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PROFITABILITY AND RISK ANALYSIS OF WAL-MART STORES
Part A
Wal-Mart Stores (Walmart) is the world’s largest retailer. It employs an “everyday low price” strategy and operates stores as three business segments: Wal-Mart Stores U.S., International, and Sam’s Club.
1. Wal-Mart Stores U.S.: This segment represented 63.7 percent of all 2008 sales and oper- ates stores in three different formats: Discount stores (approximately 108,000 square feet), Supercenters (approximately 186,000 square feet), and Neighborhood Markets (approximately 42,000 square feet). Each format carries a variety of clothing, house- wares, electronic equipment, pharmaceuticals, health and beauty products, sporting goods, and similar items, and Supercenters including a full-line supermarket.40 Wal- Mart U.S. Stores are in all 50 states, Discount stores are in 47 states, Supercenters are in 48 states, and Neighborhood Markets are in 16 states. Customers also can purchase many items through the company’s website at http://www.walmart.com.
2. International: The International segment includes wholly owned subsidiaries in Argentina, Brazil, Canada, Japan, Puerto Rico, and the United Kingdom; majority- owned subsidiaries in five countries in Central America, Chile, and Mexico; and joint ventures in India and China. The merchandising strategy for the International segment is similar to that of the Walmart U.S. segment.
3. Sam’s Clubs: Sam’s Clubs are membership club warehouses that operate in 48 states. The average Sam’s Club is approximately 133,000 square feet, and customers can purchase
40Walmart’s fiscal year ends at the end of January of each year. Despite Walmart’s convention of referring to its year ending January 31, 2009, as its fiscal 2009, we follow the common practice of referring to it as 2008 because 11 of the 12 months fall within 2008. This same convention holds true for Carrefour and Target in Part B of this case.
many items through the company’s website at http://www.samsclub.com. These ware- houses offer bulk displays of brand name merchandise, including hardgoods, some softgoods, institutional-size grocery items, and certain private-label items. Gross mar- gins for Sam’s Clubs stores are lower than those of the U.S. and International segments.
Walmart 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 2008, the proportion of merchandise channeled through its regional distribu- tion centers was as follows:
|
Walmart Stores, Supercenters, and Neighborhood Markets |
81% |
|
Sam’s Club (non-fuel) |
65% |
|
International |
74% |
Exhibit 4.48 sets out various operating data for Walmart for its most recent three years. Exhibit 4.49 presents segment data. Exhibit 4.50 presents comparative balance sheets for Walmart for 2005–2008 (an extra year to enable average balance computations when nec- essary), Exhibit 4.51 (see page 338) presents comparative income statements for 2006–2008, and Exhibit 4.52 (see page 339) presents comparative statements of cash flows for 2006–2008. Exhibit 4.53 (see page 340) presents selected financial statement ratios for Walmart for 2006–2008. The statutory income tax rate is 35 percent.
Fiscal Year:
2008 2007 2006
|
Number |
3,656 |
3,550 |
3,443 |
|
Square Footage (millions) |
589.3 |
566.6 |
540.4 |
|
Sales per Square Foot |
$ 433.98 |
$ 422.75 |
$ 418.75 |
|
Operating Income per Square Foot |
$ 31.84 |
$ 30.91 |
$ 30.76 |
|
International Number |
3,615 |
3,098 |
2,734 |
|
Square Footage (millions) |
251.8 |
222.6 |
188.4 |
|
Sales per Square Foot |
$ 391.76 |
$ 406.20 |
$ 383.04 |
|
Operating Income per Square Foot |
