Student Investment Management
Analyst Report
Initiating Coverage
Wal-Mart Stores Inc.
Wal-Mart operates over 10,000 discount department stores, supermarkets, hypermarkets and wholesale centers under
69 different banners. The company has a presence in 27 countries across the globe.
Overview of Recommendation
Investment Thesis
Opportunities
 Track record of excellent management and
continued cost cutting to improve margins.
 History of returning wealth to investors
through aggressive buybacks and dividends.
 EDLP strategy and aggressive pricing attracts
customers regardless of economic condition.
 High growth potential in emerging markets,
including significant China presence.
Risks to Recommendation
 Continued uncertainty regarding tax policy.
 Slowing economic growth in China.
 Erosion of market share due to success of
certain competitors (Amazon, Target).
 Unfavorable exchange rates.
I am initiating coverage with a rating of “BUY” and a 12month price target of $86.00. This target represents
potential capital gain of 14.01%, and potential return of
16.51% including dividend income. Wal-Mart is well
positioned in its industry, with significant market share
among hypermarkets and supercenters. Continued cost
cutting efforts have led to increases in margins and
improving global economic conditions should lead to
international sales growth. Uncertainty over tax policy in
the U.S. could lead to cautious consumer spending nearterm, but this should be countered by low priced
“staples” offerings, the company’s EDLP (Every Day Low
Price) marketing strategy, and growth in foreign markets.
April 9, 2013
Student Investment Management: Initiating Coverage
Wal-Mart Stores Inc.
Contents
Company Overview ....................................................................................................................................... 3
Wal-Mart Stores Inc. Analysis ....................................................................................................................... 4
Segment Overview and Analysis ................................................................................................................... 5
Walmart U.S. ............................................................................................................................................. 5
Wal-Mart International ............................................................................................................................. 7
Sam’s Club ................................................................................................................................................. 9
Competition and Sustained Competitive Advantage .................................................................................. 11
Competitors ............................................................................................................................................ 11
Competitive Advantage .......................................................................................................................... 12
Recent News ............................................................................................................................................... 12
Macroeconomic Outlook ............................................................................................................................ 13
Financial Projections ................................................................................................................................... 14
Key Income Statement Assumptions ...................................................................................................... 15
Analyst vs. Consensus ............................................................................................................................. 16
Valuation ..................................................................................................................................................... 16
Discounted Cash Flow Analysis ............................................................................................................... 16
Sensitivity Analysis .................................................................................................................................. 17
Multiple Analysis ..................................................................................................................................... 18
Price Triangulation .................................................................................................................................. 18
Conclusion ................................................................................................................................................... 19
Works Cited ................................................................................................................................................. 20
April 9, 2013
Student Investment Management: Initiating Coverage
Wal-Mart Stores Inc.
Company Overview
Wal-Mart Stores Inc. (Hereafter Wal-Mart or “the company”) is a discount retailer which operates retail
stores in a variety of different formats across the globe. The company relies heavily on their Every Day
Low Price (EDLP) strategy which seeks to provide consumers with the lowest prices on many common
goods. Wal-Mart operates primarily in three segments: Wal-Mart U.S, Wal-Mart International, and
Sam’s Club. Wal-Mart U.S. is the largest segment, accounting for 58.89% of total sales in FY 2013. The
company operates in twenty-six foreign countries through the Wal-Mart International segment, and
sales from this segment accounted for 29% of the total in FY 2013. Sam’s Club operates as a
membership-based discount wholesaler which operates in 47 states and Puerto Rico. Sam’s Club
accounted for 12.11% of total sales in FY 2013.1
Market Profile
Wal-Mart is a titan in the Hypermarkets and Supercenters industry. The Wal-Mart U.S. segment has FY
2013 supermarket-related sales (groceries and pharmacy) of $180 billion. This performance gives the
company a 35% share of the U.S. supermarket industry, making it the largest provider of these goods
domestically. Wal-Mart is a large presence in several other product categories, particularly
entertainment, home goods, apparel and hardlines (hardware, automotive, etc). Sam’s Club operates as
the second largest warehouse club in the U.S. (behind Costco) with FY 2013 sales of around $56 billion.
