Wal-Mart Investment Valuation

Introduction 

Wal-Mart focuses on its strong distribution, inventory management, differentiated pricing, cost leadership strategies coupled with a strong usage of IT and innovations in developing of its strategies, which has led Wal-Mart to grow to the top retailer of the world. The Wal-Mart Inc. is mainly known to employ the cost leadership strategies as part of its business strategies (Stankevičiūtė, Grunda, & Bartkus, 2012). A critical strategy that any organization needs to consider is that it has to be a market leader. Being a market leader is even more applicable to the retail sector where the competition is strong and there are large players in the market. Being a cost leader helps in driving away the competition. Wall-Mart is a company worth investing in. 

Wal-Mart has found the cost leadership strategy significant in its operations. The company, in fact, integrates the cost leadership with the Porter’s Five Forces that helps in the creation of barriers to the new entries. This solution makes it difficult for the new entries to get into the market, as they would have to think twice before getting into competition with Wal-Mart. The cost leadership is part of the Wal-Mart philosophy (Stankevičiūtė, Grunda & Bartkus, 2012). 

Any firm that is seeking to be a cost leader needs to have the strategies and methods almost similar to that of Wal-Mart. The Wal-Mart Inc., even within its slogan, captures the aspect of the cost leadership as the slogan goes, “Always Low Prices. Always.” The slogan has been a unique selling point and aspect for the company, as the consumers get even more attracted to buy items where they can get good value for their money. 

Often, Wal-Mart purchases commodities in bulk and at lower costs per unit. Further, the layouts and designs of the different stores of Wal-Mart are simple, and often there is no complexity, like most of the mega marts have. Right from the beginning, Wal-Mart had one of the stringent control in the costs of overhead. The stores had its setting in the large buildings while at the same time ensured the low payment of rents (Stankevičiūtė, Grunda & Bartkus, 2012). The company had a ceiling for the rent payments that stood at $1 for every square foot. The company did not lay a lot of emphasis on the interiors of the stores. 

The company does not have an overwhelming number of employees. Over a period, it has emphasized more on the culture of cost cutting, and this change has also been witnessed in the executive posts. In the case of travels by managers from one location to another, the company prefers to have the coach rather than pay for the flight ticket (Stankevičiūtė, Grunda, & Bartkus, 2012). Further, the managers, when traveling, are encouraged to stay in an affordable hotel to help in cost minimization. Compared to the direct competitors, Wal-Mart has been able to maintain from 0.3% to 3.0% cost differential in all the value chains activities over the direct competitors (Stankevičiūtė, Grunda, & Bartkus, 2012). 

The only point of exception regarding the cost cutting has been the area of the information technology where it was found that the cost exceeded the cost of the competitors by 0.2%. Nonetheless, this range is still acceptable within the operations of Wal-Mart given the superiority of the IT that is employed in the stores to help make operations effective. Additionally, the company has strict monitoring process and within its operations, the company has established a Universal Code in an attempt to keep a constant check on the flow of products from one area to another (Team, 2013). The company through the mechanisms can comfortably check its inventories, the sales, the process orders among others. Moreover, the effective data analysis from the huge Wal-Mart database is managed efficiently, and the process, as well as the efficacy, has been instrumental in the reduction of waste c In the long-run, there is cost minimization in the area of production, and this strategy makes Wal-Mart be continuously the best cost leader. 

Wal-Mart economic power is big. Its influence in the United States economy is comparable to those of 1990s global economy explosion and rise of information technology. Wall mart, the retailer is the power; the center while manufactures have become the vassal, the serf and the bidders for Wal-Mart. Wal-Mart has generally reversed the history of retailers depending on manufactures. The retailer has over 6000 suppliers globally; however, 80 percent of these are located in China. Wal-Mart has a tight relationship with China, which is the largest United States largest exporter of consumer goods. On the other hand, Wal-Mart is the leading retailer virtually of all consumer goods in the United States. This relationship has made many economists believe that China and Wal-Mart are joint venture. 

Wall-Mart Expansion 

The trade relationship between China and United States changed in 1990s when the two countries came to trade agreements under World Trade Organization. The Americans viewed China as a place full of untapped resources and a market for their consumer goods. However, the reality became the reverse; China’s export to the United States overtook its imports. Chinese cheap labor has become lucrative for international business. On the other hand, the Chinese government is focused on the development of export infrastructure. China’s Shenzhen port has sprung within 10 years to be the third heavily used port in the world ( Frontline 1). 

