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WAL-MART STORE, INC. WMT (U.S.: NYSE)
(Case Analysis)
SPECIALIST ASSIGNMENT
Introduction ……………………………………………………………………………………………………………………….
Question 1 …………………………………………………………………………………………………………………………
Question 2 (Financial Matrices) …………………………………………………………………………………………..
Question 3 …………………………………………………………………………………………………………………………
Question 4 …………………………………………………………………………………………………………………………
Question 5 (SWOT & GS Matrices) …………………………………………………………………………………….
Question 6a&b …………………………………………………………………………………………………………………..
Question 6c (Pro forma Statements) ……………………………………………………………………………………..
Question 7 …………………………………………………………………………………………………………………………
Update & Conclusion ………………………………………………………………………………………………………….
2
INTRODUCTION
Intention
The following is a case analysis based on the factors relevant to Wal-Mart Stores, Inc. The
focal year is 2016.
We will examine Walmart financial statements with analytical methods to identify critical
problems in the Walmart operations, financial health and strategies. From the examination,
we would provide a recommended strategy so that Walmart can implement and evaluate in
the long run.
Company Overview
Wal-Mart Stores, Inc. (Wal-Mart) is the world’s largest retailer offering a variety of products
under grocery, health and wellness, entertainment, hardline, apparel and home categories.
The company offers merchandise under various private label and licensed brands including
Equate, Everstart, Faded Glory, George, Great Value, Mainstays, Marketside, Holiday Time,
Adventure Force, Auto Drive, BlackWeb, My Life As, Onn, Kid Connection, Hyper Tough,
Special Kitty, Spring Valley, Way to Celebrate and No Boundaries. Wal-Mart classifies its
business operations into Wal-Mart US, Wal-Mart International and Sam’s Club. It
implements various programs such as everyday low prices (EDLP) and everyday low cost
(EDLC) to offer products at low prices. The company operates a network of owned and
leased stores globally. It also retails its merchandise through various e-commerce websites.
Wal-Mart is headquartered in Bentonville, Arkansas, the US.
In FY2016, the company generated 74.2% of the total revenue from the US and 25.8% from
non-US operations. (Form 10K Walmart Report 2016)
Wal-Mart History
3
•
Although Walmart was incorporated in Delaware in October 1969, the businesses
conducted by its founders began in 1945 when Sam M. Walton opened a franchise Ben
Franklin variety store in Newport, Arkansas. In 1946, his brother, James L. Walton,
opened a similar store in Versailles, Missouri. Until 1962, its founders’ business was
devoted entirely to the operation of variety stores. In that year, the first Wal-Mart
Discount City, which was a discount store, opened in Rogers, Arkansas. In 1983, we
opened its first Sam’s Club, and in 1988, we opened its first supercenter. In 1998, we
opened its first Neighborhood Market. (Form 10K Walmart Report, 2016)
•
In 2000, Walmart began its first digital initiative by creating the walmart.com retail
website. Since then, its digital presence has continued to grow. As of January 31, 2016, it
operated e-commerce websites in 11 countries, providing access to Walmart and its
various brands around the world. (Walmart Annual Report 2016)
•
In 2005, Walmart reported US$312.4 billion in sales, more than 6,200 facilities around
the world – including 3,800 stores in the United States and 2,800 elsewhere, employing
more than 1.6 million associates. Its U.S. presence grew so rapidly that only small
pockets of the country remained more than 60 miles (97 kilometers) from the nearest
store. (Zook, Matthew; Graham, Mark, 2006)
•
In the aftermath of Hurricane Katrina in September 2005, Walmart used its logistics
network to organize a rapid response to the disaster, donating US$20 million in cash,
1,500 truckloads of merchandise, food for 100,000 meals, as well as the promise of a job
for every one of its displaced workers. (Barbaro, Michael; Gillis, Justin, 2005)
•
On September 12, 2007, Walmart introduced new advertising with the slogan, “Save
money. Live better.”, replacing “Always Low Prices, Always”, which it had used for the
previous 19 years. Global Insight, which conducted the research that supported the ads,
4
found that Walmart’s price level reduction resulted in savings for consumers of US$287
billion in 2006, which equated to US$957 per person or US$2,500 per household (up 7.3
percent from the 2004 savings estimate of US$2,329). (Reuters, 2007)
•
On June 30, 2008, Walmart removed the hyphen from its logo and replaced the star with
a Spark symbol that resembles a sunburst, flower, or star. The new logo received mixed
reviews from design critics, who questioned whether the new logo was as bold as those of
competitors, such as the Target bullseye or as instantly recognizable as the previous
company logo, which was used for 18 years. (Armin, 2008)
•
On March 20, 2009, Walmart announced that it was paying a combined US$933.6
million in bonuses to every full and part-time hourly worker. (Bennett, Coleman & Co.,
2009)
•
On April 23, 2011, the company announced that it was testing its new “Walmart To Go”
home delivery system where customers will be able to order specific items offered on
their website. The initial test was in San Jose, California, and the company has not yet
said whether the delivery system will be rolled out nationwide. (Los Angeles Times,
2016.)
