TOPIC: Financial Statement Analysis
CHAPTER LINK: Chapter 5
Profitability and Risk Analysis of
Wal-Mart Stores
Wal-Mart Stores (Wal-Mart) (www.wal-mart.com) is the world’s largest retailer. It employs an “every day
low price” strategy and operates through three principal stores concepts:
1.
Wal-Mart Stores: Discount department stores that offer clothing, housewares, electronic equipment,
pharmaceuticals, health and beauty products, sporting goods, and similar items. The number of WalMart Stores decreased at a compound annual rate of 4.1 percent and square footage decreased at a
compound annual rate of 3.8 percent during the last three years. The average size of a Wal-Mart Store
was 95,750 square feet at the end of fiscal 2002.
2.
Wal-Mart Supercenters: A full-line supermarket combined with a discount department store.
Supercenters represent for Wal-Mart a move to grocery products. Combining grocery products with
Wal-Mart’s traditional discount department store offerings attempts to capitalize on one-stop shopping
by consumers and to gain efficiencies in product distribution, stocking, and advertising. Compound
annual growth rates during the last three years for Wal-Mart Supercenters are 23.6 percent in the
number of stores and 24.5 percent in square footage. A portion of the growth in Wal-Mart Supercenters
represents conversions of previous Wal-Mart Stores. The average size of a Wal-Mart Supercenter was
185,180 square feet at the end of fiscal 2002.
3.
Sam’s Clubs: Members only warehouse stores that offer large quantities of food and household
products as well as automotive, electronic, sporting goods and similar products at wholesale prices.
Compound annual growth rates during the last three years for Sam’s Clubs are 3.5 percent in the
number of stores and 4.2 percent in square footage. The average size of a Sam’s Club store was
123,600 square feet at the end of fiscal 2002.
4.
International: Wal-Mart expanded its international operations significantly in recent years and now
conducts operations (number of stores in parentheses) in Canada (196), Mexico (551), Puerto Rico (17),
Brazil (22), Argentina (11), United Kingdom (250), China (19), Korea (9), and Germany (95). WalMart operates internationally through discount stores, supercenters, and some specialty stores and
restaurants. It grew its international operations 17.9 percent in number of stores and 22.8 percent in
square footage during the last three years. Wal-Mart’s principal acquisitions included CIFRA in
Mexico on September 1, 1997, Interspar in Germany on December 29, 1998, and ASDA in the United
Kingdom on September 1, 1999. Wal-Mart allocated the purchase price to the identifiable assets and
liabilities acquired based on their market values. It allocated any remaining purchase price to goodwill,
which it then amortizes to expense over 20 to 40 years. Income and cash flows from these acquisitions
1
are included in consolidated net income and cash flows from the date of acquisition. The effects of
these and several smaller acquisitions on the balance sheet at the date of acquisition were as follows:
Cash ........................................................
Accounts Receivable ..............................
Inventories ..............................................
Prepayments ...........................................
Property, Plant and Equipment (net) ......
Goodwill .................................................
Accounts Payable ...................................
Other Current Liabilities.........................
Long-term Debt ......................................
Deferred Income Taxes ..........................
Other .......................................................
Purchase Price ........................................
1998
500
97
266
-2,105
1,213
(431)
(132)
-(353)
(900)
$ 2,365
1999
$ 137
-200
-219
576
(112)
(60)
-32
-$ 992
$
2000
195
16
655
403
5,902
7,020
(1,159)
(847)
(1,272)
(58)
(7)
$10,848
$
2001
-----452
----165
$ 617
The average size of a store in the International segment was 83,330 square feet at the end of fiscal 2002.
Wal-Mart has recently added a small number of Neighborhood Markets to its retail line. These stores,
totaling 31, averaging 45,742 square feet in size at the end of fiscal 2002, are located in residential
neighborhoods and primarily offer grocery products.
Wal-Mart uses centralized purchasing through its home office for substantially all of its merchandise. It
distributes products to its stores through regional distribution centers. During fiscal 2002, the proportion of
merchandise channeled through its regional distribution centers was as follows:
Wal-Mart Stores and Supercenters ..............................................................
Sam’s Club
...........................................................................................
International ...........................................................................................
84%
62%
71%
Wal-Mart increased its use of consignment arrangements during the last three years. The manufacturers of
consigned products keep the inventory on their books and bear the risks of inventory obsolescence and theft.
Unsold products revert back to the manufacturer. Wal-Mart records the sales of such products as Sales
Revenue and the amount it must pay the manufacturer as Cost of Goods Sold.