The key to Wal-Mart success is never a single silver bullet. The retailers’ success is due to several integrated number of choices ( Scott, 2007). The generic discount retail model is defined by its 8 key marketing pillars, which are: pressure over manufactures, pricing, technological advancement, human resource management, product selection, expansion policies, consumer service and cost consciousness. Notably, each Wal-Mart CEO has utilized a different model from Sam Walton, David Glass to Lee Scott. The latter has not significantly changed Wal-Mart business model. Lee Scott significant contribution was alteration of human resource practice. However, it was during this period that Wal-Mart faced a lot external challenges. The size of Wal-Mart during this period made it vulnerable to criticisms. Additionally, the bankruptcy of Kmart’s in 2002 affected Wal-Mart’s perception. In 1990s, Wal-Mart was heavily accused of low payments to its workers; the organization was also accused of favoring women to men. In early 2000s, Wal-Mart opposed unionization attempts. Following the challenges, Lee Scott reviewed workers compensation and health benefits ( Brea-Solís, Ramon, & Emili, 2012). He also reorganized work condition for operational employees. Apart from these changes, Wal-Mart model has remained the same since its initiation. Wal-Mart success; however, has been embedded on its pricing and outsourcing strategy. 

Accounting Analysis 

This section seeks to establish whether the accounting practice that is adopted by the Wal-Mart Inc. reflects the accurate picture in terms of the economic performance of the company. The research is to establish whether there are any public announcements in regards to the restatement of earnings or even other financial statements that would indicate any form of dubious financial statement representation. The exact accounts and position of Wal-Mart will be determined through the 8K filings with the SEC. 

In the 8-K fillings last reported on 18 August 2015, a couple of issues were raised. From the issues, it is easy to gauge the financial position of the company as well the overall soundness of the company. It was noted that the investments made at Wal-Mart were significant in assisting to facilitate the business activities. Even though the investments may not be as fast as required, the fundamentals of serving the customers are consistently improving, and the reflection is mainly seen by the comps and the growth of revenue. Therefore, the desired changes in existence require that there should be pressurized investments. Through a strategic plan, there will be the creation of robust sustainable growth mainly for the shareholder returns over a defined time. 

In terms of the performance indicators, the Q2 diluted EPS from continuing operations stood at $1.08. It is noted that the exchange rate of the currency affected the EPS negatively by averagely $0.04. At Wal-Mart in the United Sates, the company’s sales increased by 1.5%, and these changes were mainly facilitated by the traffic of 1.3%. The Neighborhood Market comps also increased by 7.3% and mainly driven by the strong growths from the new stores. Further, the customer experience scores also improved last year, and the total revenue realized stood at $120.2 billion. On a constant currency standard, the total revenue was at $124.5 billion. On the other hand, globally the sales from the e-commerce segment increased by approximately 16% on the constant currency basis. 

According to the reports, the gross merchandise value also referred to as the GMV increased by averagely 18% on the constant currency basis. The 2nd quarter earnings were also pressurized by fluctuations of the currency with the company realizing lower margins in the Wal-Mart Inc. in the United States and low investments in customer experience as well. 

In terms of the consolidated operating income, there was a decline of 10%. In fact, the Wal-Mart Inc. updated full year EPS guidance to a range of $4.40 to $4.70 and this decision was from the previous range of $4.70 to $5.05. The range also included the quarter three guidance of $0.93 to $1.05. During the captured period, the payments in dividends were $1.6 billion, and there was a repurchase of approximately 14 million shares for $1 billion. The part of the report was returned on investment for the trailing 12-months, and this decision ended July 2015 and stood at 16.2% in comparison to 16.7% for the previous period, which ended on July 31, 2014. 

From the reports, it emerged that the decline in the ROI was driven by the continued capital investments including the decrease in the operating income. The free cash flow stood at $5.1 billion for the six months period that ended July 31, 2015, and this result was compared to the $6.8 billion that was in the previous year. The decrease in the free cash flow was mainly because of the lower income that accrued from the continued operations as well as the timing of payments. 

Financial Analysis 

The liquidity ratio serves as an indicator of the ability of any entity or firm to meet the liabilities in short-term. Often, it describes the speed with which organizations are capable of converting the various assets that they have into cash to meet their debt obligations (Saleem & Rehman, 2011). There are two types of ratios, and they include current ratio and the quick ratio or rather acid test ratio. Current ratio is representative of the ability of a company to change the assets that it has in cash. 

Current Ratio = Current Assets/ Current liabilities 

FY 2014: Current Ratio = 59632/67132 =0.88 

FY 2015: Current Ratio = 58132/65262 = 0.89 

The acid test ratio helps to show whether a company has enough short-term assets to help cater for the liabilities that are identified immediately without being involved in the sale of inventory (Chen & Du, 2009). 

Acid test ratio = (Current assets – Inventories) / Current liabilities. 

FY 2014: Acid Test Ratio = (59632-45451)/ 67132 = 0.211 

FY 2015: Acid Test Ratio = (58132-45007)/ 65262 = 0.201 

The cash ratio is representative of the liquidity of the company, which further refines both the current ration and the quick ratio. It does this through the measurement of the cash, the cash equivalents, or the invested funds that are in the current assets to help cover the current liabilities. 