Sam’s Club’s sales come primarily through the food, beverage, health and wellness categories (~60% of
sales).
Corporate Strategy
The company’s strategy centers on the Every Day Low Price philosophy. Wal-Mart seeks to provide value
for its customers by providing every day staple goods (grocery, pharmacy, etc) as well as more
discretionary purchases (entertainment) at the lowest possible prices. Wal-Mart is able to provide goods
at steep discounts through aggressive cost cutting efforts and improvements in operating efficiency and
supply chain management. An area of focus for the company recently has been eCommerce, and
management believes it can continue domestic growth through this channel. As of the most recent
earnings release, the company believes it has grown eCommerce share in all key markets. This will
continue to be an area of focus going forward. International focus will be on expansion and
improvement in operating efficiency. Margins of the International segment have lagged the remaining
segments, and management has made it a goal to improve net and operating margins through
aggressive cost cutting and increases in operating efficiency.
1
Information obtained through Scottrade company description and Analyst Ian Gordon’s report (S&P) dated 3/30/13.
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Wal-Mart Stores Inc.
Wal-Mart Stores Inc. Analysis
Outlook
Global economic conditions will continue to be a key factor for the success of the company going
forward. Growth has slowed in the U.S., and the company will look towards international markets to
continue expansion. Comps (comparable same-store sales) in the U.S. were positive and contributed to
sales growth, though for FY 2013 they came in lighter than expected. The growth driver in the future will
be primarily from expansion and comp growth internationally. I anticipate an improving global economy
which will lead to favorable comp growth internationally. This, coupled with a favorable environment to
open new locations, should lead to strong sales growth in FY 2014.
The company should be able to continue growth through new initiatives, primarily a strong focus on
eCommerce both domestically and internationally. The company believes that eCommerce will add
close to $.10 EPS in FY 2014, and continued growth will look to improve this figure. Customers are
increasing the amount of products they purchase online and I look for this trend to continue going
forward. Wal-Mart was late to the game, and has just recently begun to put such a heavy focus on
eCommerce. However, I am impressed with the company’s ability to gain market share and solid Cyber
Monday results.
Competitors pose a significant threat to the company going forward. Discount retailers such as Dollar
Tree (NASDAQ:DLTR) pose a threat to the company’s market share. Target (NYSE:TGT) has begun
expanding grocery offerings and is looking to compete with Wal-Mart in the Hypermarkets and
Supercenters category. While these competitors should be taken seriously, I do not believe the pressure
from these competitors to be very severe. Wal-Mart is a well-established company that has been
providing the widest variety of goods at the cheapest prices for longer than any comparable company.
Competitors in eCommerce such as Amazon (NASDAQ:AMZN) pose a much more significant threat.
Although there is difficulty competing with Wal-Mart in the grocery business, competition on
discretionary items is fierce. As previously stated, Wal-Mart is making great strides in eCommerce, but is
far behind Amazon in the space. This competition should be watched very closely going forward.
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Wal-Mart Stores Inc.
Segment Overview and Analysis
Walmart U.S.
Wal-Mart U.S. is the segment of the greater company which operates retail stores exclusively in the
United States. As of the FY 2013 earnings release, the segment operated 4,017 locations in all 50 states
and Puerto Rico2. The focus of this segment has shifted in recent years, with fewer stores being built
than in the past. The company is turning attention to improving current stores and experimenting with
new formats. In FY 2013 the company opened 76 new “small format stores,” which include many
neighborhood market locations. The neighborhood markets are meant to be the opposite of the typical
Wal-Mart store, and look to attract customers with the small store format, easier parking and less
crowded aisles (typical complaints from customers regarding the typical “supercenter” format)3.
In FY 2013, the Wal-Mart U.S. segment accounted for 58.89% of sales but 71.29% of operating income.
This difference can be attributed to increases in operating efficiency and cost cutting efforts (including
cutting labor hours). These actions have resulted in improving margins in this segment, which would
explain the significant portion of operating income from this segment.
