full line super market.
|Wal-Mart Store Segments (Number. of stores)|
2008 |
2007 | 2006 |
|Super-Centers
|
2447 |
2256 | 1980 |
|Discount-Centers
|
971 |
1075 | 1209 |
|Neighborhood Markets
|
132 |
112 | 110 |
|Sams Club
|
591 |
579 | 567
|
|International Segments
|
3121 |
2757 | 2181 |
From the above table, it is evident that Wal-Mart is trying to capture and
build up on the international market by increasing its operations worldwide.
There is a decrease in discount centers as higher % of discount centers are
being converted to super centers. This indicates that Wal-Mart is
concentrating on increasing its comparable sales across already existing
stores.

As of November 2008, Wal-Mart has 3242 units internationally with Mexico


topping the list with maximum number of stores.
|Market
|Mexico
|Puerto Rico
|Canada
|Brazil
|Argentina
|China
|United Kingdom
|Japan
|Costa Rica
|El Salvador
|Guatemala
|Honduras

|Units
|1118
|55
|310
|328
|24
|215
|351
|393
|160
|76
|154
|48

|Year of entry
|1991
|1992
|1994
|1995
|1995
|1996
|1999
|2002
|2005
|2005
|2005
|2005

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Products
Wal-Mart has a varied list of product categories ranging from clothes, books,
apparels, toys, electronics, grocery, healthcare, pharmacy etc. In addition to
this, since Wal-Mart is geographically diversified with operations all across
the globes, it also boasts of products that are confined to that region and
various communities.
This is illustrated by the fact that Wal-Mart opened its first super center that
targets Hispanic shoppers in May 2008 in Texas. The new store offers
products that appeal specifically to this group (fresh tortillas and corn chips,
Hispanic-oriented fresh fruits and vegetables, and ice cream and juices
popular among Latinos).To promote sales at such centers, Wal-Mart
is targeting customers by hiring bilingual cashiers and stockers, and
featuring whole aisles devoted to regional foods.
Wal-Mart also offers various low priced alternatives (to named brand
products) such as Equate, Sams choice, Great Value, beverage products
such as Gravette and Orangette which give good completion to other soft
drink beverages companies like Coca-Cola, product in other sections like
apparels, homelines etc.These private brands resulted in sales of 64% versus
30% for major label competitors as was found in by a survey conducted this
year. This survey has prompted Disney to join hands with Kroger chain to
launch more than 100 Disney-branded products to be sold as Kroger's kidfocused private label.

Waddoups, senior director says that Wal-Mart is promoting products that


benefit waste reduction and recycling, natural resources and energy.
According to him the company highlighted more than 50 products, including
T-shirts made from recycled plastic bottles, fair trade coffee, recycled-tire
mulch, CFLs and Clorox's Green Works cleaners.
Wal-Mart is also specializing in pet food products by investing $43 billion as
it guarantees continued consumer spending regardless of how tight the
household budget gets.
Outstanding Litigation
Wal-Mart is involved in a number of legal issues.
1) Dukes vs. Wal-Mart Stores: The suit was filed by the former and current
female employees across its US retail store operations. These employees
totaling to 1.6 million alleged that the company shows gender discrimination
at the time of promotions, pay, and training and job assignments.
2) In another suit, the company was accused of violating California labor
law with respect to provision of lunch and meal breaks to employees
working over six hours in a shift. The court in April 2008.It declared a
compensation of more than $170 million.
Such proceedings may adversely affect the financial performance of the
company in future and spoil the companys brand image.
Business model
Wal-Mart's business model is selling a wide variety of general merchandise
at "always low prices, keeping employee costs down, and investing in
modern and more efficient technology. Because of Wal-Marts commitment
to offering low prices to its customers, although Wal-Mart is the number one
company in total annual sales in the World, its profit dollars dont even rank
the company in the top 10. The area where Wal-Mart beats its competitors is
its focus on technology, logistics, distribution and transportation (Supply
Chain Management) which has resulted in massive reduction in shipping
costs. The other factor distinguishes Wal-Mart from its peers is that the
management gives responsibilities to the store managers and makes them
feel like an entrepreneur and gives them ample leeway in improving the
operations of individual stores.

