Discounter Wal-Mart Stores, Inc. (WMT) has annual sales of $375 billion, close to 10 percent of U.S. retail sales.It squeezed ahead of Exxon Mobil (XOM) to garner the top spot on the 2008 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.
Most U.S. retailers are challenged by the slowing economy, in which consumers have been weakened by high food and energy prices and are nervous about their jobs and homes.In this environment, super-efficient Wal-Mart has the advantage of selling the merchandise shoppers can't do without, and it does so at prices hard for competitors to match. To bolster store traffic, Wal-Mart has shown it is willing to implement price reductions that squeeze already razor-thin profit margins.
When we analyzed Wal-Mart after the January 2008 quarter, the Overall score was 26 of 100 points. Of the four individual gauges that fed into this composite result, Cash Management and Value were the strongest at 7 of 25 points.Growth was weakest at 5 points.
Now, with the available data from the April 2008 quarter, our gauges display the following scores:
- Cash Management: 7 of 25 (unchanged from January)
- Growth: 13 of 25 (up from 5)
- Profitability: 9 of 25 (up from 6)
- Value: 1 of 25 (down from 7)
- Overall: 23 of 100 (down from 26)
Before we examine each gauge, we will 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) | April 2008 (actual) | April 2008 (predicted) | April 2007 (actual) | |
| Revenue (1) | 94122 | 92412 | 85387 | |
| Op expenses | ||||
| CGS | (71886) | (70695) | (65311) | |
| SG&A | (18107) | (17558) | (16249) | |
| Other | (0) | (0) | (0) | |
| Operating Income | 4129 | 4159 | 3827 | |
| Other income | ||||
| Investments (2) | (122) | (100) | (100) | |
| Interest, etc. (3) | 685 | 620 | 631 | |
| Pretax income | 4692 | 4679 | 4358 | |
| Income tax | (1670) | (1637) | (1532) | |
| Net Income | 3022 | 3041 | 2826 | |
| $0.76/sh | $0.76/sh | $0.68/sh | ||
| Shares outstanding | 3967 | 4000 | 4128 |
2. Minority interests
3. Includes some income Wal-Mart considers to be operating income.
Revenue in the April quarter was 1.85 percent above the predicted value, and it was 10.2 percent higher than in the April 2007 quarter.Year-over-year revenue growth was 9.0 percent.
We thought the quarter's Gross Margin would be 23.5 percent of Revenue, and the company actually achieved 23.6 percent.The Cost of Goods Sold (CGS) was, therefore, 76.4 percent of Revenue.
Sales, General, and Administrative (SG&A) expenses in the quarter were 19.2 percent of Revenue, compared to our forecast of 19.0 percent.
With the actual values for Revenue and Operating Expenses so close to the predicted values, it's no surprise that our forecast for Operating Income was only off by 0.7 percent.Operating Income, as we define it, was 7.9 percent more than in the April 2007 quarter.
Non-operating income was $43 million greater than expected.However, the Income Tax Rate was 35.6 percent, instead of the predicted 35 percent.As a result, Net Income and Earnings Per Share matched the prediction almost exactly.
Cash Management. This gauge didn't change from 7 points in January.
| April 2008 | 3 months ago | 12 months ago | |
| Current Ratio | 0.8 | 0.8 | 0.9 |
| LTD/Equity | 51.2% | 46.1% | 49.4% |
| Debt/CFO | 2.0 yrs | 2.0 yrs | 2.1 yrs |
| Inventory/CGS | 44.0 days | 43.9 days | 45.5 days |
| Finished Goods/Inventory | N/A | N/A | N/A |
| Days of Sales Outstanding (DSO) | 2.9 days | 3.2 days | 2.8 days |
| Working Capital/Market Capitalization | -3.9% | -4.4% | -3.0% |
| Cash Conversion Cycle Time | 11.8 days | 10.0 days | 13.0 days |
Debt is up a little, but no more so than the Cash Flow to pay for it. The CCCT reduction is very positive, indicating significantly more efficient management of cash.
Growth. This gauge jumped from 5 points in January to 13 points now.
| April 2008 | 3 months ago | 12 months ago | |
| Revenue growth | 9.0% | 8.6% | 10.3% |
| Revenue/Assets | 229% | 229% | 226% |
| CFO growth | 23.0% | 2.0% | -4.2% |
| Net Income growth | 6.0% | 5.8% | 7.1% |
The dramatic increase in year-over-year Cash Flow is the big growth-related news. CFO in the first quarter of 2008 was more than double CFO in the year-earlier quarter.Profitability. This gauge increased from 6 points in January to 9 points now.
| April 2008 | 3 months ago | 12 months ago | |
| Operating Expenses/Revenue | 95.3% | 95.3% | 95.2% |
| ROIC | 11.8% | 11.6% | 12.1% |
| FCF/Equity | 12.6% | 8.4% | 4.1% |
| Accrual Ratio | 3.2% | 5.0% | 5.9% |
Expenses have been held remarkably steady. The increase in Free Cash Flow follows the aforementioned increase in CFO. This increase also reduces the Accrual Ratio, which signifies high quality earnings.
Value. Wal-Mart's stock price rose over the quarter from $50.74 to $57.98. The Value gauge, based on the latter price, decreased to 1 point from 7 points three months ago.
| April 2008 | 3 months ago | 12 months ago | 5 year median | |
| P/E | 17.6 | 15.7 | 16.0 | 17.8 |
| P/E to S&P 500 average P/E | 101.2% | 94.3% | 96.6% | 110% |
| Price/Revenue | 0.6 | 0.5 | 0.6 | 0.6 |
| Enterprise Value/Cash Flow (EV/CFO) | 12.0 | 11.7 | 12.7 | 13.1 |
The quarter unfolded, by and large, as predicted, and our Growth and Profitability gauges both increased. However, the Overall gauge still fell back to 23 of 100 points because a run up in the share price depressed the double-weighted Value gauge.
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