2
3
http://corporate.walmart.com/our-story/locations
http://corporate.walmart.com/our-story/our-stores/united-states-stores
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For this segment, the average receipt (ticket) amount was up 1.1% during Q4 (which includes the holiday
season). However, there was a 10 basis point decrease in traffic in the stores. A decrease in traffic is
likely attributed to the high and volatile gasoline prices during this time period. Overall, holiday sales
came in relatively in-line with company and street expectations. Traffic in the stores was soft during the
first three weeks of December, but the stores saw significant traffic in the final week. As mentioned, the
increase in average ticket also helped to improve holiday sales numbers. The segment saw a 10%
increase in layaway volume, driven by a recent expansion of the layaway program. Top items in layaway
during the holiday season included iPads and televisions with screens greater than 50”. Correspondingly,
the company reported an increase in market share in the entertainment category4.
The segment continues to improve share in eCommerce domestically. On Cyber Monday, the company
reported the highest one-day sales performance in company history. In addition to eCommerce,
management continues to explore new channels to increase growth domestically. The company
continues to test a Scan and Go system which would allow customers to check out as they shop in order
to save the hassle of standing in line. This program is still in a testing phase, but early feedback has been
overwhelmingly positive.
Outlook
The segment has a strong track record of improving operating efficiency, and this should continue to be
the case moving forward. Operating margins from this segment should continue to increase, as
operating income will grow at a faster rate than sales. The segment continues to add share in many key
categories such as consumables, grocery, health and wellness and entertainment. I look for Wal-Mart to
continue to gain significant share in the entertainment category. Certain entertainment products,
namely televisions, have stagnated in terms of new and exciting technological development. With a lack
of new and exciting products, consumers are beginning to focus more on price when making a
purchasing decision. This trend works in Wal-Mart’s favor as the company is able to price many items
below competitors. I anticipate Wal-Mart to maintain current share in the grocery and consumables
categories, as increased pressure from the new offerings of competitors (Target, for example) will
impact the segment.
In the near term, the segment will suffer from recent increases in payroll tax and the delay of tax
refunds. The company expects comps to be flat Q1 of FY 2014, and I believe this will be the case. These
factors, coupled with high gas price, will work to decrease both traffic and average ticket in U.S. stores,
and could likely lead to negative comps in Q1. I would not expect this continue for all of FY 2014, and the
segment will likely see solid comps in Q2 as tax refunds are received and the initial shock of payroll tax
increases begins to wear off. Overall, the segment should see a healthy FY2014 with success driven by
increases in share in key categories and continued margin improvements.
4
The NPD Group survey
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Wal-Mart Stores Inc.
Wal-Mart International
Wal-Mart International is responsible for the operation of all discount retail stores outside of the U.S.
The segment currently operates 6,155 stores in 26 different countries under a variety of different
names5. The focus from this segment continues to be a mix of growth and improvements to operating
efficiency. Margins have declined over the last few years, and margins from this segment lag the greater
company by a significant amount. Improvements in this area are being made through cost cutting efforts
in the stores and also through improvements in logistics and supply chain management.
For FY 2013, Wal-Mart International accounted for 29% of total sales and only 22.2% of operating
income. The disparity is due to the poor margin performance from this segment. It is important to
mention that foreign exchange rate fluctuations contributed slightly to the increases in operating
income and sales. Favorable exchange rates improved operating income by $78 million and sales by
roughly $300 million.
The negative comps are a troubling sign for the company, and management has cited several reasons for
this trend:
 Fewer trips to the store and smaller basket sizes from the convenience shopper. This has been
especially prevalent in Brazil, Mexico and Canada.
 Increase in traffic from customers with bigger baskets.
 Change in consumer shopping patterns from daily to weekly shopping trips. Especially
noticeable in Chinese market.
 Increase in traffic for food and consumable offerings, but decreasing where general
merchandise is the primary offering. This has been noticed particularly in Canada6.
The company is making changes to adjust to these trends. Space allocation is shifting in some markets to
appeal more to the convenience shopper.
Holiday sales came in weaker than expected internationally, and contributed to the soft sales growth.
