In an earlier post, we examined Wal-Mart Stores (NYSE: WMT) Income Statement for the second quarter of fiscal 2010 and compared the figures to our "look-ahead" estimates. Earnings in this period, which ended 31 July 2009, rose from $0.87 to $0.88 per share.The retailing behemoth sold more than $400 billion last year at its discount stores.
We have since mined Walmart's financial statements in the earnings announcement to update the metrics
we use to assess Cash Management, Growth, Profitability and Value. This post reports on these metrics and the Financial Gauge scores.When Walmart files a 10-Q, with more complete financial statements and notes, we will re-examine the analysis and make any necessary adjustments.
In the mean time, Walmart's estimated GCFR gauge scores are as follows:
- Cash Management: 6 of 25 (down from 9 in April)
- Growth: 1 of 25 (down from 10)
- Profitability: 6 of 25 (down from 8)
- Value: 10 of 25 (up from 9)
- Overall: 29 of 100 (down from 36)
The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary.
| Cash Management | Jul 2009 | Apr 2009 | Jul 2008 | 5-Yr Avg |
| Current Ratio | 0.9 | 0.8 | 0.9 | 0.9 |
| LTD/Equity | 48.8% | 50.8% | 51.2% | 46.0% |
| Debt/CFO (years) | 1.8 | 1.7 | 1.7 | 1.9 |
| Inventory/CGS (days) | 41.8 | 41.9 | 42.5 | 46.5 |
| Finished Goods/Inventory | N/A | N/A | N/A | N/A |
| Days of Sales Outstanding (days) | 3.1 | 3.0 | 2.8 | 2.5 |
| Working Capital/Invested Capital | -8.0% | -8.9% | -5.3% | -8.3% |
| Cash Conversion Cycle Time (days) | 9.3 | 10.3 | 10.2 | 13.3 |
| Gauge Score (0 to 25) | 6 | 9 | 10 | 7 |
The Cash Conversion Cycle Time hit a record low for Walmart in the recent period, according to our calculations. Walmart, already the epitome of efficiency, has become more so by this measure.
We need to reconsider the penalty for negative Working Capital. Operating profitably with negative Working Capital is another sign of efficiency in handling cash.
| Growth | Jul 2009 | Apr 2009 | Jul 2008 | 5-Yr Avg |
| Revenue growth | 1.6% | 4.5% | 9.3% | 7.7% |
| Revenue/Assets | 239.9% | 245.4% | 244.9% | 245.3% |
| Operating Profit growth | 5.2% | 5.8% | 9.4% | 6.9% |
| CFO growth | -7.0% | 1.6% | 30.3% | 10.7% |
| Net Income growth | -0.5% | 1.7% | 7.3% | 6.7% |
| Gauge Score (0 to 25) | 1 | 10 | 16 | 8 |
Walmart has been performing better than other retailers during the recession, but its Revenue, CFO and Net Income are either declining or growing much slower.
The small drop this quarter in the Revenue/Assets ratio had a significant negative effect on the gauge score because the ratio had been improving.
| Profitability | Jul 2009 | Apr 2009 | Jul 2008 | 5-Yr Avg |
| Operating Expenses/Revenue | 94.3% | 94.4% | 94.2% | 94.2% |
| ROIC | 14.8% | 15.1% | 15.4% | 15.7% |
| Free Cash Flow/Invested Capital | 10.5% | 11.4% | 11.8% | 6.9% |
| Accrual Ratio | 1.5% | 1.0% | 1.1% | 3.6% |
| Gauge Score (0 to 25) | 6 | 8 | 11 | 7 |
It's remarkable that Wal-Mart has been able to keep Operating Expenses so steady given the change in economic conditions. ROIC and FCF, which have mostly held up well, weakened a little in the latest quarter.
The Accrual Ratio increase could be signaling a degradation in Earnings Quality. However, potentially anomalous Cash Flow results in 2008, exceptionally bad in one quarter and exceptionally good in the next, is muddying this calculation. The 10-Q may clear this up.
| Value | Jul 2009 | Apr 2009 | Jul 2008 | 5-Yr Avg |
| P/E | 14.5 | 14.8 | 17.3 | 17.2 |
| P/E vs. S&P 500 P/E | 0.6 | 0.7 | 1.0 | 1.0 |
| PEG | 2.8 | 2.5 | 1.8 | 1.6 |
| Price/Revenue | 0.5 | 0.5 | 0.6 | 0.6 |
| Enterprise Value/Cash Flow (EV/CFO) | 10.0 | 10.1 | 10.8 | 11.6 |
| Gauge Score (0 to 25) | 10 | 9 | 4 | 12 |
Wal-Mart's share price slipped 1.1 percent during the quarter, from $50.40 to $49.88, but the recent market rally then helped the shares retake the $50 level. The PEG ratio (note that our calculation for this ratio is non-standard) will become a concern if earnings growth doesn't rebound.
Wal-Mart's valuation ratios can be compared with other Discount and Variety Retailers.
| Overall | Jul 2009 | Apr 2009 | Jul 2008 | 5-Yr Avg |
| Gauge Score (0 to 100) | 29 | 36 | 34 | 36 |
The Growth gauge was most affected, in this case to the downside, by the data characterizing the second quarter. Cash Management and Profitability slipped by lesser amounts, but Value managed to eke out a 1 point gain. These results caused the Overall gauge to fall rather substantially.
We will make any necessary adjustments to the scores after Walmart files a 10-Q, with more complete financial statements and notes.
Full disclosure: Long WMT at time of writing.
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