SWOT analysis
Strengths:
Strong Market Position in US: The Company earns almost 75% of its
revenues from the US. This has resulted in Wal-Mart moving in the Fortune
500 list from second largest company in 2006 to the largest company in
2007 in terms of revenues.
Brand Mix: Wal-Mart has a balanced and versatile brand mix with private
label products and external brands. This balanced mix allows customer that
much more variety in goods and thus increases the customer loyalty. The
brand mix also at times increases the amount of time customers spend at a
store which is utilized by Wal-Mart as it has many food courts such as
Subway and Mac Donalds which cater to customers hunger while
shopping.
Marketing Capabilities: Wal-Mart exhibits good marketing capabilities by
employing Everyday Low Prices (EDLP), Rollbacks, Store within a Store,
and Store of the Community. In all these promotions or techniques, cost
saving is continuously passed on to the customers by lowering prices on
selected goods.
.
Weakness:
Numerous Legal Issues: Wal-Mart future financial performance may be
adversely affected by various outstanding legal issues against it as
mentioned before.
Adaptability to various market segments: Wal-Mart recently has faced
severe competition from local retailers in countries like Germany and South
Korea. Due to its in ability to cater to the needs of customers, the company
had to shut down its operations in Germany and South Korea.
Safety, Quality and Usability of the product: As customers faced certain
issues in terms of safety in using certain products bought from Wal-Mart, the
company had to recall certain products such as Holiday Times candle
holders in April 2008.
Opportunities:
Wal-Mart is trying to increase the comparable sales by renovating its already
existing stores by providing better ambience to the customers, by increasing
the ease with which customers can find goods easily. At the same times it is
expanding in other regions but making sure that these expansions dont have

a major impact on the comparable sales. As a result of growing customer


interest in natural and organic foods, Wal-Mart is increasing square footage
within stores devoted to this category. Since the prescription drug spending
in the US is estimated to increase in the upcoming years, another area that
Wal-Mart can expand and is expanding is the drugs, pharmacy industry. In
fact, Wal-Mart has announced plans to expand its in-store clinics from 78
clinics in 2007 to 400 by 2010.Wal-Mart is also implementing category
management which is employing marketing, promotion, pricing strategies
which help to know which item sells the most, the fastest or the both.
Threats:
Opposition from communities: Wal-Marts opening of stores in other
countries is hindering the growth opportunities of local retailers. In India,
number of shopkeepers opposed by gathering outside Chandi chowk and
protested against its entry in Indian retail market.
Opposition from the New US Government: Wal-Mart is known for opposing
attempts made by its employees to form unions. Victory of Obama is a
concern for Wal-Mart because Obama has been a strong supporter of
implementing Employee Free Choice Act which allows workers to form
unions without a secret ballot election. The formation of union would give
the works a platform to fight for their rights and for better and improved
standard of living.
Decline in Housing Market: Homeowners in the US have more debt than
their homes are worth. This has caused a great decrease in consumer
spending which have affected the % change in retail industry sales being
only 3.5% in 2008 as compared to 6.3% in 2007
Revenue drivers
Wal-Marts revenue drivers are expanded domestic supercenters (converting
discount stores to supercenters) resulting in increase in comparable sales and
international stores.
Food prices are set to rise in the upcoming years. The food at home sales is
expected to increase more than the food away from home sales .This means
that more number of people are going to save money by eating at home.
Thus Wal-Mart is remodeling its stores, as a result of which food sales
should increase as a percent of total sales, resulting in lower gross margins
but higher sales per customer.

