Wal-Mart
November 2010
Price: $55
Research Report by
Peter Hughes, Check Capital Management
Wal-Mart (WMT) is by far the world’s largest retailer. The company has over 8700 stores, with
49% of those outside the United States. WMT has famously low prices, which it achieves
through expert merchandising and economies of scale. In evaluating Wal-Mart, consider that:



The company has increased its
sales, dividends and earningsper-share (EPS) every year for
at least 35 years.
It employs two million people
worldwide and is the largest
private employer in the U.S.
WMT’s sales in 2010 will
approach $420B. This exceeds
the GDP of all but 21 countries
in the world and is larger than
the sales of the world’s next
four largest retailers combined.
[Note: All dates in this report
correspond with the calendar
year, not Wal-Mart’s fiscal year,
which ends in January.]
Earnings and Dividends Per Share
$4.50
$4.00
$3.50
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010*
EPS
Dividend/Share
* Expected Results in 2010
World's Largest Retailers (2009 Sales in Billions)
THE BUSINESS
$450
$400
$350
WMT’s formula for success is
$300
simple: offer lower prices than
$250
competitors. This is how Wal$200
Mart remains the destination of
$150
choice for many price-conscious
$100
consumers. [68% of U.S. sales
$50
$come from families with houseWal-Mart Carrefour Tesco Metro AG Kroger Costco
Home
Target
hold incomes below $70,000.]
Depot
Because prices are consistently
low, WMT has few “sales events” and thus saves on advertising costs. As the company rolls out
new stores and tweaks its offerings, sales and earnings continue to climb.
Wal-Mart has grown remarkably since its first store opened in 1962. Earnings-per-share have
grown at an average annual rate of 13% over the last 15 years and nearly 11% for the last five
years. The company achieved such growth by finding ways to reinvest its cashflow and earn
solid returns on capital. The key to attaining these returns is WMT’s low cost structure. The
firm is able to offer the lowest prices due to its operational efficiency and economies of scale.
1
Check Capital Management Inc.

Costa Mesa, CA.

(714) 641-3579
(800) 710-5777
Operational Efficiency
Wal-Mart pioneered the use of supply-chain inventory management. Retailers’ results typically
suffer because of inventory miscues—items are unavailable when needed or languish on store
shelves, tying up capital and eventually being sold at significant markdowns. WMT does an
exceptional job of managing its inventory supply chain by using a management system called
Retail Link, which provides suppliers with sales-trend information, enabling them to respond
quickly and improve efficiency. Managers are able to make real-time decisions about which
merchandise is in demand and needs to be reordered. Thus, merchandise arrives on the shelves
just when needed, increasing inventory turnover. Even though the company has a very small
margin on each item it sells, its rapid turnover means that annual profit per foot of shelf space is
extremely high. According to some reports, WMT sells over 60% of its products before even
paying for them, making inventory costs for those items essentially zero. To further increase
efficiency and drive down costs, Wal-Mart has recently proposed taking over the supply-chain
management of some of its largest suppliers. The company is also endeavoring to source more
of its inventory directly from producers and manufacturers, reducing middle-man markups.
Part of Wal-Mart’s logistical success stems from its distribution infrastructure. The company has
an impressive system of distribution centers operating 24 hours a day. WMT’s strategy is to
build new stores within one day’s drive from a distribution center. (Usually 150-200 stores fit in
this range.) When there are enough new stores in an area, the firm can open a new distribution
center, reducing driving miles and the need to stock inventory in-store. Most competitors
outsource their trucking, but Wal-Mart maintains its own fleet of trucks, further lowering costs.
Store managers are trained to maximize profits on every square foot of space. Each store is
evaluated as a profit center and its performance can be calculated on a real-time basis, making it
easy for managers to remain fully informed. Furthermore, each department is monitored so
trends can be spotted and adjustments made quickly. Departments are also incentivized to be
creative; successful ideas are spread to other stores.
Economies of Scale
Wal-Mart’s size enables it to achieve
significant economies of scale relative to rivals. The firm can distribute
administrative expenses over a larger
number of products sold. Its high
store density in many areas contributes to reduced distribution costs.
Most important, WMT’s size gives it
enormous clout with vendors. For
numerous manufacturers, getting
products into Wal-Mart stores is a
make-or-break issue, so WMT is able
to negotiate very low prices.
2
Check Capital Management Inc.
Percent of Sales to Wal-Mart
30%
25%
20%
15%
10%
5%
0%
Clorox