•
In June 2014, some Walmart employees went on strike in major U.S. cities demanding
higher wages. (Sheridan, Patrick M., 2014)
•
On January 15, 2016, Walmart announced it would close 269 stores in 2016, affecting
16,000 workers. “Walmart will close 269 stores this year, affecting 16,000 workers”.
(CNN.com. January 16, 2016.)
•
On August 8, 2016, Walmart announced a deal to acquire e-commerce website Jet.com
for US$3.3 billion. (Hadley Malcolm, 2016)
5
•
October 19, 2016, Walmart announced it would partner up with IBM (IBM) and
Tsinghua University to track the pork supply chain in China using blockchain. (Roberts,
Daniel, 2016)
Industrial Environment
The US food retail industry had total revenues of $1,007.3bn in 2014, representing a
compound annual growth rate (CAGR) of 3.5% between 2010 and 2014.
Walmart’s top competitor is Costco Wholesale Corporation and eight other companies:
Target Corporation, Dollar General Corp., Tesco PLC (ADR), Kroger Co, Companhia
Brasile, PriceSmart, Inc., Big Lots, Inc., Fred’s, Inc. (EBSCO, 2017)
In this top ten companies, Walmart gains the largest market share 57.7% followed by Costco
17.2%, Target 7.8%, and others 17.3%. (Google Finance, 2017)
6
CASE ANALYSIS
Mission Statement
“We save people money, so they can live better.” (Walmart, 2017)
Mission Statement Evaluation:
1
2
3
4
5
6
7
8
9
Component
Customer
Product
Market
Technology
Profitability
Philosophy
Selfconcept
Public
image
Employee
Wal-Mart
Mission
Statement
YES
NO
YES
NO
YES
YES
YES
YES
NO
Walmart mission statement is as short as its vision statement, however, it doesn’t satisfy all 9
components (David, 2005) with the score of 6.0/9.0. It shows the business present orientation
to “save people money” and the purpose & basis of its competitive advantage is cost
leadership.
Company Objectives
In 2016, Wal-Mart President and CEO Doug McMillon addressed four key objectives to
focus on. They were: (1) Make every day easier for busy families; (2) Operate with discipline,
including a continued focus on expense management; (3) Be the most trusted retailer; and (4)
Deliver results and position the company to win. (Walmart Annual Report 2016)
Company Strategies
Integrated cost leadership differentiation:
Walmart strategy is to lead on price, differentiate on access, be competitive on assortment
and deliver a great experience. Leading on price is designed to earn the trust of its customers
every day by providing a broad assortment of quality merchandise and services at everyday
low prices (“EDLP”). EDLP is Walmart’s pricing philosophy under which they price items at
a low price every day so its customers trust that its prices will not change under frequent
7
promotional activity. Price leadership is core to who they are. Everyday low cost (“EDLC”)
is their commitment to control expenses so those cost savings can be passed along to their
customers. Their digital and physical presence provides customers access to its broad
assortment anytime and anywhere. They strive to give their customers and members a great
digital and physical shopping experience. (Walmart Annual Report 2016)
Horizontal diversification:
The Company pursues horizontal diversification by operating in many industries not related
to food to provide their customers a one-stop shopping experience.