$ 19.62 |
$ 21.23 |
$ 18.76 |
|
Sam’s Club (Domestic) Number |
602 |
591 |
579 |
|
Square Footage (millions) |
79.9 |
78.2 |
76.3 |
|
Sales per Square Foot |
$ 586.41 |
$ 567.23 |
$ 544.98 |
|
Operating Income per Square Foot |
$ 20.15 |
$ 20.69 |
$ 19.40 |
|
Domestic Comparable Store Sales Increase |
3.5% |
1.6% |
2.0% |
Sales Mix
Walmart Discount Stores, Supercenters,
2008 2007 2006
and Neighborhood Markets 63.7% 64.0% 65.6%
International 24.6 24.1 22.3
Sam’s Club 11.7 11.9 12.1
100.0% 100.0% 100.0%
|
Operating Profit Margin |
7.3% |
7.3% |
7.3% |
|
Assets Turnover |
3.0 |
2.8 |
2.9 |
|
ROA |
22.2% |
20.8% |
21.0% |
|
International Operating Profit Margin |
5.0% |
5.2% |
5.5% |
|
Assets Turnover |
1.6 |
1.5 |
1.4 |
|
ROA |
8.2% |
7.6% |
7.8% |
|
Sam’s Club Operating Profit Margin |
3.4% |
3.6% |
3.6% |
|
Assets Turnover |
3.8 |
3.8 |
3.6 |
|
ROA |
13.0% |
13.8% |
12.9% |
2008 2007 2006 2005
|
ASSETS |
|
||||||
|
Cash and cash equivalents |
$ 7,275 |
|
$ 5,492 |
|
$ 7,373 |
|
$ 6,193 |
|
Marketable securities |
|
|
|
|
|
|
|
|
Accounts receivable—Net |
3,905 |
|
3,642 |
|
2,840 |
|
2,575 |
|
Inventories |
34,511 |
|
35,159 |
|
33,685 |
|
31,910 |
|
Prepaid expenses and other current assets |
3,063 |
|
2,760 |
|
2,690 |
|
2,468 |
|
Current assets of discontinued segments |
195 |
|
967 |
|
— |
|
679 |
|
Current Assets |
$ 48,949 |
|
$ 48,020 |
|
$ 46,588 |
|
$ 43,825 |
EXHIBIT 4.50 (Continued)
2008 2007 2006 2005
Long-term investments — — — 1,884 Property, plant, & equipment—At cost 131,161 127,992 115,190 100,929
Accumulated depreciation (35,508) (31,125) (26,750) (23,064)
Goodwill and nonamortizable intangibles 18,827 18,627 16,165 14,613
Total Assets $163,429 $163,514 $151,193 $138,187
|
LIABILITIES AND EQUITIES Accounts payable—Trade |
$ 28,849 |
$ 30,344 |
|
$ 28,090 |
|
$ 25,101 |
|
Current accrued liabilities |
18,112 |
15,725 |
|
14,675 |
|
13,274 |
|
Notes payable and short-term debt |
1,506 |
5,040 |
|
2,570 |
|
3,754 |
|
Current maturities of long-term debt |
6,163 |
6,229 |
|
5,713 |
|
4,879 |
|
Income taxes payable |
760 |
1,140 |
|
706 |
|
1,817 |
|
Current Liabilities |
$ 55,390 |
$ 58,478 |
|
$ 51,754 |
|
$ 48,825 |
|
Long-term debt |
34,549 |
33,402 |
|
30,735 |
|
30,096 |
|
Deferred tax liabilities—Noncurrent |
6,014 |
5,087 |
|
4,971 |
|
4,630 |
|
Total Liabilities |
$ 95,953 |
$ 96,967 |
|
$ 87,460 |
|
$ 83,551 |
|
Minority interest |
$ 2,191 |
$ 1,939 |
|
$ 2,160 |
|
$ 1,465 |
|
Common stock + paid-in capital |
4,313 |
3,425 |
|
3,247 |
|
3,013 |
|
Retained earnings |
63,660 |
57,319 |
|
55,818 |
|
49,105 |
|
Accum. other comprehensive income (loss) |
(2,688) |
3,864 |
|
2,508 |
|
1,053 |
|
Common Shareholders’ Equity |
$ 65,285 |
$ 64,608 |
|
$ 61,573 |
|
$ 53,171 |
|
Total Liabilities and Equities |
$163,429 |
$163,514 |
|
$151,193 |
|
$138,187 |
Required
a. What are the likely reasons for the changes in Walmart’s rate of ROA during the three-year period? Analyze the financial ratios to the maximum depth possible.
b. What are the likely reasons for the changes in Walmart’s rate of ROCE during the three-year period?
Note: Parts c and d require coverage of material from Chapter 5.
c. How has the short-term liquidity risk of Walmart changed during the three-year period?
d. How has the long-term solvency risk of Walmart changed during the three-year period?
Part B
Part A of Case 4.2 analyzed the profitability and risk of Wal-Mart Stores for its fiscals 2006, 2007, and 2008. Part B of this case compares the profitability and risk ratios of Walmart and two other leading discount retailers, Carrefour and Target, for their 2006–2008 fiscal years.