Wal-Marts low pricing strategy is drawing customers from moderately price


chains such as
Kohls corp., JC. Penney. Wal-Mart outplays its rivals by introducing right
mix of merchandise and good marketing strategies like save money, live
better.
Wal-Mart has put a great deal of emphasis on inventory management and
making sure that inventory is growing less than half the pace of sales.
Internationally Wal-Mart has joined hands with Chinas TrustMart and
Indias Bharti to take to improve its performance outside the US.
Expense Drivers and Margin Discussion
Expense Drivers:
The following are the major expense drivers:
1. Product Costs: Almost all in the retailing industry pay 70 cents to 73 cents
in product costs for every dollar of their sales. The search for lower product
costs is always on in the retail industry as retailers try to increase their
purchasing power over suppliers.
2. Labor costs: Retailing is a labor-intensive business, and employee costs
are the greatest operating expense, accounting for roughly 50% of total
operating expenses. Any increase in minimum workers page would affect
the profit as it would be difficult to pass on this increase to the customers.
3. Other operating expenses: Marketing and advertising, rent, transportation,
and utilities are other cost that is incurred by retailers.
4. Store Renovation, New store opening costs: These are the expenses
encountered in opening and maintaining new stores.
5. Administrative expense: These include costs related to executive
compensation as well as payroll as well as other employee related expenses.
6. Technology, Logistics related expense: These are the expenses that help to
make the company more productive.
Margin Discussion
Retail is a low profit margin business and as a result of this Wal-Mart tries to
increase its margins by selling goods at lower price which in turn result in
higher volumes of goods sold. Due to the current economic slowdown, WalMart low prices are hurting its gross margins. Wal-Mart is trying to better its
gross margin by concentrating more on groceries, daily consumables rather
than on higher margin goods like trendy clothes, home dcor etc.If you
compare Wal-Mart average gross margin over the last 5 years, it is same as

the industrys with value as 23.1%


Analysis of the companys recent financial performance
Most recent quarter
Amidst the worst ever economic recession, Wal-Mart had a very strong
quarter with sales being $97.6 billion, an increase of 7.5% over the same
period last year.
Operating income was up 6.7% with diluted shares per earning being $0.77
as compared to $0.70 reported in the same period last year. One of Wal-Mart
financial performance highlights has been to ensure that inventories grow at
the half pace of sales. This was yet again highlighted this year with
inventories growing at 2.2% as compared to sales growth of 9.6% relative to
the start of the year. Now considering the financial performance at all the 3
segments:
a. Wal-Mart US segment: Total sales increased by 6.1% with comparable
sales increasing by 2.7%.Operating income for this segment grew faster than
sales indicating efficient management control in handling operating
expenses. This was all the more commendable considering that $176 million
was spent related to hurricane Gustaf. In addition 20 new stores were opened
this quarter bringing year to date total of 102 new stores,Wal-Marts WinPlay-Show merchandising strategy went a great way in improving the sales
particularly in apparels, electronics such as Flat TV,GPS units etc.
b. International Segment: Sales in this segment increased to $24.9 billion
with an increase of 11.2% compared to prior year. Strongest sales
performances in the quarter came from China and Brazil. Operating income
for the third quarter was approximately $1.2 billion up 10.6%. Due to
currency fluctuations and the strengthening of US dollar, the operating
income grew slower than the sales. The strongest sales were in food products
such as meat, chilled foods, rice, pasta and wine.Wal-Mex, Wal-Marts
segment in Mexico also benefited by improving the quality and the price of
perishables. Performance in China specially Sams club lead to an increase
in comparable sales by 11.9%
c. Sams Club: Sales grew by 7.4% with comparable sales increasing by
4.5%. Sales growth was influenced by impact of higher fuel prices .There

was healthy sales in apparel section as the members responded to new fall
items. Food and consumable categories dominated Sam's comparable sales
growth for the quarter. Highlights included strong sales in grocery, fresh,
pets, and baby care. Operating income increased by 1.7% to $365 million.
Most recent year
Wal-Mart delivered strong financial 2008 results with annual
revenues of $374.52 billion, an increase of 8.5% from 2007. Net Income
from continuing operations and before minority interests after tax was
$13.29 billion.Wal-Mart total net sales increased by 8.6% with comparable
sales growth in U.S being 1.6%.
Operating Income growth was greater than the growth in sales in the WalMart US and International segments. There was an increase in diluted
earnings per share from $2.92 in 2007 to $3.16 in 2008. There was an
increase in free cash flow from $4331 in 2007 to $5417 in 2008.This
increase is attributed to decrease in capital expenditures. Gross Margin was
23.5% in this year with Wal-Mart US and International segments yielding
higher gross margin as compared to Sams club.
The company paid a dividend of $0.88 per share in this fiscal year an
increase of 31.3% with respect to previous year. The company has approved
of an increase of 8 % in dividend for the coming fiscal year.
There is a continuous increase in the corporate expense due to Wal-Marts
investment in transformation programs. This program is used to improve
the information systems for merchandising, finance and human resources.
Previous five years:
From the year 2003 to 2008, Wal-Marts performance has been on a high and
is continuously increasing compared to previous years. The average growth
of sales has been 10.5% in the past five years. There is an increase in the
earnings per share from 2.03 in 2004 to 3.16 in 2008. There is an increase in
the return of equity from 20.1 in 2003 to 20.4 in 2008. Wal-Mart has been
utilizing its assets to their full capacity as been evident from the return on
assets which has increased from 8.3% to 8.4%. The company has maintained
strong dividend payout ratio between 21%-23% in the last 5 years. The
companys dividend yield has increased from 0.9% to 1.7% in 2008.
The company hopes to drive comparable-store sales by focusing on local