Costa Mesa, CA.
General
Mills

Kraft
(714) 641-3579
Procter &
Gamble
KimberlyClark
(800) 710-5777
Even for some of the world’s biggest producers, sales to Wal-Mart makes up a large percentage
of total revenues, allowing WMT to get quantity discounts (see chart on page 2). The firm
constantly works with vendors to lower prices and then passes those savings on to customers.
Competition
Wal-Mart is being pressured by competitors. It is being undercut by firms like Costco and the
various “Dollar” stores. Costco sells far fewer items and its bulk-quantity strategy allows it to
sell for prices which are very competitive with Wal-Mart. Similarly, firms like Family Dollar,
Dollar General and Dollar Tree have carved out market niches that appeal to the price-conscious
crowd. At the other end of the spectrum, Target has successfully positioned itself as the upscale
discounter. Its stores are often newer and better maintained than Wal-Mart’s and its “Expect
More, Pay Less” motto appeals to consumers who are not solely focused on price. These tough
competitors continue to crimp Wal-Mart’s growth.
Recent Performance
Despite its strengths, Wal-Mart’s growth is slowing. Sales grew 3.8% in the first three quarters
of 2010, although EPS rose 13% as margins widened. Management expects EPS of $4.08-$4.12
for all of 2010. WMT outperformed its peers during the recession, as consumers focused more
on value. An improving economy may return some of those shoppers to higher-priced rivals.
FUTURE GROWTH
Wal-Mart is the victim of its own success. The firm increased its super-center count from 441 in
1997 to 2880 in 2010. The firm’s marketshare went up, but new stores now often cannibalize
older stores’ sales. WMT’s U.S. business is now mature, and its advanced market penetration
makes future growth increasingly difficult. As the graph below shows, the firm’s same-store
sales have been slipping for a decade and have posted a slight decline thus far in 2010.
Wal-Mart’s success will now depend on its ability to earn reasonable rates of return on
reinvested profits. In 2008, investors
Annual Change in U.S. Same-Store Sales
began pressuring WMT to reduce its
6%
domestic store expansion, which was
5%
viewed as an increasingly low-return
investment. Management acquiesced,
4%
and this was an important, positive step
3%
for the company. In 2006, Wal-Mart
2%
increased its U.S. selling space by 42
million feet. In 2010 the increase will
1%
be only 11 million. The company is
0%
now spending $2B-$3B less on capital
expenditures and focuses more on re-1%
modeling current stores than building
-2%
new ones. The saved money is being
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010*
reallocated to foreign expansion and
* Year to date (through 10/31/2010)
returned to shareholders.
3
Check Capital Management Inc.

Costa Mesa, CA.

(714) 641-3579
(800) 710-5777
Because Wal-Mart’s ability to open new stores in the United States is limited, it is pursuing other
growth strategies, including tinkering with its domestic formula and international expansion.
The company has proven savvy at finding ways to incrementally improve results in the U.S. and
will likely be able to continue adjusting its U.S. offering to marginally increase returns. The firm
has recently announced two new strategies to stimulate growth in urban areas. One is a partnership with FedEx, which will allow consumers to buy merchandise online and then pick it up,
with no shipping cost, at any FedEx outlet. WMT is also beginning to open new stores in urban
areas that heretofore could not support a Wal-Mart. The new stores will utilize much smaller
formats (20,000-60,000 square feet, versus 185,000 for a typical supercenter) and focus mostly
on groceries. Some of WMT’s past moves have greatly increased profitability over time:
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1978—Opening pharmacies and automotive service centers in stores.
1983—Opened the first Sam’s Club to compete in the wholesale-club category. There
are now 608 Sam’s Club stores.
1988—Began using the “Supercenter” format. These larger stores offer photo processing, optical products/exams, fast food and groceries.
1998—Opened the first of many Neighborhood Market grocery stores. Groceries now
account for 51% of
International Sales as Percent of Total Revenues
WMT’s U.S. sales. The
30%
company is now the largest
grocer in the U.S., with a
20% share of the market.
25%
2006—Began to offer onemonth supplies of many
20%
generic drugs for $4,
resulting in additional foot
traffic from consumers
15%
who might not otherwise
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010*
visit Wal-Mart.
* Year to date (through 10/31/2010)
Wal-Mart’s bigger opportunity,
however, lies overseas. Given its retailing
expertise, WMT is likely to be successful in
many international markets. In 2010, foreign
operations accounted for 26% of sales. The
firm operates stores in 14 foreign countries,
under 46 different banners, with multiple sizes
and formats.
Stores Outside the U.S.
South
America
18%
Mexico
36%
Central
America
12%
WMT’s greatest foreign success has come in
developing countries, particularly Mexico and
the rest of Latin America. In these markets,
consumers are drawn to the firm’s low prices.
Wal-Mart has over 1400 stores in Mexico,
plus 1200 in Central and South America. The
firm has experienced less success in first-
4
Check Capital Management Inc.

