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Wal-Mart was launched in 1962 by retailer Sam Walton, who then owned a small franchised variety store. The company was based on a simple vision; pass on the savings from buying in bulk on to the customer and earn profits through volume. This was in sharp contrast to other retailers, who did not change their retail prices when a discount was given by suppliers. By controlling payroll costs, fighting unions and hiring as little people as possible, Wal-Mart kept growing steadily. Technology also played a big role; in 1970, the company began using computers to link stores with warehouses, achieving greater efficiency through reducing inventories. After the death of Sam Walton, the perception of Wal-Mart became increasingly negative. Basing their strategy on Mr. Walton’s; the new directors became increasingly obsessed by lowering costs, but they forgot to give the employees a feeling of having a stake in the company. Press reports increased in negativity and in 2004, a report by McKinsey and Co. found that 8 percent of Wal-Marts former customers did no longer shop there because of the bad reports. In order to turn this around, Wal-Mart has to work out its identity crisis in order to become a model for the industry (Frank, 2006).
What Does Wal-Mart Do?
Walmart Stores, Inc. (WalMart) is a global brick and mortar- as well as online Retail Company. It operates in three segments; the WalMart US segment. Secondly, the WalMart International segment, with stores in 26 countries, and finally the Sam’s Club segment. In 2011; the US segment accounted for 60% of net sales while WalMart International accounted for 28%. Wal-Mart has wholly owned subsidiaries in China, Brazil, Canada, Japan, the United Kingdom, Mexico and Argentina. The company operates in six merchandise units; grocery, entertainment, health & wellness and apparel & home, across a wide variety of stores including supercenters, discount stores and neighborhood centers or smaller venues (Reuters, 2012).
Future U.S. Market- and Global Strategy
After two consecutive years of cost cutting, Wal-Mart plans to keep on doing this for the coming five years, by reducing operating expenses as a percentage of sales by more than one-hundred basis points for every consecutive year. Allowing Wal-Mart to widen the price gap with their competitors as well as aiding the International Segment in improving operating margins in emerging markets. During 2013, Wal-Mart is aiming to add between 36 and 39 million sq. ft. of shopping space all over the world. In the US, the main focus will be on expanding, converting and relocating current shops. Around 210 to 235 shops will expand their retail space by around 14 to 15 million sq. ft. This increase is largely due to the larger percentage of supercenters but also a smaller growth in the number of small and medium sized stores. The supercenters are forecasted to be the primary sources of growth for Wal-Mart (Consumer Goods Technology, 2011).
New Express Format Stores
In addition to the small, medium and supercenter sized stores, Wal-Mart will also open six new Express-format-stores, small sized fresh-produce-based stores which put Wal-Mart on the offensive in a battle with perky, small competitors that are popping up all around the country, as opposed to Wal-Mart’s usual image of bigger is better (Jones, 2011).
Future Cost Savings
Wal-Mart US will decrease capital spending by around $500 million as compared to 2012. Bringing it down to a 6 to 6.5 billion dollar range. According to Wal-Mart’s CEO; Bill Simon,
“We also will bring down the cost of building in all of our operations and we will continue to reduce the cost of remodels,” said Simon. “For next year, Wal-Mart U.S. will build more square footage with fewer dollars. We plan to decrease U.S. construction costs by 10 percent and will further gain leverage on our remodeling costs. (Simon, 2011)”
In 2013, capital expenditures in the international market will range between 4.5 and 5 billion dollars. New stores that will open (without the impact of acquisitions) will account for an increase in shopping space of about 26 to 28 million sq. ft. Wal-Mart’s main focus in the international market is on emerging countries such as; China, Brazil and Mexico. Wal-Mart will attempt to further drive growth in the existing markets such as the before mentioned countries whilst increasing acquisitions in higher growth markets (Bevel, 2011).
