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WMT AT A GLANCE

P/E ► 14.5 AVG EV/EBITDA ► 8.25 AVG ROA ► 9% AVG ROE ► 20.2% AVG Debt to Equity ► 1.52 AVG Current Ratio ► 0.857 VERY LOW Interest Coverage Ratio ► 14.4 AVG

 

 

 

 

 

 

Wal-Mart Stores, Inc. (NYSE: WMT) is the world's largest retailer and grocery chain by sales, and in the U.S. it accounts for 7.5% and 21% of consumers' total annual expenditures on retail goods and groceries, respectively.^[1] Wal-Mart is so large that its 2008 sales were almost 50% more than its 7 closest competitors combined, including Target (TGT) and Sears Holdings (SHLD).^[2] Because of its mammoth size and buying power, Wal-Mart can buy its products at rock-bottom prices, exchanging high purchase volumes for low cost while passing the savings onto its customers. Many suppliers give in to Wal-Mart's pressure because they depend on the discount retailer for a majority of their sales. For example, Dial Corporation sells 28% of its manufactured goods to Wal-Mart annually, and would have to double its sales to its next nine customers to replace sales to Wal-Mart.^[3]

Conversely, however, Wal-Mart's reliance on Chinese-made imports makes the company vulnerable to a weakening dollar or strengthening of the Yuan. Wal-Mart purchases $27 billion of its merchandise directly from China every year,^[4] with many of its other inventory from companies like Mattel (MAT) coming indirectly from China. In fact, if Wal-Mart were a country, its imports are so substantial that it would be China's sixth largest export country.^[5]

Wal-Mart earned $401.2 billion in revenue in 2009, a 7.2% increase from 2008.^[6] The company operates 7,873 stores worldwide, with over 3,000 of them in international markets, where the company has grown its presence at an average annual rate of 30% between 2005 and 2009.^[7] Due to Wal-Mart's low prices, consumers gravitate to Wal-Mart stores during economic downturns. As a result, after the subprime lending crisis and 2007 Credit Crunch, Wal-Mart's comparable store sales increased by 3.5% in FY2009 (WMT recognizes its fiscal 2009 as the 12 month period ending January 31, 2009)^[6], better than higher-priced competitors like Target (TGT), which suffered from a 2.9% decline in comparable store sales in the same period.^[8]

Company Overview

Wal-Mart operates 8,900 stores across three business segments of retail stores worldwide that offer a wide array of general merchandise including groceries, apparel, electronics, and small appliances.^[7] In addition, the company is the world's largest retailer and grocery chain by sales.^[1] Over 54% of the company's stores are located in the United States, with the majority of international stores located in Central and South America and China.^[7] The company focuses on offering the lowest prices across its business segments, which together earned $401.2 billion in revenue in 2009, a 7.2% increase from 2008.^[6] Wal-Mart's largest business segment is its namesake Wal-Mart stores, which accounted for 63.7% of the company's revenue in 2009. The company also earns revenue through its Sam's Club and international business segments which accounted for 11.7% and 24.6% of the company's 2009 net revenue each, respectively.^[9]

Business Segments

Wal-Mart stores account for a majority of the company's revenue (64%) because most sales come from within the United States. ^[9]

Wal-Mart Stores (63.7% of Revenue, 79.6% of Operating Income)^[9]

Wal-Mart's 4,258 domestic namesake stores^[7] accounted for $255.7 billion of the company's revenue during fiscal year 2009 which was a 6.8% increase from sales from 2008. This moderate growth coincides with Wal-Mart Stores' 3.2% increase in comparable store sales in 2009, which is slightly higher compared to 1.0% growth in 2008 and 1.9% growth in 2007. Wal-Mart blames the slow growth in comparable store sales to declines in consumer spending, particularly in apparel categories as well as cannibalization caused by new store expansions. For example, if Wal-Mart builds a store relatively close to an already existing store, the new store might take away customers from the old store (a reason could be convenience) thus hampering comparable store sales -- this is cannibalization. Wal-Mart stores earned 49% of their revenue from grocery sales in 2009, with sales of entertainment, electronics, and toys a distant second at 13% of Wal-Mart stores' revenue.^[10] In 2010, the company plans to add 150 to 165 Wal-Mart Stores, 125 to 140 of which will be Wal-Mart Supercenters.^[7]

Wal-Mart stores come in one of three traditional formats:^[11][7]

• Supercenters average about 187,000 square feet in size and carry general merchandise and include a supermarket. Wal-Mart operated 2,612 Supercenters at the end of 2009, an additional 165 locations from 2008 which were primarily from conversions of Wal-Mart Discount Stores.
• Discount Stores average approximately 108,000 square feet in size and carry a wide assortment of general merchandise, but a limited assortment of food products. Wal-Mart operated 891 Discount Stores at the end of 2009, 80 fewer than a year before as the company converted 78 Discount locations into Supercenters.
• Neighborhood Stores are usually about 42,000 square feet in size and carry a limited assortment of general merchandise, but have a full supermarket. Wal-Mart operated 153 Neighborhood format stores at the close of 2009, an increase of 21 locations from 2008.