Exhibit 1 sets out various operating data for Wal-Mart for its most recent three years. Exhibit 2 presents
segment data. The “Other” segment represents Wal-Mart’s distribution centers. These distribution centers
not only distribute products to Wal-Mart stores but to other retailers as well. Exhibit 3 presents comparative
balance sheets, Exhibit 4 presents comparative income statements, and Exhibit 5 presents comparative
statements of cash flows for Wal-Mart for its 2000, 2001, and 2002 fiscal years. Exhibit 6 presents selected
financial statement ratios for Wal-Mart for its 2000 and 2001 fiscal years. The income tax rate is 35 percent.
REQUIRED
a.
Compute the amounts of the ratios listed in Exhibit 6 for the 2002 fiscal year.
b.
What are the likely reasons for the changes in Wal-Mart’s rate of return on assets during the three-year
period? Analyze the financial ratios to the maximum depth possible.
c.
What are the likely reasons for the changes in Wal-Mart’s rate of return on common shareholders’
equity during the three-year period?
2
d.
How has the short-term liquidity risk of Wal-Mart changed during the three-year period?
e.
How has the long-term liquidity risk of Wal-Mart changed during the three-year period?
3
Wal-Mart Stores (Domestic)
Number ..................................
Square Footage (millions) ......
Exhibit 1
Operating Data for Wal-Mart Stores
Fiscal Year Ended January 31:
2000
2001
2002
1,8011,736
1,647
170.8
165.4
157.7
Wal-Mart Supercenters (Domestic)
Number ..................................
Square Footage (millions) ......
721
130.7
Wal-Mart Stores and Supercenters (combined)
Sales per Square Foot.............
$360.60
Operating Income per Square
Foot ......................................
$27.92
Sam’s Club (Domestic)
Number ..................................
Square Footage (millions) ......
Sales per Square Foot.............
Operating Income per Square
Foot ......................................
International
Number ..................................
Square Footage (millions) ......
Sales per Square Foot.............
Operating Income per Square
Foot ......................................
Domestic Comparable Store Sales
Increase .....................................
Employees (full and part time) .
888
162.6
1,066
197.4
$371.61
$391.81
$29.68
$29.02
463
56.4
$439.73
475
58.0
$462.03
500
61.8
$475.65
$13.45
$16.76
$16.63
1,004
74.9
$303.44
1,071
80.4
$399.25
1,170
97.5
$363.95
$10.90
$13.83
$14.95
8%
1,140,000
4
5%
1,244,000
6%
1,383,000
Sales Mix
Wal-Mart Discount Stores and
Supercenters ........................................
Sam’s Club ............................................
International ..........................................
Other .....................................................
Exhibit 2
Segment Profitability Analysis
2000
2001
2002
65.9%
15.0
13.8
5.3
100.0%
63.7%
14.0
16.8
5.5
100.0%
63.9%
13.5
16.3
6.3
100.0%
Wal-Mart Discount Stores and Supercenters
Profit Margin .........................................
8.0%
Total Assets Turnover ...........................
6.0
Rate of Return on Assets.......................
47.8%
8.0%
6.0
48.0%
7.4%
6.4
47.1%
Sam’s Club
Profit Margin .........................................
Total Assets Turnover ...........................
Rate of Return on Assets.......................
3.4%
6.9
23.7%
3.5%
7.0
24.5%
3.5%
7.4
26.0%
International
Profit Margin .........................................
Total Assets Turnover ...........................
Rate of Return on Assets.......................
3.6%
.9
3.2%
3.5%
1.2
4.3%
4.1%
1.3
5.5%
Other
Profit Margin .........................................
Total Assets Turnover ...........................
Rate of Return on Assets.......................
(3.0%)
.4
(1.1%)
(2.8%)
.4
(1.1%)
(5.2%)
.4
(2.3%)
5
Exhibit 3
Wal-Mart Stores, Inc.
Comparative Balance Sheets (amounts in millions)
ASSETS
1999
Cash.............................................. $ 1,879
Accounts Receivable ....................
1,118
Inventories....................................
17,076
Prepayments .................................
1,059
Total Current Assets .............. $ 21,132
Property, Plant and Equipment (net) 28,756
Other Assets .................................
2,891
Total Assets ............................ $ 52,779
January 31:
2000
2001
$ 1,856
$ 2,054
1,341
1,768
19,793
21,442
1,366
1,291
$ 24,356
$ 26,555
39,001
45,417
10,024
10,641
$ 73,381
$ 82,613
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts Payable ......................... $ 10,257
$ 13,105
Notes Payable...............................
-3,323
Current Portion of Long Term Debt 1,006
2,085
Other Current Liabilities ..............
5,499
7,290
Total Current Liabilities ......... $ 16,762
$ 25,803
Long-term Debt ............................
12,390
19,706
Other Noncurrent Liabilities ........
2,515
2,038
Total Liabilities ...................... $ 31,667
$ 47,547
Common Stock............................. $ 445
$
446
Additional Paid-in Capital ...........
435
714
Retained Earnings ........................