Wal-Mart’s management has near-total control of the company. Based and founded in Arkansas, the management culture at the top is based on the legacy of Wal-Mart’s founder; Sam Walton. The ‘Good old Boy’ culture encourages groupthink and high coherency levels. Basically, whoever belongs to the group is considered a good friend of all those within that group. Another characteristic of this culture is that women and minorities are purposely excluded and discriminated against (Koster, Brouwer, Vitanov, & Meijs, 2012).
This leadership culture has caused Wal-Mart to be the target of several investigations into; racism, unpaid overtime, child labor, suppression of unions, breaching labor laws as well as an investigation by the US Immigration Service for employing illegal aliens at its stores in the US; Wal-Mart’s management style is one where fear and intimidation rule over good corporate governance and ethical leadership (Associated Press, 2009).
From 2005, Wal-Mart management introduced a companywide code of conduct and ethics and promised to get tighter control on its management practices and more power to the boards (Stanwick & Stanwick, 2009).
A recent New York Times (April 23, 2012) investigation found that the wholly owned Wal-Mart subsidiary; Wal-Mart de Mexico had paid up to $24 million in bribes to local officials to make the rapid expansion in Mexico easier. When an independent research committee was founded, Wal-Mart executives in Arkansas tried to shut it down, however under the pressure of authorities, the investigation continued but it was met with aggressive resistance by Wal-Mart executives (Barstow, 2012).
The most pressing governance currently existing at Wal-Mart are; a culture of silence, general counsel and key finance officials are partners instead of guardians, the failure of the CEO to fuse ambition with integrity and a lack of board interference into pressing matters (Benjamin, 2012). Wal-Mart seems unwilling to look seriously into its compliance issues as well as why the board is unable to oversee serious matters as they arise and act properly. After the Mexico scandal became public, a group of New York City based pension funds told Reuters they would use their 4.6 million shares’ voting power to vote against the current directors (Reuters, 2012).
This section includes key ratio analysis and industry comparisons.
General Financial Information
Wal-Mart recorded revenues of $421,849 million during the financial year ended 2011. This is an increase of 3.4% compared to the financial year 2010. The US and Puerto Rico accounted for 73.9% of total revenues (MarketLine, 2011).
Share price listed on the New York Stock Exchange on May 10, 2012 was $59.19; Compared to a 52-week high of $62.63 and a 52-week low of $48.31. Share volume on May 10, 2012 was 7,740,689 as compared to an average volume of 10,229,729 shares (Reuters, 2012).
WAL-MART’s ability to pay short term obligations.
Saw a slight decrease from 0.88 in 2009 to 08.86 in 2010 to increase again to 0.89 in 2011, the bottom limit is 1.0, it seems that Wal-Mart is unable to quickly convert its products into cash. The industry is well above this figure and even in the safe zone with 1,11 in 2011.This has little to do with WAL-MART’s inventory though, as emphasized by the Inventory Turnover figure of 8.68 in 2011.
Acid Test Ratio
WAL-MART’s ability to pay short term obligations with its most liquid assets.
Went up from 0.26 in 2009 to 0.28 in 2010, with a small decrease of 0.1 in 2011. The higher the better is the rule of thumb, in relation to industry average the figure is quite low (0.48). As the high inventory turnover is excluded, its ability to turn its most liquid assets into cash are a cause of concern.
WAL-MART’s effectiveness in extending credit but also at collecting debts, also measures how efficiently its assets are used.
Went down from 102.71 in 2009 to 97.76 in 2010. Even further down in 2011 to 82.89. The high figures in this case, despite dropping slightly over the years means Wal-Mart is operating on a cash basis mostly and/or is very good at crediting and collecting Accounts Receivable, this is a favorable figure since it has a positive impact on cash flow. Assets are being utilized efficiently. The industry average is not far behind with 80.02, giving Wal-Mart an advantage in efficiency, though a slight one.
How much Wal-Mart earns from every dollar in sales.
Went up from 3.42 to 3.69 in 2010. In 2011 there was a slight rise to 3.81.The number has increased which means that Wal-Mart is getting better at cost control and is becoming more profitable obviously. Compared to industry average (6.33)Wal-Mart is under performing, by almost half.
