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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
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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
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2447 |
2256 | 1980 |
|Discount-Centers
|
971 |
1075 | 1209 |
|Neighborhood Markets
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132 |
112 | 110 |
|Sams Club
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591 |
579 | 567
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|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.
|Units
|1118
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|310
|328
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|Year of entry
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|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.
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
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
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
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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
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[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
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|Total Assets Turnover
|2.58
|2.55
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2.42
|2.41
|2.40
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|Days Receivables
|1.99
|1.88
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2.56
|2.88
|3.13
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|Fixed Asset turnover
|3.83033
|3.78414
|3.55341
|3.50458
|3.43529
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|Inventory Turnover Ratio
|7.79
|7.80
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7.67
|8.02
|8.32
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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%
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23.86%
|24.24%
|24.36%
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|Operating Margin
|5.81%
|5.93%
|6.00%
|5.88%
|5.81%
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|Return on Equity
|21.85%
|22.61%
|22.88
%
|21.97%
|21.06%
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|Return on Assets
|15.17%
|15.33%
|14.67%
|14.34%
|14.15%
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|Walmart
|
|WMT
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|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
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|Bond Spread 1 yr bond
|55
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|Bond Spread 10 yr bond
|105
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|Cost of Short Term Debt(Rstd)
|1.67
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|Cost of Long Term Debt(Rltd)
|4.98
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|Tax Rate
|0.35
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|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
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