Carrefour, headquartered in France, is Europe’s largest retailer and the second-largest retailer in the world. Sales in 2008 totaled €86,967 million (approximately $118,000 million).
|
2008 |
2007 |
2006 |
|
|
Revenues $ 405,607 |
$ 378,476 |
$ 348,368 |
|
|
Cost of goods sold |
(306,158) |
(286,350) |
(263,979) |
|
Gross Profit |
$ 99,449 |
$ 92,126 |
$ 84,389 |
|
Selling, general, and administrative expenses |
(76,651) |
(70,174) |
(63,892) |
|
Operating Profit |
$ 22,798 |
$ 21,952 |
$ 20,497 |
|
Interest income |
284 |
309 |
280 |
|
Interest expense |
(2,184) |
(2,103) |
(1,809) |
|
Income Before Tax |
$ 20,898 |
$ 20,158 |
$ 18,968 |
|
Income tax expense |
(7,145) |
(6,889) |
(6,354) |
|
Minority interest in earnings |
(499) |
(406) |
(425) |
|
Income (loss) from discontinued operations |
146 |
(132) |
(905) |
|
Net Income (Computed) |
$ 13,400 |
$ 12,731 |
$ 11,284 |
|
Other comprehensive income items |
(6,552) |
1,356 |
1,575 |
|
Comprehensive Income |
$ 6,848 |
$ 14,087 |
$ 12,859 |
Carrefour is organized by geographic region (France, Europe excluding France, Asia, and Latin America). Each segment is organized according to store formats, which include the following (2008 number of stores and sales mix percentages in parentheses):
Hypermarkets (203; 62%): Offer a wide variety of household and food products at competitively low prices under the Carrefour store brand
Supermarkets (590; 22%): Sell traditional grocery products under the Champion, Norte, GS, and GB supermarkets and other store brands
Hard Discount Stores (842; 11%): Offer a limited variety of food products in smaller stores than those of hypermarkets and supermarkets at aggressively low prices under the Dia, Ed, and Minipreco store brands
Other activities (9; 5%): Includes convenience stores and wholesale stores, the latter targeted at business customers, under the SHOPI, Marche Plus, 8 A Huit, express, Contact, and Proxi store brands
Carrefour derived approximately 44 percent of its 2008 sales in France, 37 percent in Europe excluding France, 12 percent in Latin America, and 7 percent in Asia.
Target Corporation, headquartered in the United States, operates two reportable segments: retail and credit card. The retail segment includes all merchandising operations, including large-format general merchandise and food discount stores as well as an online business at
|
STATEMENT OF CASH FLOWS |
2008 |
2007 |
2006 |
|
Net income |
$ 13,400 |
$ 12,731 |
$ 11,284 |
|
Add back depreciation and amortization expenses |
6,739 |
6,317 |
5,459 |
|
Deferred income taxes |
581 |
(8) |
89 |
|
(Increase) Decrease in accounts receivable |
(101) |
(564) |
(214) |
|
(Increase) Decrease in inventories |
(220) |
(775) |
(1,274) |
|
Increase (Decrease) in accounts payable |
(410) |
865 |
2,132 |
|
Increase (Decrease) in other current liabilities |
2,036 |
1,034 |
588 |
|
Other addbacks to net income |
|
|
|
|
Other subtractions from net income |
(146) |
132 |
860 |
|
Other operating cash flows |
1,268 |
910 |
1,311 |
|
Net Cash Flows from Operations |
$ 23,147 |
$ 20,642 |
$ 20,235 |
|
Proceeds from sales of property, plant, and equipment |
$ 714 |
$ 957 |
$ 394 |
|
Property, plant, and equipment acquired |
(11,499) |
(14,937) |
(15,666) |
|
Investments sold |
781 |
|
267 |
|
Investments acquired |
|
(95) |
|
|
Other investment transactions |
(1,576) |
(1,338) |
(68) |
|
Other |
838 |
(257) |
610 |
|
Net Cash Flows from Investing Activities |
$(10,742) |
$(15,670) |
$(14,463) |
|
Increase in short-term borrowing |
|
$ 2,376 |
|
|
Decrease in short-term borrowing |
$ (3,745) |
|
$ (1,193) |
|
Increase in long-term borrowing |
6,566 |
11,167 |
7,199 |
|
Decrease in long-term borrowing |
(5,739) |
(9,066) |
(6,098) |
|
Share repurchases—Treasury stock |
(3,521) |
(7,691) |
(1,718) |
|
Dividend payments |
(3,746) |
(3,586) |
(2,802) |
|
Other financing transactions |
267 |
(622) |
(510) |
|
Net Cash Flows from Financing Activities |
$ (9,918) |
$ (7,422) |
$ (5,122) |
|
Effects of exchange rate changes on cash |
(781) |
252 |
97 |
|
Net Change in Cash |
$ 1,706 |
$ (2,198) |
$ 747 |
|
Cash and Cash Equivalents, Beginning of Year * |
$ 5,492 |
$ 7,373 |
$ 6193 |
* The amounts do not reconcile with the balance sheet presentation because Walmart reclassified cash and equivalents applicable to discontinued operations.