Poor economic conditions in many markets led to sluggish sales growth. The highlight of all markets was
in Latin America, mainly Brazil and Chile. High sales growth in these markets helped to drive the 7.4%
increase that was seen this year. The company continues to experiment with new channels to improve
5
6
http://corporate.walmart.com/our-story/our-stores/united-states-stores
FY 2013 Earnings Call Transcript
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Wal-Mart Stores Inc.
traffic and ticket. eCommerce continues to present excellent opportunities in many of the international
markets. For example, despite negative comps in the U.K., Total online sales increased 18.8% from last
year. This channel continues to provide many opportunities to improve sales while working to improve
margins. In terms of inventory, the company noted that it is improving inventory management and
control in Latin America and China, but is still struggling in emerging markets. Continued inventory
improvements should translate to improved efficiency and higher margins in the future.
In addition to eCommerce, the company is expanding offerings in many ways. In the U.K., the company
continues to expand the “Click and Collect” program. This program allows consumers to make purchases
online and then drive to the store to pick up their items. U.K. stores branded “ASDA” reported that more
than half of their customers were shopping through this program. The success of this initiative in the
U.K. is a positive sign, and the program will likely be expanded in to new global markets in the coming
fiscal year.
Outlook
Looking forward, strong performance from Wal-Mart International is crucial to the continued growth
and success of the greater company. Growth opportunities are scarce domestically, and the company is
looking to opportunities in new markets moving forward. Overall, this segment should perform well in
the coming years. Wal-Mart Stores has demonstrated the ability to consistently improve efficiency and
increase margins, and there’s no reason to believe this will not continue in global markets. Wal-Mart has
discovered there is a steep learning curve when conducting business in international markets,
particularly on such a large scale. Once management becomes more familiar with these new markets,
improvements in efficiency should quickly follow. Relationship building will continue to improve supply
chain efficiency, and this should all translate to more attractive margins in this segment. The area of
eCommerce has grown significantly and the company is looking to expand the eCommerce business in
to several new markets this year.
In terms of comps, I anticipate slow improvements in most markets. Improving economic conditions,
coupled with management becoming more familiar with the core customer, should drive higher tickets
and more traffic in the stores. Increases in discretionary income in emerging markets should translate to
increases in discretionary categories such as entertainment and apparel. Overall, I anticipate seeing solid
sales growth in FY2014. I anticipate comps to be positive in more markets than FY 2013 and expect
improvements in efficiency leading to higher margins. New channels, recovering economies and a focus
on “disciplined growth” when opening new stores will drive the sales growth moving forward.
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Wal-Mart Stores Inc.
Sam’s Club
Sam’s Club is a membership-based discount warehouse store. The stores offer a variety of goods in bulk
sized packaging designed to give the consumer the highest possible value for their dollar. Through
simple store designs and bulk packaging, the segment is able to cut costs and pass the savings to the
customer. The company operates over 700 clubs, many in the United States but with over 100
internationally. Members pay a membership fee every year which grants them access to the products
within the store. Much like the Wal-Mart stores, the Sam’s Club stores offer a variety of specialty
services, including a pharmacy, optical center, tire center and more7.
In FY 2013, the Sam’s Club segment provided 12.1% of sales and 6.5% of operating income. Sam’s Club
has had the lowest margins of all segments for the last five years, and this explains the difference in
contributions to sales and operating income.
Thanks to a strong holiday-driven November and late December, the segment was able to report
excellent results for FY 2013. A very aggressive approach to holiday shopping led to a solid performance
for the season. The segment began many campaigns to target shoppers early in the season, including
holding “Holiday Taste of Sam’s” events, a cyber-week special and a special VIP event for business
customers and “Plus” members. Holding events early in the holiday season led to strong November
sales, which likely explains the lack of sales in early December.
Sam’s Club made significant comp gains in many categories, led by strong performance in apparel and
home goods. For the year ended December 31, 2012, it was estimated that Sam’s Club gained a 20 basis
point share in wireless8. As a standalone category, wireless comps were up double-digits and are an area
of excitement going forward. The segment is offering many popular phones, including the iPhone 5 and
Samsung Galaxy S3. Many other areas of electronics were very strong. Sales of iPads saw double digit
growth, and there were also significant gains in televisions with screens in excess of 70”. The popularity
of these products lines, coupled with the low cost offerings through this segment will continue to
present an excellent growth opportunity.