Alternative strategies include product development, market development, and market
penetration. While brand name merchandise accounts for a majority of the sales, Walmart
has both leveraged U.S. private brands and developed market specific private brands to serve
their customers with high quality, lower priced items. Along with the private brands
marketed globally, such as “Equate,” “George,” “Great Value,” “Holiday Time,”
“Hometrends,” “Mainstays,” “Ol’ Roy” and “Parent’s Choice,” its international markets have
developed market specific brands including “Aurrera,” “Cambridge,” “Chosen by You,”
“Extra Special” and “Smart Price.” (Walmart Annual Report 2016)
Wal-Mart Financial Conditions
Walmart financial statements showed the current financial condition. From the historical
records, the percent change can be calculated between 2014 and 2016, hence, the
performance of Walmart’s can be evaluated with current trends in five categories – liquidity
ratios, liquidity ratios, asset utilization ratios, leverage ratios, profitability ratios, and market
ratios. (see appendix A)
Liquidity Ratios
Assets Utilization
Historical Financial Evaluation
Positive
Positive
Competitive Evaluation
Weakness
Weakness
8
Debt Management
Profitability Ratios
Market Ratios
Positive (TIE: Negative)
Negative
Positive
Strength
Strength (BEP, ROA, ROE: Weaknesses)
Weakness
Historical Financial Analysis
•
Liquidity ratios
The current ratio and the quick ratio have shown positive trends between FY2014 and
FY2016, even though we saw a recent drop 5% in the current asset and 1% in the current
liabilities. Notably, the quick ratio is well-managed to fluctuate between 0.28 and 0.24 in the
period.
•
Asset utilization ratios
During FY2014 and FY2016, the accounts receivable turnover increases 20% while the day
sales outstanding decreases 17%. The efficiency ratios indicate a positive trend.
•
Leverage ratios
The times earning interest (TIE) decreases 19% between FY2014 and FY2016, hence, this
interest coverage ratio indicates a negative impact from the risk management. However, the
debt ratio with 4% decrease shows a good signal from Walmart to reduce its long-term debt
during the period.
•
Profitability ratios
Even though the gross margin increases 1% between FY2014 and FY2016, the operating
margin, the profit margin, and the return on equity (ROE) decrease 10% simultaneously. In
general, the growth is negative during the period.
•
Market ratios
During FY2014 and FY2016, the price per earnings ratio (P/E) increases 10% which shows
positive capital gain from the stock market.
Competitor Financial Analysis
9
The Costco Wholesale Corporation is the key competitor to Wal-Mart following by Target
Corporation. We would discuss about Walmart financial condition compared to Costco in the
five categories.
•
Liquidity ratios
The quick ratio of Walmart is 39% less than Costco’s, hence, the liquidity ratios of Walmart
are weak compared to the key competitor.
•
Asset utilization ratios
The efficiency ratios show a lot of weaknesses such as inventory Turnover (29% less)
accounts receivable turnover (10% less), fixed asset turnover (37% less), and total assets
turnover (53% less) compared to the Costco’s. As a whole, Walmart is weaker than Costco in
the asset utilization.
•
Leverage ratios
Walmart has strength in debt management which has debt ratio 35%.
•
Profitability ratios
Walmart has strength in which the gross margin 89%, the operating margin 62%, and the
profit margin 45% greater than the Costco’s. However, it’s weaker in basic earnings power
24%, and return on assets 32% than the Costco’s. Due to the strength in debt management, it
helps Walmart to gain strength over Costco.
•
Market ratios
The price per earnings (P/E) of Walmart’s is 40% less than the Costco’s, therefore, Walmart
is weak compared to Costco.
Company Valuation
10
Company Valuation
(million)
Wal-Mart Stores, Inc.
Costco Wholesale
Corporation
Target Corporation
Stockholders’ Equity (Goodwill + Intangibles)
$60,785
$13,178
$13,586
Net Income x 5
$75,400
$12,810
$24,835
(Share Price/EPS) x Net
Income
$242,947
$69,151
$33,844
Number of Shares
Outstanding x Share Price
$242,947
$69,151
$33,844
METHOD AVERAGE
$155,520
$41,072
$26,527
As a whole, Walmart’s valuation is 3.8 times larger than Costco’s valuation, and 5.9 times
larger than Target’s valuation using the method average. In short, after all the financial
analysis were taken into account, Wal-Mart financial stability was sustainable by the top
management between FY14 and FY16.
11
Recommendation
We suggest Walmart to improve the asset utilization, thus, increasing liquidity. For better
understanding of Wal-Mart business, we will move on to evaluate external and internal
factors in next section.
External Opportunities and Threats
Opportunities are the factors which when utilized properly, may lead to an expansion of the
venture as well as its success in the market (Hollensen, 2015). Walmart has several
opportunities which when it exploits, it will lead to a wider customer base, a greater profit
margin among others. On the other hand, threats are factors that may be posted by a
competitor or any external influence that if not taken care of in an early stage, may lead to
the company losing a portion of its market or even failing terribly (Hollensen, 2015).