Wal-Mart is also the largest grocery store by sales and that segment produces 41% of revenues in Wal-Mart stores ^[10]

Sam’s Club (11.7% of Revenue, 7.4% of Operating Income)^[9]

Sam’s Club is Wal-Mart’s membership-only warehouse club, the second largest in America after Costco by sales. Under the membership-only system, customers pay $40 and business owners pay $35 annually for memberships to shop at Sam's Club stores.^[12] Like its parent company, Sam's Club main strategy is price leadership. The core customer base of Sam’s Club is comprised of small businesses, including convenience stores, restaurants, offices, daycares and schools, and motels. Sam’s Club management remains focused on growing this foundation and improving its relationships with small business owners. To this end, the company expanded its offerings of office furniture and restaurant supplies in 2006. The company also introduced services geared towards small business, such as prescription drug plans and worker’s compensation claims billing.

The company operated 602 Sam’s Club locations nationwide, which generated $46.8 billion in total sales during fiscal year 2009. This represents a 5.6% increase in sales from 2008 which is mainly due to a 4.8% increase in comparable store sales and 11 newly opened Sam's Club locations during 2009.^[12][9] Sam's Club stores earn revenue through the sale of bulk brand name merchandise including grocery items, electronics, and furniture, but also sells private-label merchandise under the Member's Mark, Bakers & Chefs, and Sam's club brands. In 2010, Wal-Mart plans to open 15-20 new Sam's Club locations nationwide.^[13]

Sundries and Food represent the majority of the revenue of Sam's Clubs because a majority of the customers that shop at those locations are small businesses ^[12]

Wal-Mart International (24.6% of Revenue, 21.7% of Operating Income) ^[9]

Wal-Mart operates international locations of its Wal-Mart and Sam's Club stores as well as other retail and supermarkets in Central and South America, Mexico, Canada, Japan, China, and the United Kingdom. Wal-Mart operated 3,121 international locations altogether, which generated $98.6 billion in revenue in 2009, a 9.1% increase from 2008 sales.^[9][7] As Wal-Mart begins to slow its square footage growth in the US, it is expected to turn to its international locations to continue real estate growth. As a result, the company plans to add 550 to 600 new international stores in 2010.^[13]

Wal-Mart has a large international base which extends from Japan to the UK to South America. Mexico and Canada, neighbors of the United States, account for a quarter of the company's international revenue^[7]

Business Growth

FY 2009 (ended January 31, 2009)^[6]

Wal-Mart's 2009 net sales were $401.2 billion, a 7.2% increase from 2008; furthermore it represented a 43% increase in sales since 2005. The company attributed its increase in revenues to global store expansions as well as positive annual comparable store sales growth since 1998. For example, international sales helped spur Wal-Mart's growth as sales abroad increased 9.1% in 2009 because of new store openings and increased customer traffic.^[9] Additionally in 2009, the company operated at a 23.7% gross margin, up slightly from 23.5% in 2008 and 23.4% in 2007.

Although Wal-Mart's sales continued to increase, its comparable store sales slumped in 2007 and 2008 primarily because of over-expansion and resulting cannibalization of Wal-Mart's stores as well as weakened consumer spending because of the 2007 Credit Crunch. Domestic comparable store sales increased 3.5% in 2009, compared to 1.6% in 2008, and 2% in 2007.^[9] The company estimated that opening new domestic stores led to an approximate 1.5% decline in comparable store sales during 2007 and 2008. As a result, in 2007 the company shifted focus to international expansion, particularly in areas without Wal-Mart stores. Approximately 75% of stores opened in 2009 were international stores and 550 to 600 new stores planned to open in 2010 are abroad.^[13]