market share positions by continuing expansion of its supercenter format.


Wal-Mart operates over 869 million square feet globally and has historically
grown square footage of at least 8% per year.
Wal-Mart has tried to increase its international presence by making various
acquisitions and joint ventures. In December 2007, the company acquired a
35% interest in BCL, an operator of 101 hypermarkets in China under the
banner Trust-Mart.
The company also had to face some stiff competition in countries like
Germany and South Korea where it had to eventually stop its operations.
The stock price has moved from $47.8 to $50.4 in the last five years.
Increase in stock price over the last five years reflects Wal-Marts stability
and well being.
Wal-Mart has emerged the strongest amongst all its competitors in this
economic recession period only because of its pricing strategies. The most
recent example of Wal-Marts pricing strategy is to sell T-mobile G1
powered by Google for $30 less than T-Mobile.
Peer group analysis
Comparative data (Product differentiation, Market Share etc)
Product Differentiation:
Wal-Marts major competitors include Costco stores and Target. Costco
offers fewer brands of each item, keeps infrastructure costs low and does not
spend much on advertising.
On the other hand Wal-Mart & Target sell the same kinds of products; WalMart has captured a much bigger market share in the fast food sector by
effective pricing of commodities. Though there are certain sections such as
advertising in which Target spends a lot more money than Wal-Mart.
The difference between a Target and a Wal-Mart store is the ease in shopping
that the customers experience. For ex: Finding a short checkout line at WalMart is much tougher where as Target has zigzagged checkout lines that are
easy to get through. Due to some other differences in customer experience at
the two stores, Wal-Mart is spending a lot of money to make sure that their
customers have a good time while shopping at Wal-Mart. Most of these
stores make money from the sales of household products. Wal-Mart does
better here because the household items are much cheaper there as compared
to its competitors. But for section like clothing, Target scores over Wal-Mart,
as clothes there are renowned to be much more stylish while clothes at WalMart are said to be very dull. Items like tops, jeans, jewellery, shoes have got

a major overhaul at Target.


Market Share:
The table below gives all financial ratios related to Wal-Marts competitors.
|
|WMT
|COST
|TGT
|Industry |
|Market Capitalization
|208.03 B
|20.20 B
|
21.14B
|1.95 B
|
|Employees
|2100000
|75000
|
366000
|14.11K
|
|Quarterly Revenue Growth
|7.30%
|13.30%
|1.90%
|6.50%
|
|Revenue
|404.16B
|72.48 B
|
65.26B
|4.70 B
|
|Gross Margin
|24.54%
|12.39%
|
31.11%
|31.54%
|
|EBITDA
|30.24 B
|2.65 B
|6.88 B
|341.56 M |
|Operating Margin
|5.82%
|2.75%
|
7.80%
|3.93%
|
|Net Income
|13.59 B
|1.28 B
|2.63 B
|N/A
|
|EPS
|3.455
|2.89
|3.304
|
2.05
|
|P/E
|15.32
|16.16
|8.5
|
15.32
|
|PEG
|1.34
|1.16
|0.72
|
1.16
|
|P/S
|0.49
|0.27
|0.32
|
0.28
|
Comparing the data above, it is evident that Wal-Mart is the biggest retailer.
It has a far bigger market capital and a much bigger employee structure than
any of its competitors. It is also more profitable as is evident by the higher
earnings per share value as compared to its competitors.
Stock Performance:
[pic]
The above graph shows the stock performance of Wal-Mart with its

