WAL-MART
Invest Money. Live Better.
Introduction to Finance
February 2011
Emily Cray
FIN303C
Table of Contents
Welcome to Walmart ............................................................................................................ 3
Stock Analysis........................................................................................................................ 3
Financial Analysis: Net Income, Revenue, Profitability & Earnings .......................................... 4
Woops................................................................................................................................... 5
Company Risk: Analyst Recommendations ............................................................................. 5
Competition: Costco and Target ............................................................................................. 5
Projected Outlook ................................................................................................................. 6
Conclusion............................................................................................................................. 7
Figure 1: Dividend Growth .................................................................................................................................................. 8
Figure 2: Net Income .............................................................................................................................................................. 8
Figure 3: P/E Ratio v. Market ............................................................................................................................................. 9
Figure 4: Competitor Comparison .................................................................................................................................... 9
Welcome to Walmart
“Save Money. Live Better.” Four words. Two sentences. One, universal message. Wal-Mart Stores,
Inc. (NYSE: WMT) operates discount stores, supercenters and neighborhood markets in the services
sector of the discount, variety stores industry. Headquartered in Bentonville, AR, the company
operates nationally and internationally. Its markets offer “a full-line supermarket and a limited
assortment of general merchandise”. In addition to its large, discount department stores, it also
owns and operates the Sam’s Club retail warehouses, which have been very successful under
Walmart’s reign since opening in 1983. Walmart began expanding internationally in 1991: today its
international sector makes up about a quarter of the company’s revenue.
Walmart serves customers and members more than 200 million times per week at more than 8,900
retail units under 60 different banners in 15 countries. Walmart employs more than two million
associates worldwide. A leader in sustainability, corporate philanthropy and employment
opportunity, Walmart ranked first among retailers in Fortune magazine's 2010 Most Admired
Companies survey.
Twenty-seven years after opening its first location, 1,402 Walmart stores and 123 Sam’s Club
locations had been established. Sales had grown from $1 billion in 1980 to $26 billion within the
decade; and by 1990, Walmart had positioned itself as the nation’s number one retailer. In 1997, it
had become the nation’s leading employer with 680,000 associates and experienced its first $100
billion dollar sales year as total sales hit $105 billion. The following year, Walmart exceeded $100
million in annual charitable contributions, with donations totaling $102 million. In 2010, Walmart
was listed as number one on Fortune 500’s annual ranking of America’s largest corporations,
beating out big names like Exxon Mobile, Chevron, General Electric and more. Walmart’s revenues
nearly doubled that of the number two’s spot, gathering $408,214 million in revenue and $14,335
in profits. Walmart also claims the third spot on the Fortune 500’s most profitable companies list
(money.cnn.com, Bloomberg, walmartstores.com).
Stock Analysis
In 1970, Wal-Mart stock was offered for the first time on the New York Stock Exchange. Today,
Walmart has 3.66 billion shares outstanding; stock price closed at $53.67 as of Tuesday, February
22, 2011. Its market capitalization is $189.2 billion – ranked number one in the discount, variety
stores industry. The 52 week range, starting January 28, 2011, was $47.77-$57.90. Walmart’s
adjusted beta is .51, meaning Walmart’s asset returns generally follow that of the market’s and
company risk is low. Walmart pays an annual dividend of $1.21 per share, paid in quarterly
installments. Dividends with Walmart have seen a 15.06% growth in the past five years: an 11%
growth in just the past year (see Figure 1). Walmart’s huge market presence serves as a safety net;
its low beta score means low risk; their dividend means a nice source of income for the average
investor. Investing in Walmart is a safe and intelligent investment. It may not be a flashy stock, but
it’s a reliable one. (Bloomberg, yahoofinance.com).
Financial Analysis: Net Income, Revenue, Profitability & Earnings
As stated before, Walmart is ranked as the third most-profitable company on the Fortune 500 list –
and with good reason. Its performance is extraordinary for fiscal year 2010, partially due to
international success as sales in the US were hindered by a fragile economy. However, the
challenging US economy pairs nicely with Walmart’s mission to help customers “Save money, live
better” and allowed Walmart to perform as a haven for budget-constricted consumers during the
recession. International expansion will open up many more opportunities for global growth and
continue to generate revenue.
In 2010, Walmart reported a 22% increase in its profit because of stores cutting costs and slimming
down their inventories. Net income for 2010 was $14,335 billion. In fact, the company’s net income
has seen continual growth of at least one billion dollars each year since 2007 (see Figure 2). This
positive net income growth makes Walmart an attractive stock for potential investors.
In 2010, net sales for the full year topped $405 billion, with international net sales exceeding $100
billion for the first time. Walmart U.S. had record operating income of $19.5 billion. Free cash flow
performance closed the year impressively with $14.1 billion – an increase over 2009’s of almost 21
percent. The company returned $11.5 billion to shareholders through dividends and share
repurchases in 2010, a level of return that is 58% higher than the 2009 fiscal year.
Net profit margin shows what percent of each dollar from sales result in net income. In 2010, the
net profit margin was 3.51%, meaning Walmart made 3.51 cents for every dollar of sales. 2011’s
profit margin is currently 3.89%, making 3.89 cents for every dollar of sales. Walmart has a trailing
P/E ratio of 11.6, with an impressive forward P/E (for the year ending Jan 31, 2013) of 10.6. This
projected lower number means more earnings per share and outperforms that the market’s ratio
(see Figure 3). Walmart’s lower number means strong earnings for the company, making it more
bang for the investor’s buck (Bloomberg).
Woops.
