WMT: Financial Analysis through January 2009

Wal-Mart recently announced earnings for the three months that ended 31 January 2009.  This post provides the GCFR analysis for the period, which was the final quarter of the company's fiscal 2009.

When Wal-Mart files a 10-K, with more complete financial statements and notes, we will re-examine the analysis and make any necessary adjustments.


Discounter Wal-Mart Stores, Inc. (NYSE: WMT) had sales of $400 billion, nearly 10 percent of U.S. retail sales, in the last 12 months.  It garnered the top spot on the 2008 edition of the Fortune 500 list of America's largest corporations, edging ahead of Exxon Mobil (NYSE: XOM).


Mike Duke, former vice chairman of Wal-Mart International, took over as CEO from Lee Scott on 1 February 2009.  He grabbed the reins when most retailers are struggling.  Holiday sales were down, and one prominent corporate adviser has warned that many large retailers "are at significant risk of filing for bankruptcy or facing financial distress in 2009 or 2010."

Wal-Mart, on the other hand, sells consumer staples that are purchased even during tough times.  Economies of scale and ruthless efficiencies allow Wal-Mart to keep prices so low that competitors, such as Target (NYSE: TGT), Kohl's (NYSE: KSS), and Sears Holdings (NASDAQ: SHLD), find it difficult to match them. 

The company certainly has its share of critics, some of whom have commented on GCFR analyses.

Wal-Mart announced on 23 December 2008 the settlement of 63 wage and hour class action lawsuits at a cost to the company between $352 million and $640 million.  The results for the January 2009 quarter included a $255 million after-tax charge ($382 million pre-tax?) to account for this obligation.


Three months ago, the GCFR Overall Gauge of Wal-Mart slipped to 28 of the 100 possible points.  Our initial and updated analysis reports on the third quarter of fiscal 2009 explained the score in some detail.

Earnings in the October quarter were a little better than we expected.  However, three of our four component gauges fell.  Since the price of Wal-Mart shares actually rose in 2008, which cannot be said for most other companies, our contrarian Value gauge didn't get the lift we've seen for other firms.


Now, with the available data from the January 2009 quarter, our gauges display the following scores:

• Cash Management: 7 of 25 (down from 8 in October)
  
• Growth: 14 of 25 (down from 15)
• Profitability: 12 of 25 (up from 10)
• Value: 11 of 25 (up from 3)
  

• Overall: 42 of 100 (up from 28)

Before we examine each gauge, we will compare the latest quarterly Income Statement to our previously announced expectations, which were updated after Wal-Mart reported December sales.

Please note that the presentation format below, which we use for all analyses, can and often does differ in material respects from company-used formats.  A common difference is the classification of income and expenses as Operating and Non-Operating.  The standardization is simply for convenience and to facilitate cross-company comparisons.


http://sheet.zoho.com/public/ncarvin/wmt-income-statement-2?mode=html





Revenue in the recent quarter was 1.7 percent greater than in the January 2008 quarter, and it was 2.2 percent above our target.  On a year-over-year (i.e., trailing twelve months) Revenue grew at 7.2 percent.

The Cost of Goods Sold (CGS) was 76.5 percent of Revenue, which translates into a Gross Margin of 23.5 percent.  Our target for the margin was 23.5 percent of Revenue, so our estimate was correct. 

Sales, General, and Administrative (SG&A) expenses in the quarter were 18.6 percent of Revenue.  Our forecast was 18 percent.  We suspect that the settlement charges were included in the SG&A line item, instead of a special operating expense.  If we back out the estimated settlement charges, SG&A was 18.3 percent of Revenue.

The uptick in these expenses was probably due to increased marketing costs during the holiday period to remind worried consumers of Wal-Mart's low prices.

Operating Income, as we define it, was 8.4 percent less than in the January 2008 quarter.  Operating Income fell below our forecast by 3.15 percent because SG&A expenses were a little higher than the predicted values.

Non-operating Income was about 5.6 percent more than last year's result, and it was 9.2 percent greater than expected.  The Income Tax Rate was 33.3 percent, which was a little less burdensome than the predicted 34.5 percent. 

Net Income from continuing operations was 7.4 percent less than in January 2008.  This Net Income value was a tiny 0.4 percent below forecast.  EPS matched our forecast to the penny.

Cash Management	January 2009	3 months ago	12 months ago
Current Ratio	0.9	0.9	0.8
LTD/Equity	48.0%	47.0%	46.1%
Debt/CFO	1.7 yrs	2.1 yrs	2.0 yrs
Inventory/CGS	41.5 days	47.9 days	43.9 days
Finished Goods/Inventory	N/A	N/A	N/A
Days of Sales Outstanding (DSO)	3.4 days	2.9 days	3.2 days
Working Capital/Market Capitalization	-2.9%	-2.9%	-4.3%
Cash Conversion Cycle Time	9.6 days	13.6 days	9.7 days
Gauge Score (0 to 25)	7	8	7

The changes in the Cash Management metrics are most minor.  The slight increase in Long-term Debt to Equity was less the increase in the Cash Flow available to pay off the Debt.  The decrease in Inventory is welcome, and it suggests that sales might have been greater than the company's expectations.  The slight drop in the CCCT indicates that super-efficient Wal-Mart has become a tad more so.

Growth	January 2009	3 months ago	12 months ago
Revenue growth	7.2%	9.1%	8.5%
Revenue/Assets	246%	240%	238%
CFO growth	12.1%	8.6%	3.5%
Net Income growth	3.7%	6.6%	5.3%
Gauge Score (0 to 25)	14	15	4

Growth rates are trailing four quarters compared to four previous quarters.

While the high-profile Revenue and Net Income growth rates ebbed somewhat, we were elated by the surge in Cash Flow from Operations and the increase in Revenue relative to Assets.

Profitability	January 2009	3 months ago	12 months ago
Operating Expenses/Revenue	95.4%	95.3%	95.2%
ROIC	12.5%	12.1%	11.7%
FCF/Equity	17.9%	14.0%	9.0%
Accrual Ratio	0.6%	2.2%	4.7%
Gauge Score (0 to 25)	12	10	6

It's remarkable that Wal-Mart has been able to keep Operating Expenses so steady when the economy is so weak.  The Increase in Free Cash Flow to Equity seems impressive, and the decrease in the Accrual Ratio tell us that Earnings Quality has improved substantially.

Value	January 2009	3 months ago	12 months ago	5 year median
P/E	13.9	16.1	15.9	17.5
P/E to S&P 500 average P/E	93%	108%	95%	107%
Price/Revenue	0.5	0.6	0.5	0.6
Enterprise Value/Cash Flow (EV/CFO)	9.4	12.2	11.5	12.1
Gauge Score (0 to 25)	11	3	8	N/A

Wal-Mart's share price slipped from the end of October to the end of January from $55.81 to $51.34. Given the company's solid operational performance, it's no surprise that the Value metrics have become quite positive.

Wal-Mart's valuation ratios can be compared with other Discount and Variety Retailers.

Overall	January 2009	3 months ago	12 months ago
Gauge Score (0 to 100)	42	28	26

Wal-Mart's earnings in the fourth quarter matched our expectations, which few companies have done this period.   The increase in the Overall score was a direct result of a good quarter (esp., cash flow), coupled with a lower share price.  Wal-Mart became significantly more attractive to us in the fourth quarter.