http://www.target.com. Target stores offer a wide variety of clothing, household, electronics, sports, toys, and entertainment products at discount prices. Target stores attempt to differ- entiate themselves from Walmart’s discount stores by pushing trendy merchandising with more brand-name products. Target emphasizes customer service, referring to its customers as “guests” and focusing on the theme of “Expect More, Pay Less.” Target Corporation
Wal-Mart Stores
Financial Ratio Analysis (Case 4.2, Part A)
|
|
|
Fiscal Year: |
|
|
2008 |
2007 |
2006 |
|
|
Profitability Ratios ROA |
9.3% |
9.3% |
9.5% |
|
Profit Margin for ROA |
3.7% |
3.9% |
4.0% |
|
Assets Turnover |
2.5 |
2.4 |
2.4 |
|
Cost of Goods Sold/Sales |
75.5% |
75.7% |
75.8% |
|
Selling and Administrative Expense/Sales |
18.9% |
18.5% |
18.3% |
|
Interest Expense (net of taxes)/Sales |
0.3% |
0.4% |
0.3% |
|
Income Tax Expense (excluding tax effects of interest expense)/Sales |
2.0% |
2.0% |
2.0% |
|
Accounts Receivable Turnover |
107.5 |
116.8 |
128.7 |
|
Inventory Turnover |
8.8 |
8.3 |
8.0 |
|
Fixed Assets Turnover |
4.2 |
4.1 |
4.2 |
|
ROCE |
20.4% |
20.4% |
21.2% |
|
Profit Margin for ROCE |
3.3% |
3.4% |
3.5% |
|
Capital Structure Leverage |
2.5 |
2.4 |
2.4 |
|
Risk Ratios Current Ratio |
0.88 |
0.82 |
0.90 |
|
Quick Ratio |
0.20 |
0.16 |
0.20 |
|
Accounts Payable Turnover |
10.3 |
9.9 |
10.0 |
|
Cash Flow from Operations to Current Liabilities Ratio |
40.7% |
37.5% |
40.2% |
|
Long-Term Debt Ratio |
34.6% |
34.1% |
33.3% |
|
Total Liabilities/Total Assets Ratio |
58.7% |
59.3% |
57.8% |
|
Cash Flow from Operations to Total Liabilities Ratio |
24.0% |
22.4% |
23.7% |
|
Interest Coverage Ratio |
10.6 |
10.5 |
11.0 |
attempts to differentiate itself from competitors by providing wider aisles and a less cluttered store appearance. At the end of fiscal 2008, Target Corporation operated 1,682 stores and 34 distribution centers. The credit card segment offers branded proprietary credit cards under the names Target Visa and the Target Card. For 2008, total revenues were $64,948, consist- ing of retail sales of 62,884 and credit card revenues of $2,064.
Exhibits 4.54 and 4.55 (see page 342) present profitability ratios for Carrefour, Target, and Walmart for their 2006–2008 fiscal years. Exhibit 4.56 (see page 343) presents risk ratios for the three firms. Exhibit 4.57 (see page 344) presents selected other data for these firms. The financial statements include the present value of commitments under all leases in property, plant, and equipment and in long-term debt.
|
for Carrefour, Target, and Walmart (Case 4.2, Part B) |
||||||||
|
|
|
ROA |
|
|
|
|||
|
|
2008 |
2007 |
2006 |
|
|
|||
|
Carrefour |
3.0% |
4.4% |
4.5% |
|
|
|||
|
Target |
6.0% |
7.8% |
8.6% |
|
|
|||
|
Walmart |
9.3% |
9.3% |
9.5% |
|
|
|||
|
Profit Marg |
in for ROA |
|
|
|
Assets Turnover |
|
|
|
|
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Cost of Goods
Selling and
*Amounts do not sum because Profit Margin for ROA is reduced by taxes on operating profits, which do not equal total taxes reported on the income statement.
Cross-Section ROCE Profitability Analysis
for Carrefour, Target, and Walmart (Case 4.2, Part B)
|
|
|
ROCE |
|
|
2008 |
2007 |
2006 |
|
|
Carrefour |
14.8% |
24.6% |
27.2% |
|
Target |
15.3% |
18.4% |
18.7% |
|
Walmart |
20.4% |
20.4% |
21.2% |
|
|
|
|
|
||||
|
Profit Margin for ROCE |
|
Assets Turnover |
|
Capital Structure Leverage |
|||
|
|
2008 |
2007 |
2006 |
2008 |
2007 |
2006 |
2008 |
2007 |
2006 |
|
Carrefour |
1.8% |
3.0% |
3.2% |
1.7 |
1.7 |
1.6 |
5.0 |
4.9 |
5.2 |
|
Target |
3.5% |
4.6% |
4.8% |
1.4 |
1.5 |
1.6 |
3.1 |
2.6 |
2.4 |
|
Walmart |
3.3% |
3.4% |
3.5% |
2.5 |
2.4 |
2.4 |
2.5 |
2.5 |
2.5 |
a. Walmart and Target follow somewhat different strategies. Walmart consistently has a higher ROA compared to Target. Using information in Exhibits 4.54 and 4.57, sug- gest reasons for these differences in operating profitability.
