Discounter Wal-Mart Stores, Inc. (WMT) has annual sales of $375 billion, close to 10 percent of U.S. retail sales. It squeezed ahead of Exxon Mobil (XOM) to garner the top spot on the 2008 edition of the Fortune 500 list of America's largest corporations. Many retailers are challenged by the slowing U.S. economy, in which consumers have been discouraged by high food and energy prices and are nervous about their jobs and homes. In this environment, super-efficient Wal-Mart has the advantage of selling the merchandise shoppers can't do without, and it does so at prices difficult for competitors to match.
When we analyzed Wal-Mart after the April 2008 quarter, the Overall score was 23 of 100 points. Of the four individual gauges that fed into this composite result, Growth was strongest at 13 of 25 points. The Value gauge was the weakest at only 1 of 25 points. The Growth score's leap up 8 points from the previous quarter was enabled by a strong rise in Cash Flow from Operations. The Value gauge was held down by the even faster-paced increase in the price of Wal-Mart shares.
Now, with the available data from the July 2008 quarter, our gauges display the following scores:
- Cash Management: 10 of 25 (up from 7 in April)
- Growth: 18 of 25 (up from 13)
- Profitability: 11 of 25 (up from 9)
- Value: 2 of 25 (up from 1)
- Overall: 32 of 100 (up from 23)
Before we examine each gauge, we will compare the latest quarterly Income Statement to our previously announced expectations.
Please note that the presentation format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.
| ($ M) | | July 2008 (actual) | July 2008 (predicted) | July 2007 (actual) * |
| Revenue (1) | | 101,598 | 100,269 | 91,990 |
| Op expenses | | | | |
| | CGS | (77,642) | (76,706) | (70,859) |
| | SG&A | (19,228) | (18,800) | (17,127) |
| | Other | (0) | (0) | (0) |
| Operating Income | | 4,728 | 4,763 | 4,271 |
| Other income | | | | |
| | Investments (2) | (130) | (120) | (106) |
| | Interest, etc. (3) | 613 | 600 | 605 |
| Pretax income | | 5211 | 5,243 | 4,773 |
| Income tax | | (1826) | (1,861) | (1,676) |
| Net Income from continuing operations | | 3,385 $0.855/sh | 3,382 $0.846/sh | 3,097 $0.754/sh |
| Income from discontinued operations | 64 $0.016/sh | - | (145) ($0.035)/sh | |
| Shares outstanding | 3958 | 4000 | 4108 |
2. Minority interests
3. Includes some income Wal-Mart considers to be operating income.
* Restated
Revenue in the July quarter was 1.3 percent above the expected value, and it was 10.4 percent higher than in the July 2007 quarter. Year-over-year Revenue growth is 9.4 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 18.9 percent of Revenue, compared to our forecast of 18.75 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 off by less than 1 percent. Operating Income, as we define it, was 10.6 percent more than in the July 2007 quarter.
Our forecasts for Non-operating income were also very close to the actual results. The Income Tax Rate was 35.0 percent, instead of the predicted 35.5 percent.
As a result, Net Income from continuing operations matched our prediction almost exactly. The company had fewer shares outstanding, which enabled EPS to exceed our forecast by almost a penny.
Cash Management. This gauge increased from 7 points in April to 10 points now.
| July 2008 | 3 months ago | 12 months ago | |
| Current Ratio | 0.9 | 0.8 | 0.8 |
| LTD/Equity | 51.2% | 51.2% | 44.8% |
| Debt/CFO | 1.7 yrs | 2.0 yrs | 2.1 yrs |
| Inventory/CGS | 42.3 days | 44.0 days | 43.9 days |
| Finished Goods/Inventory | N/A | N/A | N/A |
| Days of Sales Outstanding (DSO) | 2.8 days | 2.9 days | 2.7 days |
| Working Capital/Market Capitalization | -2.0% | -3.9% | -3.8% |
| Cash Conversion Cycle Time | 10.1 days | 11.8 days | 11.2 days |
Debt is up as a percentage of Equity, but it is down as a percentage of the Cash Flow that is needed to repay it. The decrease in Inventory from the comparable period last year is particularly welcome, given that troubling economic conditions could easily lead to a backup of unsold goods. Similarly, the CCCT reduction is very positive, indicating that already super-efficient Wal-Mart is becoming more so.
Growth. This gauge jumped from 13 points in April to 18 points now.
| July 2008 | 3 months ago | 12 months ago | |
| Revenue growth | 9.4% | 9.0% | 9.7% |
| Revenue/Assets | 235% | 229% | 229% |
| CFO growth | 27.8% | 23.0% | 2.5% |
| Net Income growth | 7.2% | 5.9% | 6.9% |
The dramatic increase in Cash Flow from Operations is the big growth-related news, and it will be missed by investors that only look at Net Income. CFO in July 2008 quarter was 44 percent more than CFO in the July 2007 quarter. We also consider it to be significant that Revenue grew faster than Assets.
Profitability. This gauge increased from 9 points in April to 11 points now.
| July 2008 | 3 months ago | 12 months ago | |
| Operating Expenses/Revenue | 95.3% | 95.3% | 95.2% |
| ROIC | 11.9% | 11.8% | 11.7% |
| FCF/Equity | 16.6% | 12.6% | 4.9% |
| Accrual Ratio | 1.3% | 3.2% | 5.4% |
It's remarkable that Wal-Mart has been able to keep Operating Expenses so steady when prices for many goods are rising and other retailers have to cut prices to stimulate sales.
The increase in Free Cash Flow is, naturally enough, related to the aforementioned increase in CFO. However, it also confirms that capital expenditures are under control. The FCF increase also reduces the Accrual Ratio, which signifies high quality earnings.
Value. Wal-Mart's stock price rose over the quarter from $57.98 to $58.62. The shares are up from $45 just a year ago. This increase explains why the Value gauge is stagnant at only 2 points, despite the recent quarter's strong operating results.
| July 2008 | 3 months ago | 12 months ago | 5 year median | |
| P/E | 17.4 | 17.6 | 15.2 | 17.5 |
| P/E to S&P 500 average P/E | 98.8% | 97.5% | 95.2% | 105.2% |
| Price/Revenue | 0.6 | 0.6 | 0.5 | 0.6 |
| Enterprise Value/Cash Flow (EV/CFO) | 11.0 | 12.0 | 11.7 | 12.6 |
Wal-Mart shares are clearly less of a bargain now than they were last summer and fall, and we congratulate investors with the foresight to purchase the shares then. While the shares are somewhat less attractive now, we suspect investors haven't yet given Wal-Mart sufficient credit for improving its Cash Flow in trying times.
With Net Income from continuing operations $3.385 billion vs. our $3.382 billion estimate, it's fair to say the quarter unfolded as we (and company management, whose guidance helped us) expected. Three of our gauges increased nicely, which pushed up the Overall gauge from 23 to 32 of the 100 possible points. On an absolute basis, the score isn't that attractive, but the change over a single quarter is impressive. A pullback in the share price would be the last piece in the puzzle needed to turn us bullish.
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