7
8
http://corporate.walmart.com/our-story/our-stores/united-states-stores
NPD Group Survey
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Sam’s Club has had success with the offering of fuel to consumers, and this continues to be a growing
business. The lower prices offered to members has attracted many customers in a period when gas
prices are running very high. Sam’s Club derives a majority of sales through the food, beverage, and
health and wellness categories, and all three categories recorded positive comps for the most recent
year.
Business membership declined slightly during the year and there has been a noticeable decrease in
traffic from the business customer. Macroeconomic issues have put pressure on business, particularly
on businesses of small to medium size. The spending patterns of this type of customer are highly
correlated to the greater economy, and sluggish performance has contributed to the decrease in traffic.
Outlook
Although it currently makes up a small percentage of total revenue and income compared to other
segments, Sam’s Club performance is very important to the company going forward. There is significant
room for this segment to grow, both domestically and internationally. Pressure is being applied to the
segment by Costco, the largest company in the membership-based wholesale store category. Despite
this, I am optimistic on this business moving forward.
In an improving economy, I anticipate the business customer to pick up spending and make a strong
comeback in FY 2014. Payroll tax increases will likely hurt many core customers, but with an emphasis
on low prices and stretching the consumer’s dollar, I expect the impact to be minimal. The product
offerings from the segment are strong and gains in electronics and wireless in particular look
exceptionally promising. Many electronics categories are experiencing solid growth, and core offerings
(food, beverage, health and wellness) continue to produce healthy gains. The company has succeeded in
growing operating margins over the last four year, and I look for this trend to continue in the near-term.
Growth in sales will come from increased comps in addition to the opening of new locations. The
segment plans to add 15 to 20 new stores in FY 2014, which will help continue expansion of the brand9.
The company has had great success with eCommerce and looks to continue to build upon this success.
Cyber Monday brought substantial traffic to the site, as consumers are increasingly looking to the
internet to make purchases. Sam’s Club was late to the eCommerce game but has been able to steadily
increase share in the space. I look for this to help contribute to sales growth going forward.
9
FY 2013 Earnings Call Transcript
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Wal-Mart Stores Inc.
Competition and Sustained Competitive Advantage
Competitors
Rivalry among discount retailers is very fierce, but no company is able to match Wal-Mart in terms of
market share. The recent success of “dollar stores” such as Dollar Tree, Dollar General and Family Dollar
pose a threat to the company’s market share. However, these competitors are very small and are not
able to provide the same variety of products and services as Wal-Mart. For example, the grocery
selection at dollar stores is small and even non-existent in some locations. Fresh meat and produce is
generally unavailable, while Wal-Mart is able to provide the same grocery selection as a normal
supermarket in addition to discount merchandise not associated with “grocery stores.”
A more significant threat to the market share of Wal-Mart comes from the direct competitors Costco
and Target. Costco competes with the Sam’s Club segment of Wal-Mart and is the largest discount
wholesaler. Costco has been able to attract a consumer with a higher average income than the Sam’s
Club shopper, and this strategy has led to strong financial performance. The Costco threat has become
more subdued recently, and although there is potential for erosion of market share in the Sam’s Club
segment, I do not see this being the greatest threat.
In terms of competing with Wal-Mart on all levels, Target poses the biggest threat to the company’s
market share. Target has recently begun adding expanded grocery options to their stores and is trying to
gain market share from Wal-Mart in many categories. Target follows a similar low priced strategy as
Wal-Mart, and has run ad campaigns promising to match any competitor’s price on certain items.
General sentiment from consumers seems to be favorable toward the atmosphere and experience of
Target, while generally more in favor of the low prices Wal-Mart is able to offer. If Target is able to
continue expanding offerings, which I anticipate they will, this could lead to significant erosion of market
share for Wal-Mart. This rivalry will need to be watched very closely in the future, as further aggressive
pricing and expansion by Target will bring trouble to Wal-Mart performance.