competitors over the past one year. In the start of this fiscal period, due to
economic recession and decrease in consumer spending, there was a drop in
the stock price of all the three retailers but the drop in Wal-Marts share price
was less as compared to the others. Comparing stock prices over a year
period we observe that Wal-Mart has performed better than the others with
its stock price increasing by 10% as compared to last year.
[pic]
In the fiscal year 2008 Wal-Mart has outperformed the S & P index with the
index dropping at a much lower level as compared to Wal-Mart.
Ratio analysis
Financial ratios are used by managers within a firm, by current and potential
stockholders (owners) of a firm, and by a firm's creditors. Values used in
calculating financial ratios are taken from Wal-Marts balance sheet, income
statement, cash flow statement and statement of equity.
Liquidity Ratios
|
2007
|2008
|Current Ratio
|0.90
|0.81
|Quick Ratio
0.20
|0.16
|Cash Ratio
0.15
|0.10

|2003

|2004

|2005

|2006

|
|0.98

|0.91

|0.90

|0.90

|0.14

|0.17

|0.17

|0.19

|0.09

|0.14

|0.13

|0.13

|
|
|

[pic]
If you look at the liquidity, they have all gone down this year as compared to
previous years. From the graph, the increase in current liabilities by far
exceeds the increase in current assets. This means a deficit in net working
capital. The main reason for this being efficient use of cash and issuance of
short term long term debt, commercial papers in funding their operations and
in providing returns to shareholders in the form of dividend payments. The
ve working capital is not a worrying factor for Wal-Mart as this has been the
trend for the past 5 years and will continue to do so for future years.
Asset Utilization Ratios

They measure the firm's efficiency in utilizing their assets to generate sales.
|
|2004
|2005
|2006
|2007
|2008
|
|Total Assets Turnover
|2.58
|2.55
|
2.42
|2.41
|2.40
|
|Days Receivables
|1.99
|1.88
|
2.56
|2.88
|3.13
|
|Fixed Asset turnover
|3.83033
|3.78414
|3.55341
|3.50458
|3.43529
|
|Inventory Turnover Ratio
|7.79
|7.80
|
7.67
|8.02
|8.32
|
|
|
|
|
|
|
|
Wal-Mart has been performing extremely well in making sure that all its
inventories are getting used up at a faster rate as compared to previous years.
The reason for this can be attributed to Wal-Marts policy to ensure that
inventories are always increasing at half pace of sales. There is a slight
decrease in Fixed Asset turnover and Total asset turnover ratio because of
Wal-Marts ongoing expansion in new territories i.e. opening of new stores.
These new stores have not yet reaped the amount of sales as forecasted by
them but have a slightly ve effect on the comparable sales. Days
Receivables is continuously increasing which is a good sign considering that
sales is also increasing continuously.
Profitability Ratios
It measures how well the firm controls its expenses to generate an acceptable
rate of return or profit.
|
|2004
|2005
|2006
|2007
|2008
|
|Gross profit margin
|23.17%
|23.72%
|
23.86%
|24.24%
|24.36%
|
|Operating Margin
|5.81%
|5.93%
|6.00%
|5.88%
|5.81%
|
|Return on Equity
|21.85%
|22.61%
|22.88
%
|21.97%
|21.06%
|
|Return on Assets
|15.17%
|15.33%
|14.67%
|14.34%
|14.15%
|