In the wake of the recession, Walmart is slightly struggling to keep sales up as customers head to
higher-end stores with a little more cash in their pocket as the economy recovers. According to CEO
and President Mike Duke, “some of the pricing and merchandising issues ran deeper than we
initially expected, and they require a response that will take time to see results.” As part of its
“Project Impact” initiative, Walmart removed merchandise it deemed unprofitable from its shelves.
The company saw an increase in profit, but received backlash from loyal shoppers. In efforts to
attract consumers with higher incomes, Walmart’s apparel industry raised their prices and dropped
their larger sizes – a problem for budget-conscious and/or overweight shoppers. The food industry
introduced organic products - not exactly what the typical Walmart shopper was interested in.
Today, Walmart is going back to founding father, Mr. Sam Walton’s Winning Formula of “every day
low prices”. Bill Simon, president of Walmart U.S., said the retailer is adding more less-expensive
items in a bid to compete against dollar stores, but warned it could take until the fourth quarter of
this year to restore low-price merchandise in categories such as electronics. However, according to
analysts, Walmart’s “woopsie” translates into a buying opportunity (The Wall Street Journal).
Company Risk: Analyst Recommendations
While it is true Walmart’s overall sales have decreased, a rebound is in its future. Analysts’ mean
recommendation for the past two weeks (Feb 13-27, 2011) has been listed as a strong 2.0, meaning
the stock is a good buy (1 is a strong buy, 5 equals sell). Out of 3,368 analysts’ recommendations
found on Bloomberg, 19% reported to sell, 57% said to hold, and 24% recommended to buy the
stock. Of 31 analysts on Yahoo!Finance, 14 recommend Walmart stock as a strong buy, 4 as a buy,
12 as a hold, 1 as underperform and 0 to sell. Investment firms such as UBS, Credit Suisse, Wells
Fargo, The Buckingham Research Group and Citigroup have all recommended purchasing Walmart
stock. Company insiders and owners own 46% of Walmart stock. This translates into a high degree
of personal stake in their own business endeavors. Other top institutional holders of Walmart stock
include Vanguard, State Street, Black Rock and Berkshire Hathaway. These are very positive signs
for potential investors. High recommendations from accredited analysts, big-name investors
holding shares, and high company involvement with the stock points toward a strong future for
growth and increase in stock price (Bloomberg, yahoofinance.com).
Competition: Costco and Target
In North America, Walmart’s primary competition includes discount departments stores, mainly
Costco and Target. In its industry, Walmart is clearly the leader in market capitalization. When
directly compared to other US competitors, Walmart’s market cap, revenue, net income, P/E ratio,
and EPS figures leave competitors in the dust (see Figure 4). Their quarterly revenue growth is the
only area lacking when compared to Costco’s; however, they tie with Target. Costco is priced at
$73.57 and Target is priced at $52.36. Walmart falls in between (yahoofinance.com).
P/E ratio for Costco is 24.25; Target’s is 13.09. Both of these are above this analyst’s general
benchmark of a 12 P/E. This ratio means Target and Costco’s earnings per share price isn’t as
strong as Walmart’s. In other words, Costco’s stock price may be a higher value, but why pay for a
higher-priced stock when Walmart’s reports better earnings.
As the world’s number one retailer, Walmart has an incredible amount of power in the retail
industry. It is the world’s largest company in terms of revenues and employee base. Walmart has
many cost advantages through its tremendous buyer power, generated by its sheer size. Its
business model of offering a wide range of low-cost products in many different markets meets
convenience demands for customers. The company generates high customer satisfaction through
investing time and money into training employees. Walmart’s global expansion has exponentially
increased its growth and control as well as profits and sales. Walmart is consistently able to
eliminate competition through setting low prices and subsequently driving competition out of
business. This highly efficient business model will continue to be as successful in the future as it has
been in the past.
Projected Outlook
Walmart is “positioning for the next generation”. Walmart expects to grow total company square
footage between three and four percent the next fiscal year. Projected Walmart U.S. and Sam’s Club
units include expansions, relocations and conversions of traditional discount stores to supercenters
without any change in square footage to the actual unit. Three new formats will be introduced to
help them enter into new markets. “The large format is our supercenter, which sells a broad
assortment of groceries and general merchandise. We have integrated efficiencies into our
supercenter design that have allowed us to decrease the average square footage for our
supercenter format. The medium format, between 30,000 and 60,000 square feet, will be based on
the needs of an individual market. The small format, which is less than 30,000 square feet, will be
targeted to urban markets and small towns,” said Bill Simon, Walmart U.S. president and CEO.
Already a titan in the United States, Walmart has expanded overseas to find holes in markets to help
people “save money, live better”. Walmart’s international expansion has been highly successful in
the UK, South America and China. Their global footprint has stepped into 15 countries outside the
continental U.S. Today, Walmart International is a fast-growing part of Walmart’s overall
operations. They’ve created stores with “different styles and formats to fit in with local customer
needs, desires and customs”. Walmart is headed towards becoming a boundary-less, global titan of
a corporation. Its current path foresees even more power, profits and expansion
(investors.walmartstores.com).
Conclusion
Walmart is an iconic U.S. brand. Whether found down the block or across the world, it’s message to
help people “save money, live better” translates to every human being. The world’s biggest retailer
may have slipped temporarily; however, according to professional analysts, 2011 is the time to
invest in Walmart. After getting back to their roots, Walmart will recover within the next few years.
When looking at the macro view of the world’s biggest retailer, the company’s efficiency, economic
power and international recognition, investors are attracted to an investment in a safe, quality
stock.
Figure 1: Dividend Growth
Figure 2: Net Income
Figure 3: P/E Ratio v. Market
Figure 4: Competitor Comparison
Sources:
Bloomberg
The Wall Street Journal
www.cnn.money.com
www.walmartstores.com
www.yahoofinance.com