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Wal-Mart Stores Inc.
Competitive Advantage
The largest competitive advantage for Wal-Mart comes from the scale and supply chain the company
has been able to build over its history. The company focuses on providing products at the lowest
possible prices, and in order to generate profit this must be done on a large scale. Wal-Mart is the
largest retailer in the world, and the sheer size of Wal-Mart’s operation is an enormous driver of
success.
Through massive economies of scale, Wal-Mart has an advantage over all competitors. Wal-Mart is able
to decrease operating expenses by having a large and integrated supply chain. As volume rises for the
company, per-unit costs decline and the company is able to pass this savings on to the consumer. When
it comes to supplier dealings with Wal-Mart, the company is able to negotiate very favorable terms in
deals. Wal-Mart has a massive market share, and if product manufacturers were to lose contracts with
the company there is no doubt they would lose a significant portion of their business. As a result WalMart is able to keep purchase costs low.
Pricing continues to be a great advantage for the company. Due to the economies of scale mentioned
previously the company is able to keep prices much lower than competitors. Wal-Mart is able to appeal
to the budget-conscious consumer. With a large middle class in the U.S. and ever-growing middle classes
in many developing countries, this aggressive pricing appeals to a vast majority of the consumer market.
Recent News



February 15, 2013 – In an e-mail to other executives, Wal-Mart’s Vice President of finance and
logistics commented that “in case you haven’t seen a sales report these days, February MTD
sales are a total disaster.” He also stated “the worst start to a month I have seen in my 7 years
with the company.”10
April 2, 2013 – Wal-Mart receives in excess of 1,000 complaints from across the U.S. stating that
the consumers found bare shelves in some spots and were unable to purchase certain products
on their recent trip. This is likely explained by lack of labor in the stores in an effort to keep costs
low in Q1 (possibly to compensate for poor sales performance in February).11
February 21, 2013 – The company announces an increase in per share dividend to $1.88, a raise
of 18%. Also mentioned are plans to continue the firm’s buyback program to help return wealth
to investors.12
10
Bloomberg
Bloomberg
12
FY 2013 Earnings Announcement Press Release
11
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Wal-Mart Stores Inc.
Macroeconomic Outlook
The economic situation in the U.S. has been steadily improving since the recent recession and has
shown continued positive signals as of late. Based on recent performance and future outlook, I am
bullish on the domestic economy in the next year.
GDP growth has been positive over the last few years and I expect to see steady growth continue in the
near term. The U.S. unemployment rate has fallen well off the recessionary highs, but continues to
remain well above a healthy historical average. Due to the staple nature of the products Wal-Mart sells,
the company is relatively insensitive to changes in GDP and unemployment. The 10-year correlation
coefficient (r value) between Wal-Mart stock and U.S. GDP in real terms in -.06 (almost perfectly
uncorrelated) versus a more discretionary name like Target with a 10-year correlation coefficient of .3
(showing some positive correlation). In terms of unemployment rate, Wal-Mart stock has a 10-year
correlation coefficient of .37, showing that there is some positive correlation13. This is likely explained by
long-term unemployment trends. I believe as individuals become unemployed, the first cuts in spending
go toward more discretionary items (cable TV for example). However, as these consumers continue to
be unemployed for a significant amount of time they begin to cut back on more staple offerings.
Inflation has remained low and well-behaved over the last several years. However, actions from the Fed
such as quantitative easing and a low interest rate environment could lead to a high inflationary
environment in the medium term. Retail sales took a significant hit during the recession in 2008-2009,
13
Thompson Reuters Baseline
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Wal-Mart Stores Inc.
but have seen a strong return in recent years. Due to Wal-Mart’s staple offerings, the company manages
low correlation to these economic factors. Although a rise in inflation is bound to occur in the next few
years, the company should be relatively unaffected. Over the last ten years, Wal-Mart stock price has a
correlation coefficient of -.09 to CPI14. This shows that the price of necessities has little impact on WalMart sales and shows the company is well-positioned going into a potentially high inflation
environment.