There is an increase in Gross Profit margin % which means that the


management has been efficient in maintaining the cost of goods sold at a
reasonable level, which is commendable as retail is a low profit margin
business. This can also be attributed to the increase in the volumes of goods
sold. Although there is an increase in gross profit margin, there is decrease
in operating margin indicating that other operating, administrative expenses
have been on a rise. The reason for this being that Wal-Mart is engaged in a
transformation programs as mentioned before. Wal-Mart has been
repurchasing its stocks for a while now but in spite of this, there is a slight
decrease in the Return on Equity for the last couple of years. This is due to
lower levels in consumer spending because of recession. But these ratios are
still much higher than the industry average of 19.9 %.
Market Ratios
These are the ratios used by the investor in determining that whether he
should buy the companys stock or not.
|
|2004
|2005
|2006
|
2007
|2008
|
|Market to Book
|5.40
|4.53
|3.63
|3.23
|3.20
|
| P/E
|26.01
|21.77
|17.19
|17.62
|16.23
|
|EPS
|2.1
|2.4
|2.7
|
2.7
|3.1
|
|Book Value per share
|9.98
|11.58
|
12.70
|14.77
|15.87
|
There is an increase in the earnings per share over the last 5 years. The book
value per share is continuously increasing and market to book value is
decreasing. This indicates that share price of Wal-Mart is decreasing. Book
value per share is decreasing as number of outstanding shares has declined
over the period as company is repurchasing its stocks. The slowdown in
share price is attributed to the current economic slowdown. In spite of this,
Wal-Mart is still performing better than the industry as whole as its P/E is
16.23 which is higher than industry P/E of 14.3. Thus investors are willing
to pay more for a Wal-Mart share thus anticipating a growth in the company.
Debt Ratios

It measures the firm's ability to repay long-term debt.


|
|2004
|2005
|2006
|2007
|2008
|
|Interest Burden Ratio
|0.9520
|0.9460
|0.9382
|0.9254
|0.9165
|
|Interest Coverage Ratio(Times Interest Earned)
|20.84
|18.51
|
16.19
|13.41
|11.97
|
|Debt Ratio
|0.59
|0.59
|0.62
|0.59
|0.60
|
The interest burden ratio is not very low and is close to 1 indicating that
Wal-Mart generates enough income before tax and interest expense to pay
off its interest expense. The debt to ratio is also on a decline indicating better
financial health for the company and lower levels of risks for the investors.
Analysis of the companys future performance
Projected Income Statement, Balance Sheet and Cash Flow Statement
I feel that Wal-Mart's threat to US food retailers will increasingly decrease
over the next three years, as the company's supercenter expansion
decelerates and its food-related sales growth starts to decline. I feel that it
will remain price competitive but it will slow down its expansion in square
footage growth. As a result of this Wal-Mart is trying to venture into new
product lines. One of the sectors that Wal-Mart is planning to target and
should target is Pharmacy. According to Standard & Poors, demand for
pharmacy services is going to increase due to aging baby boomers.Wal-Mart
has taken advantage of this by offering low priced generic drugs. In order to
boost its sales in the food products section, Wal-Mart is planning to take
advantage of the festive seasons such as Thanksgiving and Christmas and
offer roll backs on food prices and provide incredible saving deals.Wal-Mart
has even started a new Savings Alerts by which people would be informed
about food savings through free text messages. Other product line that that
Wal-Mart is getting into is mp3 music by re-launching a much improved
mp3 music download store. To improve its sales, Wal-Mart is renovating its
already existing stores to create a comparatively easier shopping
environment for the customers. This is illustrated by fact that Wal-Mart has
launched a new Wal-Mart smart Network with an investment of $10
million that helps the customers by providing relevant and in store

information via in-store TV.


Forecast for next Ten Years
I have forecasted Wal-Mart statements for the next ten years till the year
2018 where I feel the growth rate would become constant at 8 % as the
company would get to the maturity stage. Most of the items on the Income
statement, like cost of goods sold, operating, selling expenses etc, have been
taken as a percentage of sales. Other items like tax rate and interest expense
have been taken as per the companys annual report. Capital expense has
been increased for the initial year at a % greater than the interest expense.
For the remaining years, it is kept constant. There is an increase in the
treasury stocks as the Wal-Mart management has decided to buy back stocks
of around 15 billion dollars. The treasury stock is projected at a percentage
of 39.96% which is the average change in treasury stocks over the previous
years.The items on the Balance sheet like the current assets and current
liabilities have been forecasted as a percentage of sales.The projections in
the Balance sheet of long term debt have been made accordingly.The
retained earnings for a particular year is calculated by adding back left over
net income from continuing operations before the minority interest(after
paying dividends) in that year to the retained earnings of the previous year.
No adjustments are made to the net income in terms of foreign currency
translation loss or gain.There is a decrease in the debt to equity ratio due to
reduction in Wal-Marts shareholder equity as they are repurchasing stocks.
Also Wal-Mart is repaying off their debts.
Analysis of the companys weighted average cost of capital
(Market Capitalization, Long term debt, Short term debt in millions)
|Company Name
|Ticker Symbol
|
|
|Market Capitalization
|Long Term Debt
|Short Term Debt
|Total Capital
|Wt(Long Term Debt)
|Wt(Short Term Debt)

