Wal-Mart’s Financial Performance for the Last 5 Years
Wal-Mart Stores, Inc. (NYSE: WMT) is world’s largest retailer for sales and in US it accounts for about 7.5% and 21% of the total consumer expenditure on groceries and retail goods respectively. In 2008, Wal-Mart’s sales revenue was around 406 billion dollars. Wal-Mart has a strong reputation as a discount store, providing merchandise and services at everyday low prices (“EDLP”) however their markups remain low. Majority of Walmart’s revenue comes from groceries, health and beauty products. They further continue to use EDLP as the drive to increasing sales and encouraging customers to continue purchasing from them. Even tough Walmart fell to the second place their customers maintained their loyalty and emerged as a rare recession buster and continued growing the sales in a positive direction against their competitors like Target. This led to an increase in their revenue by 7.2% from 2008 and maintaining a growth rate around 30% until 2009.
The domestic stores segments were responsible for 63.7% of revenues & 79.6% of operating income for 2009 whereas the international stores were responsible for 24.6% of revenues and 21.7% of operating income in 2009. During the same year they observed an increase of 3.5% in domestic sales and 9.1% in international sales compared to the previous years. In 2009, Walmart’s sales saw a 43% increase since 2005 and a 23.7% gross margin. This increase was due to the expansion of stores globally and a positive sales growth for the last 10 years. Furthermore, Sam’s club (Walmart’s Membership card) contributed 11.7% to revenues and 7.4% to operating income in 2009. It totally generated 46.8 billion which forms 5.6% increase from 2008.
Essential Ratio Analysis for a 5 Year Period
1. Current ratio
It measures a company’s ability to pay off debts as they become due and is equal to current assets divided by current liabilities. In case of Walmart this ratio is relatively low because of the high current liability amounts. It remained at around 0.88-0.9 for the period of 5 years.
2. Acid-test ratio
Is equal to quick assets divided by current liabilities. This is also a relatively low ratio and is around 0.16-0.2 due to high current liabilities during a year.
3. Total Debt ratio
Is the ratio of total liabilities to total assets. Wal-Mart’s debt ratio was around 60% as a result of the high amount of long-term debt. The increase in shareholder’s equity indicates a positive outlook for the future.
4. ROI (return on investment)
Is calculated by dividing net income by average total assets. The average ROI is usually 8-12% and Wal-Mart’s ROI is around 8%.
5. ROE (return on equity)
Is equal to net income divided by average owner’s equity. Wal-Mart’s ROE is around 20 % in the five year period whereas the average ROE for American companies is around 10-15%.
6. Profit Margin
Is calculated as the amount of profit earned per dollar of sales. Wal-Mart’s profit margin over a five years period has been slightly over 3%.
7. Net income
Though the net income has been increasing steadily, it slowed a little in 2008 as a result of the global economic slowdown. Factors such as the ability of the company to pay its creditors, times interest earned, has also decreased slightly since 2005. The main reasons being the company’s increased amounts of long term debt and interest associated with it. The number of a days’ sales in accounts receivable indicates that the numbers overall are very good. Accounts receivable settled quickly because Walmart’s customers use credit cards to make purchases.
8. NDS in inventory
Has been declining since 2005 and is an indication of better inventory management. Walmart has to maintain high NDS in inventory in order to provide a good variety of goods.
9. Property, plant and equipment turnover
Wal-Mart requires many locations, distribution centres and transportation equipment for success of its business. There hasn’t been many changes in this turnover however the sales have been steadily increasing and so has the average PPE.
10. Earnings per share (EPS)
This is one of the most important factor to be considered while determining a share’s price. Their EPS and stock price growth has remained steady for the 5 year period. The EPS increased from 2.46 in 2005 to 3.35 in 2009.
Cash flow from operations has been steadily increasing in the five year period provided for analysis. In all five years presented cash flow from operations has exceeded net income. Wal-Mart has been investing in international operations and the amounts invested are increasing steadily while making payments for property, equipment, etc. Net cash used in investing activities has decreased since 2008. Theamounts of cash used in financing activity have been increasing steadily in the time frame presented butWal-Mart has decreased commercial paper amounts, paying of long term debt, paying dividends and has alarge stock repurchase program.Although we see net decrease in cash and cash equivalents in fiscal 2008 (2,198 million), whichwas mostly due to large amounts spent on the stock repurchase and payment of long-term debt, cash andcash equivalents amounts are positive at the end of each of the five years presented for analysis.
There’s a quote that earlier used to go by ‘As goes General Motors, so goes the nation,’ which is now by ‘As goes Wal-Mart (WMT), so goes the nation.’
This quote clearly explains how massive the company has gotten considering the fact there’s a Walmart in almost every neighbourhood. But in order to bring in more customers and retain the older ones they need to come up with more creative ideas. We also see that their sales increase has also been slightly declining from (1-2%) their previous forecasts. The analysts of the company had expected the revenue to go up by 1.1% while the company itself was wishful for growth of 4- 6% for their company, and for the square footage growth the next year. In the following years they saw the opening of 75% new stores focused on countries such as Mexico, China and Central America. The company holds large capital value in the consumer services area. Large capital value (also known as large market capitalization) is a term used by investors to describe a company with market capitalization value more than $10 billion. This value is calculated by multiplying the number of shares outstanding by its stock price per share. Walmart is expected to exceptionally outperform the rest in the market on this value over a period of 6 months carrying very low risks. Walmart purchases a majority of their entire inventory from China every year.
Due to them being dependent on the Chinese manufacturers, they are very vulnerable to the fluctuations in the value for $ than for Chinese Yuan, Therefore, if the value of dollars falls compared to Yuan, their Chinese imports will rise. So in such a case Walmart would have to settle for lower margins which in turn will reduce their profits. Walmart is also has to put up with the pressure from politicians, lawsuits attacking the company for various issues, labour groups, and their impact on the smaller businesses. All of this would adversely affect their reputation and their ability to expand to newer customer and market groups.
But even through all this Walmart has been experiencing a steady growth in the past 5 years. The ratios mentioned earlier didn’t change much and the recession that came in at 2008 changed a lot of things. While the company experienced this, their direct competitors such as Target and K-Mart didn’t get to enjoy in the same way as they were seeing decline in their sales making it hard for them as retailers that year whereas Walmart’s sales kept increasing. Their bottom line sales rose to 5.9% that same year. All this just proves that Walmart has a ravensious desire for growth and though they have been tested through multiple challenges, they still manage to thrive.
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