The troubled global economic environment will be an import factor going forward. The Eurozone has
seen headwinds as of late, and the region is struggling to maintain positive growth. Wal-Mart has a
presence in Europe, but with all 566 European stores located in the U.K15. Growth in this region has
been shaky, but because the country is not part of the Euro, I do not expect conditions to deteriorate as
severely as in countries with the common currency. The remainder of Wal-Mart’s international presence
lies heavily in Latin and South America. These regions have performed well recently and continue to
exhibit strong growth. I look for economic success in this region in the near-term and expect this to
translate into strong financial performance for the company. Growth in China has slowed lately, but still
remains well above the average for developed nations. This region presents a wealth of growth
opportunity, and I see a favorable economic environment in the near-term.
Financial Projections
14
15
Thompson Reuters Baseline
http://stock.walmart.com/financial-reporting/unit-counts-square-footage
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Wal-Mart Stores Inc.
Key Income Statement Assumptions
International Growth – The growth of the Wal-Mart International segment is key to the projections for
the company. In the next two years, I project the sales growth rate of the Wal-Mart U.S. and Sam’s Club
segments to decrease from their FY 2013 values as these segments continue to reach a more mature
phase of the life cycle. However, I anticipate the growth rate of the International segment to increase
due to improved comp numbers, a favorable global economy, new store expansion and strong
performance in Latin and South America.
Operating Efficiency and Margin Improvements – Wal-Mart has a history of continuing to improve
margins and I look for this performance to continue. International margins lag the rest of the company,
and I look for margins to improve as scale and supply chain improves internationally. The company has
also worked to aggressively cut costs in the U.S. and I expect this to translate to higher margins from this
segment.
Tax Rate – A favorable tax rate was key to the EPS beat in FY 2013, and I do not expect this rate
(31.01%) to be the norm. The company guided a FY 2014 effective tax rate in the 32%-33% range during
the FY 2013 earnings call. Wal-Mart typically provides very solid guidance and my assumption of 32.50%
in FY 2014 through FY 2016 reflects my confidence in this guidance.
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Analyst vs. Consensus
In terms of EPS, my estimates trail the consensus estimates slightly. This could be attributed to my
conservative stance in terms of share repurchases. The company has a repurchase program currently in
place, but it will be ending soon. I anticipate buybacks to continue into the future but was conservative
when projecting these factors. My tax rate is also slightly higher than what some are projecting which
could translate in to a higher EPS figure. For sales projections, my estimates are higher than consensus
estimates. This is likely attributed to my confidence in international sales growth. I have projected high
growth in international markets, and I believe most analysts are more hesitant to predict big growth
internationally, possibly due to global uncertainty and poor performance in certain markets in FY 2013.
Valuation
Discounted Cash Flow Analysis
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Wal-Mart Stores Inc.
Key Assumptions
Discount Rate – A discount rate of 9.70% was selected. This value reflects Wal-Mart’s position as a
stable and relatively low risk business. A typical discount rate is ~10.50% and as such I elected to use one
80 basis points lower for the company. Wal-Mart has a high credit rating and sufficient liquidity, so
credit/liquidity risk is low. Performance is relatively stable, and there is low volatility in earnings and
growth when compared to other S&P 500 companies. Economic conditions are improving and this fact
contributes to the low discount rate.
Terminal Growth Rate – The terminal value accounts for 61% of total value in this DCF analysis.
Therefore, choosing an appropriate terminal growth rate is vital to coming to an accurate estimate of
intrinsic value. I selected a terminal growth rate of 3.3%. I anticipate U.S. GDP to be around the 3% mark
in the long-term, and I elected to choose a figure around 3%. However, due to higher growth in
emerging markets, I elected to select a figure of slightly over 3% to incorporate this assumption.
Other Assumptions – Revenues continue at 5.7% in the next two fiscal years, and then begins to slowly
decline. I anticipate this due to two factors. One contributor is slowing growth. I anticipate the global
economy to enter the next phase of the economic cycle around this period (contraction) and this will
contribute to lower growth. Also, I anticipate the company to become more mature in overseas market
and this will lead to a gradual decrease in sales growth. I anticipate margins widening slightly over the
next ten years. As discussed in this analysis, the company is undertaking aggressive measures to cut
costs and improve operating efficiency. This will lead to improving margins.