|
|

|Walmart
|
|WMT
|
|
|
|202.21
|
|37.712
|
|6.851
|
|246.773
|
|0.152821
|
|0.027762
|

|Wt(Common Equity)
|0.819417
|
|Beta
|1
|
|6-Month yield Rate
|1.12
|
|10 Years Yield Rate
|3.93
|
|Rs
|9.93
|
|Moody's Rating
|Aa2
|
|Bond Spread 1 yr bond
|55
|
|Bond Spread 10 yr bond
|105
|
|Cost of Short Term Debt(Rstd)
|1.67
|
|Cost of Long Term Debt(Rltd)
|4.98
|
|Tax Rate
|0.35
|
|Wacc
|8.661628
|
Thus, the Weighted Average Cost of Capital (WACC) for Wal-Mart is 8.66
%.
Valuation of the companys common shares
Discounted Cash Flow (including the forecast for terminal or horizon
value)
DCF is used to determine a company's current value according to its
estimated future
cash flows. Forecasted free cash flows (operating
profit + depreciation - capital expenditures - change in working capital) are
discounted to a present value using the company's weighted average costs of
capital. These FCFs are obtained from the assumptions made in Wal-Mart
balance sheet and income statements. These cash flows are discounted back
to the present using the WACC. According to my calculations, using the
WACC as 8.66%, the present value of a stock of is approx $65.
Dividend Discount Model
According to dividend discount model the value of a stock is all the future
cash flows expected to be generated by the firm discounted by an
appropriate risk-adjusted rate. This model is appropriate for Wal-Mart as it
has been paying dividend continuously since March 1974.For Wal-Mart
based on past financial data, the % change in dividend paid per share will
continuously increase but will remain constant at 9% in the later years when
the company reaches its maturity stage. I have assumed the dividend payout
percentage to be 25% which is the average of the dividend paid out in the

last 5 years. I have considered the present values of the forecasted dividends
and the terminal value of per share for Wal-Mart and calculated its present
per share value to be $48.I think due to current economic slowdown ,WalMarts share is undervalued but still is far ahead that all its competitors.
Relative P/E and PEG Ratio
The P/E ratio for Wal-Mart in the last 5 years is as follows.
|P/E
|17.62

|26.01
|16.23

|21.77

|17.19

As per various financial sites, the forward P/E ratio of Wal-Mart is


forecasted to 13.9 with PEG ratio being 1.2.
Conclusion and Recommendation
|Recommendation- Short Term
|
|Recommendation- Long Term
|

Buy

Hold

Based on an analysis of Wal-Mart for the past years it is clear that the
company will be able to weather the storm in the form of economic
recession and come out the strongest amongst all its competitors. With WalMart investments in providing a better shopping experience to customers,
pricing strategies ,new product lines such as energy saving products,
advancements in healthcare, pharmacy and implementing an efficient IT
systems to control the operations all over its stores , the company is bound to
experience a sustainable growth in the future. The increase in the stock price
for Wal-Marts shares can be attributed to a stronger growth expectation by
market analysts and investors.
As for the stock price, according to my analysis and from the free cash flow
model, I feel it is undervalued at the moment. Though Wal-Marts P/E ratio
is higher than the industry ratio, I feel Wal-Mart is still underpriced. The
main reason for industrys low P/E ratio is because of underperformance of
Wal-Marts competitors where in they have shown no signs of future growth
while Wal-Mart has.
Wal-Mart stocks would be a good long term investments as they have
continued to pay good dividends per year for the past 30 years or more and

their dividend per share is also increasing at a healthy rate since the last 5
years.
Bibliography
a. www.sec.gov
b. finance.yahoo.com
c. www.investopedia.com
d. www.fool.com
e. findarticles.com
f. www.marketwatch.com
g. news.moneycentral.msn.com
h. www.reuters.com
i. Walmartstores.com
j. Mergentonline.com
k. Standard& Poors.com
l. Resources.net.com
m. www.corporatewatch.org
n. news.bbc.co.uk
Tables & spreadsheets, including projected financial statements

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