Wal-Mart's operating income reached almost $23 billion in 2009, a 3.9% increase from 2008. This increase, however, failed to match Wal-Mart's 7.2% increase sales, particularly because of higher operating and expansion expenses in the Wal-Mart Stores and international businesses.^[10] In 2009, Wal-Mart Stores operating income increased 7.1%, compared to a 6.8% increase in sales; international sales increased 9.1%, but international net income only grew by 4.6%. Sam's Club stores, however, grew by 5.6% in sales and decreased -0.5% in operating income, because of increased expenses. Overall, Wal-Mart's operating expenses as a percentage of sales increased to 19.1% in 2009, up from 18.8% in 2008 and 18.6% in 2007, which in turn slowed the company's growth in operating income.^[10]

Q3 FY2010 (ended October 31, 2009)^[14]

• WMT's net income increased by 3.2% as compared with the previous-year fiscal quarter, rising to $3.25 billion. This increase was helped by better inventory management and cost cutting measures.

• Net sales were $99.4 billion in Q3 2010, up 1.1% from net sales of $98.3 billion in Q3 of last year. Net sales increased despite just a 0.4% decrease in same store sales. In addition, Sam's Club revenues were down 0.7% for the quarter as well.

• Comparable store sales fell 0.4% during the quarter compared to a 2.55% increase during the same quarter in 2009. The decrease in comparable store sales was attributed to a decrease in average transaction size per customer.

Trends and Forces

Manufacturing in China Makes Wal-Mart Vulnerable to Currency Rate Changes

Wal-Mart depends heavily on China for manufacturing its merchandise- Wal-Mart purchases approximately $27 billion of its inventory directly from China each year.^[4] Additionally, many of the company's suppliers like Mattel (MAT) manufacture their products in China, which in turn are sold in Wal-Mart stores. Wal-Mart's imports from China accounted for 15% of total U.S. consumer products imports in 2007^[15], and accounted for 11% of the total U.S. trade deficit with China between 2001 and 2006.^[4] Wal-Mart's imports are so substantial in fact, that if Wal-Mart were a country, it would be China's sixth-largest export market.^[5] By outsourcing to China, Wal-Mart is able to secure lower costs of inventory, which the company in turn passes on to low prices for customers.

However, as a result of its dependency on Chinese manufacturing, Wal-Mart is vulnerable to fluctuations in the value of the dollar compared to the Chinese Yuan. In June 2009, exchange rate was $1 = 6.8 Yuan,^[16] which was down from record levels of $1 = 8 Yuan in May 2006 ^[17] If, for example, the dollar weakens compared to the Yuan, the price of Wal-Mart's chinese imports would rise. As a result, the company would either have to raise its prices or would have to cope with narrowed gross margins, reducing its profitability. Additionally, the company is vulnerable to adverse legislation, such as higher tariffs, that would raise the cost of its Chinese imports.

Wal-Mart Uses Large Size to Maintain Low Cost Leadership

Wal-Mart is the largest retailer in the world by sales, with almost 50% higher sales than its 7 closest competitors combined, including Target (TGT), Sears Holdings (SHLD), and Macy's Inc. (M).^[2] In fact, 7.5 cents of every dollar spent in any retail store in the U.S. (excluding auto parts stores) is earned by Wal-Mart.^[3] The retail giant also earns 21 cents of every dollar spent on groceries in the U.S., making Wal-Mart the most dominant retail and grocery chain in the world.^[18]

Wal-Mart uses its enormous size and buying power to pressure its suppliers into extremely low prices, offering orders of high volumes of merchandise in exchange for low prices. Wal-Mart then passes on these savings to its customers. Since many suppliers depend on Wal-Mart for a majority of its business, companies often give in to Wal-Mart's cost cutting demands, narrowing their margins or even redesigning their product offerings. For example, Dial Corporation sells 28% of its manufactured goods to Wal-Mart annually, and would have to double its sales to its next nine customers to replace sales to Wal-Mart.^[3]

Wal-Mart's bargaining power has helped the company maintain its low price leadership despite fluctuating commodities prices. For example, although prices of gasoline, grain, and dairy products have increased significantly during 2007 and 2008, Wal-Mart has actually reduced its prices on many food items by about 30% in 2008.^[1] Wal-Mart achieved this by pressuring companies like General Mills (GIS) to shave its costs by implementing redesigns of its products and packaging.