Sensitivity Analysis
Two of the main assumptions that contribute to the final DCF value are the terminal growth rate and
discount rate. The above sensitivity table shows the sensitivity of the price to these two factors
(terminal growth rate is on the horizontal axis while discount rate is on the vertical axis). Assuming a
margin of error of 1.2% for both the rates, we get the above prices. The range given in the sensitivity
table shows possible prices between $76.50 and $106.35. The whole price range is above the current
price of $75.43. This should be comforting to readers. Even if the assumptions of the main drivers of DCF
value are off slightly, the price target is still above the current price. I believe these assumptions to be
very accurate, and find it extremely unlikely the true discount rate or terminal growth rate will vary from
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the values given in the table. As a result, I am confident in the DCF price result and the corresponding
recommendation on the company.
Multiple Analysis
Compared to the ten year median levels (absolute), Wal-Mart is trading slightly expensive. However,
given the low multiples during the recession, I believe the medians to be slightly skewed. It is my opinion
that multiples are roughly in-line given the current business climate.
Compared to the ten year median (relative to the S&P 500), Wal-Mart is trading relatively cheap. This
speaks to my thesis that Wal-Mart is a buy given the current price. I would expect these multiples to
revert towards the median levels (target multiples will be discussed in the “Triangulation” section) and
consequently the price should increase.
Price Triangulation
In order to provide the most accurate price target possible, I have elected to use several valuation
methods in final computation. In the final price, the P/Forward E ratio is given a weighting of 10% with a
target multiple of 14.5. I believe this multiple is closer to the true median for the company, given that
multiples ran extremely low during the recession. P/S has been given a target multiple of .6, as I believe
sales and market share will be more highly valued in the near-medium term due to intense rivalry in this
space. I anticipate the P/B ration to decrease very slightly to the ten year median, with a target of 3.3.
P/EBITDA was calculated as 7.0 with a ten year median of 7.3. I anticipate the ratio to move close to the
median with a target of 7.25. The DCF is the most heavily weighted contributor to the final price target. I
believe the DCF assumptions to be solid and think this is the most accurate predictor of future price.
Much more thought was put in the DCF than the multiples, and I believe this has led to an accurate final
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value. Given the weightings of the different valuation methods, I have arrived at a price target of $85.95
(which for simplicity will be rounded to $86.00).
Conclusion
Based on the analysis in this report, I am initiating coverage on Wal-Mart Stores Inc. with a rating of BUY
and a twelve month price target of $86.00. This would give an expected price appreciation of 14.01%.
When combined with the dividend income, total expected return is 16.51%.
Wal-Mart is well positioned in the industry and is able to command significant market share. Growth has
been steady over the company’s lifespan and I look for this to continue to be the case. I expect growth
rates to decrease for both Wal-Mart and Sam’s Club in the U.S. as expansion slows and these segments
continue to operate in a maturity phase. However, I anticipate strong growth from the international
segment driven by new store expansions, high growth in South and Latin America, a stronger global
economy and comp improvements in existing stores. I look for operating margins to expand both in the
U.S. and internationally through operating improvements and cost cutting. Given these factors, WalMart presents an exciting opportunity, offering significant expected returns over the next year.
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Works Cited
 Wells Fargo Equity Research Report. Nemer, Dill, Wendt, Asif. February 21, 2013.
 J.P. Morgan Equity Research Report. Horvers, Stubins, Becks, Elder. February 15, 2013.
 Thompson Reuters Baseline.
 Bloomberg Professional. Accessed at OSU campus.
 Wal-Mart FY 2013 Earnings Release.
 Wal-Mart FY 2013 Earnings Call Transcript.
 Wal-Mart Q3 FY 2012 Earnings Call Transcript.
 St. Louis Federal Reserve FRED database.
 Yahoo Finance.
 SEC EDGAR Database (Wal-Mart 10-K filings 2008-present).
 Walmart.com
 Scottrade.com
 The NPD Group
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