Wal-Mart's figures moved the stock market upward, perhaps in relief they didn't show a decline in consumer spending rates. When looked at the day after, there doesn't appear to be much in the report to justify the excitement.
With annual sales over $350 billion, or about 10 percent of U.S. retail sales, Wal-Mart squeezed ahead of Exxon Mobil (XOM) to garner the top spot on the 2007 edition of the Fortune 500 list of America's largest corporations. Wal-Mart transformed retailing (for better or for worse, depending on your perspective) by using information technology to manage its supply chain and by pressuring manufacturers to squeeze every penny out of their costs. Wal-Mart's visibility and role in advancing globalization have made it a lightning rod for criticism.
Wal-Mart's growth has weakened in recent years. Competition, market saturation, the slowing U.S. economy, and questionable merchandising choices have combined to shrink Wal-Mart's same-store sales growth to the low single digits. Target, which appeals to a somewhat more affluent customers, has been eroding Wal-Mart's market share from above. From below, high gas prices have taken a bite out of the wallets and pocketbooks of Wal-Mart's core customers. The company has responded by cutting back on plans to open new stores and by luring customers with generic prescriptions drugs for $4.
When we analyzed Wal-Mart after the July quarter, the Overall score was 30 points. Of the four individual gauges that fed into this composite result, Value was the strongest at 11 points. Profitability was weakest at 3 points.
Now, with the available data from the October 2007 quarter, our gauges display the following scores:
- Cash Management: 6 of 25
- Growth: 4 of 25
- Profitability: 3 of 25
- Value: 12 of 25
- Overall: 29 of 100
Before we examine the factors that affected each gauge, let's compare the latest quarterly Income Statement to our previously announced expectations. Please note that the presentation format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.
| ($ M) | | Oct 2007 (actual) | Oct 2007 (predicted) | Oct 2006 (actual) |
| Revenue | | 90880 | 91480 | 83543 |
| Op expenses | | | | |
| | CGS | (69292) | (70256) | (63765) |
| | SG&A | (17685) | (16924) | (16237) |
| | Other | (0) | (0) | (0) |
| Operating Income | | 3903 | 4300 | 3541 |
| Other income | | | | |
| | Invest- ments | (99) | (110) | (84) |
| | Interest, etc. | 610 | 550 | 500 |
| Pretax income | | 4414 | 4740 | 3957 |
| Income tax | | (1557) | (1659) | (1363) |
| Net Income | | 2857 | 3081 | 2594 |
| | | $0.70/sh | 0.75/sh | 0.62/sh |
| Discontinued operations | | | 53 |
2. The company includes some income in operating income that we treat as non-operating income.
Revenue in the October quarter was 0.66 percent below the predicted value and 8.8 percent higher than in the October 2006 quarter. Year-over-year revenue growth is now 9.0 percent.
We thought the Cost of Goods Sold (CGS) would be 76.8 percent of Revenue, and the actual value was 76.2 percent. Sales, General, and Administrative (SG&A) expenses were 19.5 percent of Revenue, compared to our forecast of 18.5 percent.
Operating Income was 10.2 percent above the value in the October 2006 quarter. However, Operating Income was 9.2 percent below the forecast value because of the slightly lower than expected revenue and the higher SG&A expenses
Non-operating income was $71 million greater than expected. The Income Tax Rate was 35.3 percent, instead of the predicted 35 percent. As a result, Net Income missed the prediction by 7.3 percent.
Cash Management. This gauge stayed at 6 points from July through October.
The following measures pushed the score up the most:
- Cash Conversion Cycle Time (CCCT) = 14.6 days, shorter from 17.3 days in October 2006, for this measure of efficiency.
- LTD/Equity = 47.7 percent, a manageable figure but up from 41.1 percent in one year.
- Current Ratio =0.8; weaker than we like; just slightly below the five-year median
- Debt/CFO = 2.3 years; compared to 2.0 and 1.9 years 3 and 12 months ago, respectively.
- Days of Sales Outstanding (DSO) = 2.8 days, longer than the 2.3-day duration one year earlier.
- Working Capital/Market Capitalization = -4.2 percent, down from -3.5 percent
- Inventory/CGS = 50.8 days, compared to 44 and 53 days 3 and 12 months ago, respectively.
The following measures pushed the score up the most:
- Net Income growth = 7.6 percent year-over-year, down from 8.5 percent a year ago, but a little better than the last few quarters.
- Revenue growth = 9.0 percent year-over-year, down from 10.7 percent
- CFO growth = -1.6 percent year-over-year, down from 24.7 percent
- Revenue/Assets = 2.22, down slightly from 2.23 in a year; sales efficiency didn't improved.
Profitability. This gauge held steady at the 3 points from July.
None of the following measures pushed the score up appreciably:
- ROIC = 11.2 percent, down from 11.9 percent in a year.
- FCF/Equity = 6.5 percent, down from 6.8 percent in a year
- Accrual Ratio = 5.2 percent, unchanged from Oct 2006
- Operating Expenses/Revenue = 95.2 percent, essentially the same as last year's 95.1 percent.
Value. Wal-Mart's stock price slipped over the quarter from $45.95 to $45.21. The Value gauge, based on the latter price, increased to 12 points from 11 points three months ago (and 13 points twelve months ago).
All of the following measures made small positive contributions to the score:
- Enterprise Value/Cash Flow = 11.5, down from 12.1 in October 2006, and significantly below its five-year median of 14.2.
- P/E = 14.4, down from 17.4 a year ago, and below its five-year median of 19.
- P/E to S&P 500 average P/E = 12 percent discount, much lower than its five-year median of a 13 percent premium
- Price/Revenue ratio = 0.5, lower than its five-year median of 0.7.
The average P/E for the Retail - Department and Discount industry is currently 15. The average Price/Revenue for the industry is currently 0.6.
Now at a so-so 29 out of 100 possible points, the Overall gauge wasn't moved by the third quarter results. Year-over-year revenue growth of 9 percent, which happened to be driven by international operations, can be seen as a deceleration. Net income growth of 7.6 percent wouldn't normally get anyone excited, but (unlike cash flow from operations) at least it was positive. Profitability is, at best, stable.
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