Cash Ratio = Cash Equivalents/ Current Liabilities 

FY 2014: Cash Ratio = 6184/67132 = 0.0921 

FY 2015: Cash Ratio = 5751/65262 = 0.08812 

Profitability Ratios 

The various profitability ratios that are used include the net profit margin, the return on equity, the gross profit margin, and the return on the capital employed. The profitability ratios are essential in measuring the profitability of a company. Given that profits are used in funding the capital expenditure and payments of dividends, the measures, which are employed, are important to the analysis of the company. 

Figure 1. Return on Investments 

FY 2014 = Adjusted Operating Income/Average Invested Capital 

38122/235132= 0.1621 

=16.21% 

FY 2015 = Adjusted Operating Income/Average Invested Capital 

38576/231565 =0.1666 

=16.66% 

Figure 2. Return on Assets 

FY 2014: Return on Assets = ROA= Income from continuing operations/Average total assets of continuing operations 

16214/202261=0.801 

FY 2015: ROA= Income from continuing operations/Average total assets of continuing operations 

15932/201191=0.7918 

Prospective Analysis 

From the prospective analysis, the cost of sales is estimated to be at a level that represent the average percentage of the cost of sales to sales as shown within the 5-year period that ended in the financial year July 2011, and this is 52.6% (21804-10325.7)/21804. Therefore, 485.4 B x .0.526 and this equals $255.319 B. 

The selling, general, and administrative expenses of the company in year 5 is anticipated to increase by the same percentage as the increase in the expenses occurred from year 4 to year 5, which is 13%. Therefore, it will be $134Bx 1.15= $ 154.1B. 

The expected expenses are to be averagely 6% higher in year 5, therefore, 42.6 x 1.06 = 45.156. The other projection is the interest expense, which entails the net interest capitalized and the interest income that is anticipated to increase by 4%, mainly because of the increased financial needs. Therefore, the cost projection will be $79.3 x 1.04 = $82.472. The effective tax rate for the 5th year is expected to be equal to that in the 4th year, which stood at 38.76% ($188.3/$485). This conclusion means that the tax expense is 38.76%. 

Wall-Mart Financial 

Company Dividends 

Wal-Mart Stores: Dividends  Paid Dividends
Wal-Mart Stores  Dividends Paid
07-Dec-16	0.5
10-Aug-16	0.5
11-May-16	0.5
09-Mar-16	0.5
02-Dec-15	0.49
05-Aug-15	0.49
06-May-15	0.49
11-Mar-15	0.49
03-Dec-14	0.48
06-Aug-14	0.48
07-Mar-14	0.48

Current Valuation 

 WMT

	WMT	Industry Avg	S&P 500	WMT 5Y Avg*
Data as of 12/16/2016, *Price/Cash Flow uses 3-year average.
Price/Earnings	15.4	17.1	19.9	14.6
Price/Book	2.8	3.4	2.7	3.1
Price/Sales	0.5	0.5	1.9	0.5
Price/Cash Flow	7.0	8.7	12.2	9.8
Dividend Yield %	2.8	2.2	2.3	2.5
Price/Fair Value	Premium	—	—	—

Forward Valuation 

 WMT

	WMT	Industry Avg	S&P 500
Data as of 12/16/2016.
Forward Price/Earnings	16.3	—	19.4
PEG Ratio	5.4	—	—
PEG Payback (Yrs)	12.5	—	—

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References  

Brea-Solís, H, (2012). Ramon Casadesus-Masanell, Emili Grifell-Tatjé. Business Model Evaluation: Quantifying Walmart’s Sources of Advantage. Working Paper 13-039 November 6, 2012. 

Frontline. (2012). Is Wal-Mart Good for America . 2004. Retrieved from http://www.pbs.org/wgbh/pages/frontline/shows/walmart/ 

Scott, R. (2007). The Wal-Mart effect Its Chinese imports have displaced nearly 200,000 U.S. jobs . Retrieved from http://www.epi.org/publication/ib235/ 

Saleem, Q., & Rehman, R. U. (2011). Impact of Liquidity Ratios on Profitability.    Interdisciplinary Journal of Research in Business ,    1 (7), 95-98. 

Stankevičiūtė, E., Grunda, R., & Bartkus, E. V. (2012). Pursuing a cost leadership strategy and business sustainability objectives: Walmart case study.    Economics and Management ,    17 (3), 1200-1206. 

Team, T. (2013). Wal-Mart's Slow U.S. Growth Needs International Muscle To Drive Earnings . Retrieved from http://www.forbes.com/sites/greatspeculations/2013/02/19/wal- marts- slow-u-s-growth-needs-international-muscle-to-drive-earnings/