Too Many Stores Means Cannibalization Reduces Comparable Store Sales

Like any retailer, Wal-Mart’s long term sales and income growth depend in large part on the company’s ability to open new stores and expand into new markets. However, due to Wal-Mart’s size, it runs the risk of cannibalizing its own sales figures, effectively competing with itself for market share. For example, if Wal-Mart builds a store relatively close to an already existing store, the new store might take away customers from the old store (a reason could be convenience) thus hampering comparable store sales -- this is cannibalization. In 2009, Wal-Mart's comparable store sales increased 3.5%, compared to 1.6% in 2008 and 2.0% in 2007.^[9] The company attributes cannibalization for an approximate 1.1% decrease of comparable store sales as the company had oversaturated the domestic market with stores.

As a result of overexpansion domestically, Wal-Mart has transitioned to focusing on international expansion to markets with little or no presence of Wal-Mart stores. For example, 75% of new stores in 2009 were opened internationally, with the most growth occuring in Mexico, China, and Central America. Additionally, about 76% of Wal-Mart's planned stores for 2010 will be outside of the United States.^[13]

Wal-Mart Is Tailoring Merchandise Offerings by Region

In 2006, Wal-Mart began a three-year plan to make its stores more relevant to customers and shift away from its previous single-strategy model.^[19] The first phase of the plan involved the use of several experimental stores to study specific customer demographics, such as Hispanics, baby boomers, women, urban populations, and more affluent customers.^[20] The second year of the plan falls in line with the company's remodeling plans, and largely involves changes in merchandise assortment and store experience. This movement towards tailoring merchandise offerings by region, or even by store, is a marked change from Wal-Mart's previous, one-size-fits-all strategy. This new model may work to bolster Wal-Mart's lackluster same store sales figures.

Low-Income Customers Turn to Wal-Mart in Weakened Economy

Wal-Mart's main customer base has an average annual income of $35,000^[21], versus the overall U.S. median of $48,200.^[22] Wal-Mart has found success using its price leadership to take control of the low-end market and grow. However, its reliance on a poorer demographic makes the company vulnerable to the same macroeconomic trends that threaten its low-income customers, including rising health care costs, energy costs, interest rates, and a softening real estate market. These macro factors impact a greater percentage of the Wal-Mart customer's income than they do the average American's, affecting these customer's buying power and, therefore, the company's earning potential. Conversely, because of its position as a low-price provider, many value-driven consumers navigate to Wal-Mart during rough economic times. Programs like Wal-Mart's $4 Prescription Program attract consumers seeking a break from their economic woes. Launched in September 2006, Wal-Mart offers $4 prescriptions of over 350 generic medications at over 4,000 Wal-Mart locations worldwide.^[23] As of May 2008, Wal-Mart's $4 Prescription Program has saved its customers an estimated $1 billion. Wal-Mart's low price proposition is particularly crucial because of lower levels of consumer dispensable income following the 2007 Credit Crunch. As a result, consumers turned to cheaper options for their shopping needs. For example, comparable store sales of Wal-Mart stores increased by 3.5% in 2009^[6], while comparable store sales at rival competitor Target declined 0.4% during the same period.^[8]

Legal risks and public perception

Wal-Mart has faced considerable pressure from a number of politicians, labor groups, and lawsuits, attacking the company on issues such as employee wages and benefits, discrimination, and negatively impacting communities and small business. These actions, which are often well-reported by the media, affect Wal-Mart's reputation, which in turn could affect the company's ability to expand into new areas or attract new customers. The most prominent active lawsuit is Dukes v. Wal-Mart Stores, Inc., an $11 billion class action suit (the largest civil rights class action suit in US history) accusing Wal-Mart of discrimination against 1.6 million female employees.^[24] The lawsuit began in 2000 and as of July 2009 is still ongoing.

Competition

Domestic Competitors

Target (TGT) is Wal-Mart's most direct competitor, offering a range of general merchandise in a similar store format (standard Targets, with limited food offerings, compare to Wal-Mart's discount stores, and Supertargets compare directly to supercenters). Target’s major competitive advantage over Wal-Mart lies in its customer base: the average household income for Target customers is about $50,000 a year, whereas the average yearly income for a Wal-Mart customer is only $35,000^[21]. Finally, because of its focus on low prices, Wal-Mart has found it difficult to promote higher-quality items or private labels that come in at a higher price point; meanwhile, Target has had success with its quality-at-value-prices strategy among higher-income demographics, where price is not the only influence on sales. This higher-income customer base gives Target more stability than Wal-Mart, particularly as energy costs rise and the real estate market slows.

Kmart (SHLD), as the third discount retailer of the "Big Three", has seen steadily declining sales since 2000, losing considerable market share to both Wal-Mart and Target.