Return on Equity
How much profit is generated with the investment from shareholders.
Saw a high increase from 21.04% to 59.55% in 2010. 2011 was worse with half the number Wal-Mart achieved in 2010, at 23.28%. The profit generated with the money from investors went down quickly, compared to industry average however; (15.3%) Wal-Mart outperforms the competition by far indicating good utilization of investments.
Debt to Equity
What measure of debt and equity is used to finance the assets of Wal-Mart.
Went up from 1.50 to 1.39 in 2010. Slightly increasing in 2011 to 1.60. Indicating that the amount of debt in comparison to equity is quite low. The slight rise means that Wal-Mart is becoming a little more indebted whilst financing its growth. This also means that risk for shareholders is quite small as compared to the competition; who have a debt to equity of 73.36.
How many times Wal-Mart sells and replaces its inventory over the period of one year.
Went up from 8.81 to 9.31 in 2010, with 2011 being below 2009 with 8.68. Compared to industry average (7.5), these numbers are not much off. The drop from 2010 to 2011 implies that sales are getting stronger, but that the products are ‘moving quicker’.
Free Cash Flow Analysis
How many times per year is Wal-Mart able to pay its average payables amount.
Went down from 10.59 to 9.94. 2011 posted the lowest ratio; 9.50. Indicating that Wal-Mart is taking longer to pay its suppliers. A negative liquidity (cash flow) indicator. Though, compared to its competition (8.6) Wal-Mart has a clear advantage, though if the drop continues, Wal-Mart might want to shorten its WCC, especially receivables.
Return on Assets
How well is Wal-Mart employing its assets to make a profit.
Went up from 0.08 to 0.09, 2011 was the same as 2010; 0.09. As a rule of thumb, the higher the better. These low numbers indicate a poor employment of assets, a less favorable figure for investors and management in case of desired expansion. Industry Average weighs in at 6.02 much higher, which is bad news for Wal-Mart when potential investors need to make a choice between Wal-Mart or the competition.
Interest Coverage Ratio
How easily can Wal-Mart pay interest expenses on its outstanding debt burden.
The number went up from 11.98 to 12.74. In 2011, the figure was not much better; 12.75. Indicating an increase in the debt burden felt by Wal-Mart. But since the number is still above the absolute minimum of 1.5, Wal-Mart is able to pay its interest easily beyond any doubt. The decrease affects profitability though since interest expenses will rise. The competition is off better with an average of 9.47, being weighed down less by a debt burden and decreasing their expenses to lower levels than Wal-Mart is currently experiencing.
Cash Flow Yield
The ability of WAL-MART’ operating cash flow to meet the obligations of Wal-Mart.
The number went up from 168.54 to 175.44 in 2010, 2011 saw a decrease to 148.15. In general, the greater the number, the better Wal-Mart can meet its obligations, it also gives it more cash flow to expand. The numbers now should be impressive to investors though it is on the decline, a negative indicator.
Cash Flow to Sales
The real amount of money Wal-Mart earns.
Went up from 5.77 to 6.48 in 2010. Decreasing in 2011 to 5.64; It indicates how much of the revenue is transformed into cash, the higher the better of course. Again, Wal-Mart is not doing spectacular but its doing okay-ish, the number is on the fall but not alarmingly.
Free Cash Flow
The cash Wal-Mart can generate after deducting the money it needs to maintain or expand its assets.
Went up from $18,724 to $21,674. 2011 saw a decrease below the 2009 level; $17,785.This declining figure allows Wal-Mart less to room to expand or otherwise enhance shareholder valuer. The low number might however indicate a lack of investments.
Free Cash Flow Analysis
I will apply the following formula in calculating Wal-Mart’s unlevered free cash flow (UFCF).
Below is the calculation of Wal-Mart’s unlevered free cash flow for FY 2011, following the formula presented earlier in millions of USD.
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