b. Walmart and Carrefour follow similar strategies. Walmart consistently outperforms Carrefour on ROA. Using information in Exhibits 4.54 and 4.57, suggest reasons for these differences in operating profitability.
c. Refer to Exhibit 4.55. Which firm appears to have used financial leverage most effec- tively in enhancing the rate of ROCE? Explain your reasoning.
Note: Parts d and e require coverage of material from Chapter 5.
d. Refer to Exhibit 4.56. Rank-order these firms in terms of their short-term liquid- ity risk. Do any of these firms appear unduly risky as of the end of fiscal 2008? Explain.
e. Refer to Exhibit 4.56. Rank-order these firms in terms of their long-term liquid- ity risk. Do any of these firms appear unduly risky as of the end of fiscal Year 4? Explain.
Carrefour Target Walmart
2008 2007 2006 2008 2007 2006 2008 2007 2006
Current Ratio 0.70 0.65 0.66 1.66 1.60 1.32 0.88 0.82 0.90
Quick Ratio 0.39 0.36 0.37 0.85 0.89 0.63 0.20 0.16 0.20
Cash Flow from Operations/
Average Current Liabilities 14.1% 14.2% 13.1% 39.7% 36.0% 47.0% 40.7% 37.5% 40.2%
Days Receivable 24 27 29 47 48 49 3 3 3
Days Inventory 37 39 37 55 58 57 42 44 45
Days Payable 92 95 99 52 56 59 35 37 37
Long-Term Debt Ratio 46.5% 41.3% 41.8% 56.1% 49.7% 35.7% 34.6% 34.1% 33.3%
Total Liabilities/
Total Assets Ratio 79.0% 77.3% 77.9% 68.9% 65.6% 58.1% 58.7% 59.3% 57.8%
Cash Flow from Operations/
Average Total Liabilities 9.9% 10.2% 9.4% 14.9% 16.2% 22.9% 24.0% 22.4% 23.7%
Interest Coverage Ratio 6.4 8.4 9.1 5.9 9.6 10.0 10.6 10.5 11.0
|
|
2008 |
2007 |
2006 |
|
Growth Rate in Sales Carrefour |
5.9% |
6.8% |
5.2% |
|
Target |
2.3% |
6.2% |
12.9% |
|
Walmart |
9.4% |
7.2% |
8.6% |
|
Number of Stores Carrefour |
15,430 |
14,991 |
12,547 |
|
Target |
1,682 |
1,591 |
1,488 |
|
Walmart |
7,873 |
7,239 |
6,756 |
|
Square Footage (000’s) Carrefour |
192,801 |
181,900 |
164,350 |
|
Target |
222,588 |
207,945 |
192,064 |
|
Walmart |
921,000 |
867,400 |
805,100 |
|
Sales per Square Foot Carrefour |
€451 |
€452 |
€468 |
|
Target |
$283 |
$296 |
$301 |
|
Walmart |
$440 |
$436 |
$433 |
|
Sales per Store Carrefour |
€5,636,215 |
€5,479,855 |
€6,127,919 |
|
Target |
$37,386,445 |
$38,636,706 |
$38,896,505 |
|
Walmart |
$51,518,735 |
$52,282,912 |
$51,564,239 |
|
Square Feet per Store Carrefour |
12,495 |
12,134 |
13,099 |
|
Target |
132,335 |
130,701 |
129,075 |
|
Walmart |
116,982 |
119,823 |
119,168 |
|
Fixed Assets per Square Foot Carrefour |
€77 |
€81 |
€84 |
|
Target |
$116 |
$116 |
$112 |
|
Walmart |
$104 |
$112 |
$110 |
|
Sales per Employee Carrefour |
€175,589 |
€167,636 |
€168,503 |
|
Target |
$179,157 |
$167,954 |
$164,426 |
|
Walmart |
$193,146 |
$180,227 |
$183,352 |
|
Exchange Rate: U.S. Dollars per Euro (€) |
$1.4097 |
$1.4728 |
$1.3200 |