General Environment
General Environment consists of the broader societal dimensions that influence an industry
and its firms including six segments of United States as following.
1. Demographic Segment:
Estimated population of U.S. in 2016 is 323,127,513. Race and Hispanic Origin shows white
alone (76.9%), Hispanic or Latino (17.8%), Black or African American alone (13.3%), Asian
alone (5.7%), two or more races (2.6%), and American Indian and Alaska Native alone
(1.3%). Age group: 6.2% under 5 years, 16.6% between 6 and 18 years, 15.2% over 65 years,
and 62% between 19 and 64 years. Sex percentage is female 50.8% and male 49.2%.
(Census.gov 2016)
2. Economic Segment:
The American population enjoys a high standard of living, which is reflected in the high
ranking (fifth among 187 countries) secured by the country in the 2013 Human Development
12
Index published by the United Nations Development Programme (UNDP). The US industrial
sector accounted for 20.35% of the nation’s GDP in 2014. Industrial output increased from
$2.97 trillion in 2010 to $3.57 trillion in 2014. The US was the world’s largest manufacturing
country until 2010, when it was surpassed by China. (Marketline, 2015)
3. Political/Legal Segment:
The Environmental Protection Agency (EPA) is the leading federal government agency, with
a mandate to protect human health and the environment. Each state also has its own
regulating agency. Since the 1960s, the US government has recognized protection of the
environment as an important agenda, first drafting the Clean Air Act in 1963. Although the
performance of the country has improved in terms of toxic and greenhouse gas emissions, it
has remained an underperformer compared to leading industrial countries. Democrats and
Republicans were able to sort out budget issues after the 16-day government shutdown in
October 2013 resulting in the smooth passage of the budget agreement in December 2013
and increase in debt ceiling in February 2014; however, differences in political ideology have
stalled reforms in the country. (Marketline, 2015)
4. SocioCultural Segment:
The country has a vast proportion of highly educated population, as around 43% of the adult
population in the 25–64 age group have attained tertiary education, as of 2012, a rate
exceeded only by Canada (53%), Israel (46%), Japan (47%) and the Russian Federation
(53%) for this age group. (Marketline, 2015)
Christianity is the major religion of the US population as of 2007, with Protestants
constituting 51.3%, Roman Catholics (23.9%), other or unspecified (8.8%) [includes
Mormons (1.7%), other Christians (1.6%), Jews constitute (1.7%), Buddhists (0.7%) and
13
Muslims (0.6%), unaffiliated (12.1%) and those professing no belief at 4%. (Marketline,
2015)
5. Technological Segment:
According to MarketLine, the US spent 2.8% of its GDP on research and development (R&D)
expenditure in 2013, demonstrating its commitment to innovation. However, this is less than
that of other developed nations such as Japan, which spends nearly 3.4% of its GDP on R&D.
The number of patents received by US from the United States Patent and Trademark Office
(USPTO) went up from 95,038 in 2009 to 158,713 in 2014. On a per million capita basis, the
country received 497.7 patents from the USPTO which was higher than that of Japan (441.2),
Republic of Korea (360.2), Switzerland (316.3) and Germany (216.9).
6. Global Segment:
Globalization is processes in which businesses or organizations develop international
influence or start operating on an international scale.
Successive governments have played an important role in industry, having advanced US
business goals in international trade within their policies. The federal government aims to
negotiate lower tariffs and remove other barriers to US imports while also protecting US
companies from unfair foreign competition. Furthermore, state governments promote the
export of goods produced by industries in their respective regions. Industrial growth
averaged 4.66% during 2010–14 and industrial output is expected to grow by 4.9% in 2015.
(Marketline, 2015)
Foreign exchange risk is the financial risk of an investment’s value changing due to the
changes in currency exchange rates amongst countries.
Additional opportunities and threats:
14
Additional opportunities and threats include the demand for online retailing (opportunity),
evolving customer profiles (threat), inflation (threat), increase in minimum wage as well as
healthcare costs (threats), and unreliable suppliers (threats). (see appendix B)
Firm’s strategic group
a.
Key competitor #1: Costco Wholesale Corporation (CAGR: 15%, FY2010-2015)
•
Overview
Costco Wholesale Corporation (Costco or ‘the company’) operates an international chain
of membership warehouses. The company offers a limited selection of nationally branded
and private-label products across a wide range of merchandise categories at lower prices.
Costco has operations …
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