Other Retailers

As a large-scale retailer, Wal-Mart competes with a wide variety of other, specialized retailers, such as Safeway in groceries, Best Buy (BBY) in consumer electronics, and department stores such as Macy’s in apparel and home decor. Wal-Mart’s focus on price differentiation means that these companies, while competing in overall market share, are not necessarily competing for the same type of customer; however, in more volatile or price-sensitive markets, such as consumer electronics, discounters like Wal-Mart are able to leverage their pricing advantage and apply increasing pressure on other retailers.

Sam's Club directly competes with Costco Wholesale (COST) and BJ's Wholesale Club (BJ) in the warehouse club sector, where Costco has the advantage in terms of 2007 sales.

International Competitors

Wal-Mart's major international competitors are Britain's Tesco, France's Carrefour, and Germany's Metro. Each of these companies have a competing presence in China, the UK, and Japan, with Wal-Mart contending with at least one of them in many of its other markets. Metro also purchased Wal-Mart's German operations in 2006.^[28] In the second half of 2007, Tesco began expanding into the U.S. with plans to launch small-box format stores. In 2007, Tesco, Carrefour, and Metro earned $90.8 billion^[29], $99 billion^[30], and $86.6 billion^[31] in revenue each, respectively.

References

1. ↑ ^{1.0 1.1 1.2} CNN Money "Wal-Mart puts the Squeeze on Food Costs" 29 May 2008
2. ↑ ^{2.0 2.1} CNN Money Global 500 2008 List
3. ↑ ^{3.0 3.1 3.2} Fast Company "The Wal-Mart You Don't Know" Dec 2003
4. ↑ ^{4.0 4.1 4.2} Wal-Mart Watch "Both U.S. and China Lose in Wal-Mart's Global Economy"
5. ↑ ^{5.0 5.1} China Daily "Wal-Mart aims for 12-15 new China stores in 2005" 18 May 2005
6. ↑ ^{6.0 6.1 6.2 6.3 6.4 6.5 6.6} WMT 2009 10-K, Exhibit 13, pg. 1
7. ↑ ^{7.0 7.1 7.2 7.3 7.4 7.5 7.6 7.7} WMT 2009 10-K, Exhibit 13, pg. 46-47
8. ↑ ^{8.0 8.1 8.2} TGT 2008 10-K, pg. 13 and 26
9. ↑ ^{9.00 9.01 9.02 9.03 9.04 9.05 9.06 9.07 9.08 9.09 9.10} WMT 2009 10-K, pg. 4-5
10. ↑ ^{10.0 10.1 10.2 10.3} WMT 2009 10-K, Item 1, pg. 5
11. ↑ WMT 2009 10-K, Exhibit 13, pg. 3
12. ↑ ^{12.0 12.1 12.2} WMT 2009 10-K, Item 1, pg. 10
13. ↑ ^{13.0 13.1 13.2 13.3} WMT 2009 10-K, Exhibit 13, pg. 14
14. ↑ ^{14.0 14.1} WMT Q3 2010 Report
15. ↑ "Wal-Mart as Catalyst to U.S.-China Trade" April 2008
16. ↑ Yahoo Finance Currencies Center
17. ↑ China.org "US Dollar-Yuan Exchange Rate Hits Record 1:7.9982" 5/15/2006
18. ↑ Grist "Wal-Mart Comes to the Farmers Market 11 July 2008
19. ↑ MSNBC "Wal-Mart to Drop One-Size-Fits-All Approach" 7 Sept 2006
20. ↑ Supply Chain Digest "In Search of More Growth, Wal-Mart Follows Best Buy in Move to Tailor Stores to Individual Markets" 21 Sept 2006
21. ↑ ^{21.0 21.1} "Progressive Wal-Mart. Really" The Washington Post, 11/28/2005
22. ↑ U.S. Census Bureau Press Release 28 Aug 2007
23. ↑ Reuters "Wal-Mart Launches Phase Three of $4 Prescription Program" 5 May 2008
24. ↑ New York Times "Suing Wal-Mart but Still Hoping to Move Up" 23 June 2004
25. ↑ SHLD 2008 10-K, pg. 26-31
26. ↑ COST 2008 10-K, pg. 7
27. ↑ BJ 2008 10-K, pg. 15-16
28. ↑ International Herald Tribune "Wal-Mart gives up Germany - Business - International Herald Tribune" 29 July 2006
29. ↑ Forbes "Wal-Mart Takes On Tesco At Home" 14 Jan 2008
30. ↑ CNN Money "Fortune Global 500"
31. ↑ Metro Group Press Release 18 March 2008