Costa Mesa, CA.
UK
9%
Canada
8%
Japan
9%
China
7%
Other
1%

(714) 641-3579
(800) 710-5777
world nations, where it faces more entrenched competition. It exited the German and South
Korean markets in 2006 and has since focused on emerging-market opportunities.
The company has utilized acquisitions to enter some foreign markets. In 2006, Wal-Mart
acquired a 35% stake in Taiwanese retailer Trust-Mart to help WMT’s operation in mainland
China. It has made similar acquisitions in Brazil, India and Chile over the past five years. The
company is currently in talks to buy South Africa’s Massmart for $4 billion. Wal-Mart added
532 new overseas stores in 2009 and now has over 4200 outside the U.S. The company is
gaining share in almost all of these markets.
FINANCIAL METRICS
Key Statistics
As the graph at right shows, WalMart’s key financial metrics have
remained very consistent over the
past decade. Its efficient operating system enables it to earn an
enviable return-on-capital (14%)
despite its low net margin.
Management’s most important
decision will be how to allocate
the company’s enormous cashflow. Choosing to reduce capital
expenditures and spend more on
share repurchases and dividends is
a conservative choice.
Since
2000, Wal-Mart’s share count has
declined 18%. Meanwhile, the
firm’s debt load remains reasonable at 35% of total capitalization.
(trailing four quarters ending 10/31/2010)
Revenue Net Income Debt
$416B
$14.9B
$40.8B
EPS
$3.98
Net Margin
3.5%
ROC
14.1%
Operating Metrics
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
2000
2001
2002
2003
2004
Return on Capital
2005
2006
2007
2008
2009
Net Margin
The bar chart on the next page shows that WMT has returned a large portion of its cashflow to
shareholders. Since 2006, Wal-Mart has distributed 77% of its earnings to shareholders in the
form of dividends and share repurchases. Thus far in 2010 the company has earned $9.6B and
returned $14.3B to shareholders through dividends ($3.3B) and share buybacks ($11.0B). It has
been able to do this due to strong cashflow and improved capital management.
VALUATION
Wal-Mart’s competitive advantages are strong and its business is recession-resistant. However,
its growth opportunities remain uncertain. The firm needs to prove that it can maintain its excellence, now that most of its growth will come from foreign markets. The management team is
very experienced and stable, increasing the likelihood that its operational success will continue.
5
Check Capital Management Inc.

Costa Mesa, CA.

(714) 641-3579
(800) 710-5777
Wal-Mart stock hit a high of $70
(with a P/E ratio of 55) in 1999.
Since then, the company’s EPS has
increased 216% while the stock has
declined 21%. Shares now trade for
under 14 times earnings and pay a
2.2% dividend. As the graphs below indicate, WMT is very near the
bottom of its long-term valuation.
The risk/return tradeoff appears
attractive in light of Wal-Mart’s
consistent success and its stock’s
historically low valuation. Given
the company’s strengths, management’s focus on shareholder value
and a seemingly underpriced stock,
owners should be rewarded over
time.
Money Returned to Shareholders (in $ billions)
$20
$18
$16
$14
$12
$10
$8
$6
$4
$2
$0
2006
2007
2008
Buybacks + Dividends
2009
2010*
Net Income
* Expected Results in 2010
$70
$60
$50
Price
15 times Earnings Per Share
$40
$30
$20
$10
$0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
50
P/E Ratio
40
30
20
10
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
CCM Research Reports are for informational purposes only and are not an offer to sell or a solicitation to buy.
They are not personal recommendations for any particular investor and do not take into account the financial
circumstances of any individual investor. Check Capital, or one of its officers, may have a position in the securities
discussed and may purchase or sell such securities from time to time. CCM Research Reports are created using
third-party data. While Check Capital believes such third-party information is reliable, we do not guarantee its
accuracy, timeliness or completeness.
6
Check Capital Management Inc.

Costa Mesa, CA.

(714) 641-3579
(800) 710-5777