20,232
24,674
Total Shareholders’ Equity .... $ 21,112
$ 25,834
Total Liabilities and
Shareholders’ Equity............ $ 52,779
$ 73,381
6
2002
2,161
2,000
22,614
1,471
$ 28,246
50,529
9,455
$ 88,230
$
$ 15,092
2,286
4,375
7,196
$ 28,949
20,138
2,183
$ 51,270
$
447
1,411
29,485
$ 31,343
$ 15,617
743
2,405
8,517
$ 27,282
23,511
2,335
$ 53,128
$
445
1,484
33,173
$ 35,102
$ 82,613
$ 88,230
Exhibit 4
.
Wal-Mart Stores, Inc.
Comparative Income Statements (amounts in millions)
Sales Revenue .......................................
Other Revenues .....................................
Total Revenues................................
Expenses:
Cost of Goods Sold .........................
Marketing and Administrative ........
Interest.............................................
Income Taxes ..................................
Total Expenses ..............................
Net Income ............................................
Year Ended January 31:
2000
2001
2002
$165,013
$191,329
$ 217,799
1,796
1,966
2,013
$166,809
$193,295
$ 219,812
$129,664
27,210
1,022
3,338
$161,234
$ 5,575
7
$150,255
31,679
1,374
3,692
$187,000
$ 6,295
$ 171,562
36,356
1,326
3,897
$ 213,141
$
6,671
Exhibit 5
Wal-Mart Stores, Inc.
Comparative Statements of Cash Flows (amounts in millions)
OPERATIONS
Net Income ............................................
Depreciation ..........................................
(Increase) in Accounts Receivable.......
(Increase) in Inventories .......................
(Increase) in Prepayments .....................
Increase in Accounts Payable ...............
Increase in Other Current Liabilities.....
Cash Flow from Operations ............
Year Ended January 31:
2000
2001
2002
$ 5,575
$ 6,295
$
6,671
2,375
2,868
3,290
(255)
(422)
(210)
(2,088)
(1,795)
(1,235)
(307)
75
(180)
1,849
2,061
368
1,045
522
1,556
$ 8,194
$ 9,604
$ 10,260
INVESTING
Acquisition of Property, Plant, and
Equipment ...........................................
Other .....................................................
Cash Flow from Investing ...............
$ (6,183)
(10,663)
$ (16,846)
$ (8,042)
(672)
$ (8,714)
$
$
$ (2,022)
3,778
581
(1,692)
(193)
(1,070)
(74)
$ (692)
$
198
1,856
$ 2,054
$
FINANCING
Increase (Decrease) in Short-term
Borrowing ...........................................
Increase in Long-term Borrowing .........
Increase in Common Stock ...................
Decrease in Long-term Borrowing .......
Acquisition of Common Stock..............
Dividends ..............................................
Other .....................................................
Cash Flow from Financing..............
Change in Cash .....................................
Cash, Beginning of Year .......................
Cash, End of Year .................................
$
$
$
4,316
6,000
0
(996)
(101)
(890)
300
8,629
(23)
1,879
1,856
8
$
$
$
$
(8,383)
1,237
(7,146)
(1,533)
4,591
0
(3,686)
(1,214)
(1,249)
84
(3,007)
107
2,054
2,161
Exhibit 6
Wal-Mart Stores, Inc.
Financial Ratio Analysis
Rate of Return on Assets.......................
Profit Margin for Rate of Return
on Assets .............................................
Total Assets Turnover ...........................
Cost of Goods Sold/Sales......................
Marketing and Administrative
Expense/Sales .....................................
Interest Expense/Sales ..........................
Income Tax Expense/Sales ...................
Accounts Receivable Turnover Ratio ...
Inventory Turnover Ratio .....................
Fixed Assets Turnover Ratio ................
Rate of Return on Common
Shareholders’ Equity...........................
Profit margin for Rate of Return on
Common Shareholders’ Equity ...........
Leverage Ratio ......................................
Current Ratio.........................................
Quick Ratio ...........................................
Accounts Payable Turnover ..................
Cash Flow from Operations to
Current Liabilities Ratio .....................
Long-term Debt Ratio ...........................
Total Liabilities/Total Assets Ratio ......
Cash Flow from Operations to Total
Liabilities Ratio ...................................
Interest Coverage Ratio.........................
2000
9.9%
2001
9.2%
3.8%
2.62
78.6%
3.8%
2.45
78.5%
16.5%
.6%
2.0%
134.2
7.0
4.9
16.6%
.7%
1.9%
123.1
7.3
4.5
23.8%
22.0%
3.4%
2.68
.94
.12
11.3
3.3%
2.73
.92
.13
10.8
38.5%
43.3%
64.8%
35.1%
39.1%
62.1%
20.7%
9.7
19.4%
8.2
9
2002