Bus 530 - Walmart Inc

Wal-Mart Stores, Inc.

Industry Conditions

Wal-Mart Stores, Inc. (WMT) operates over 10,000 retail stores in various formats across the world. These include discount stores, super centers, neighborhood markets and other small store formats. The company is a part of the overall Consumer Staples Sector and the Food & Staples Retailing Industry, while also holding a concentrated positon in the Hypermarket and Super Centers Sub Industry. Consequently, as the world’s largest retailer, Wal-Mart is a dominant player in many of the markets in which it competes (Standard & Poor’s NetAdvantage, 2016). To do so, Wal-Mart has a corporate strategy to “strive to create a customer-centric experience that seamlessly integrates digital and physical shopping” while also taking a position to “lead on price, differentiate on access, be competitive on assortment, and deliver a great experience” (Wal-Mart Stores, Inc. Form 10-K, 2016, p. 5). For this reason, as noted by Brealey, Myers, & Marcus (2015), Wal-Mart would be considered a retailer that “strives for high turnover at the expense of low profit margins” (p. 94).

Overall, the Consumer Staples Sector is comprised of companies whose businesses are less sensitive to economic cycles. Over the last five years, the Food & Staples Retailing Industry within the sector has continually outpaced the S&P 500 Index and ranks as the top third out of the total other industries to include Beverages, Food Products, Household Products, Personal Products, and Tobacco.

Financial Position

For years, Wal-Mart performance metrics have emphasized three financial priorities: growth, leverage, and returns. They are committed to expanding new stores while making strategic investments in their associates and the integration of digital and physical retail. According to Morningstar Reports (2016), Wal-Mart has consistently shown positive growth ratios over the last 10 years for revenue, operating income, net income, and earnings per share.

In addition, Wal-Mart’s recently filed Form 10-K (2016) indicates that leverage remains important to everyday low costs. However, Wal-Mart has indicated that during a time of increased investments, operating expenses may grow at a rate that is greater than or equal to the rate of net sales growth, and operating income may grow at a rate that is equal to or less than the rate of net sales growth. Moreover, the company has an objective of balancing growth with return to efficiently employ assets for return on investment and effectively manage working capital to deliver strong free cash flow. Finally, Wal-Mart is committed to providing returns to shareholders through share repurchases and dividends (p. 197).

Table 1 presents the comparison of a few key ratios to evaluate financial health relative to the Food & Staples Retailing industry; Wal-Mart Stores, Inc. as a whole; and a comparison to Costco Wholesale Corporation as a top competitor.

Table 1

Benchmark (TTM)

Industry

Wal-Mart (WMT)

Costco (COST)

Price to Earnings Ratio

17.9

16.2

29.3

Earnings Per Share (EPS)

$3.38

$4.52

$5.29

Return on Equity (ROE)

17.19%

18.15%

21.27%

Return on Investment (ROI)

9.97%

11.12%

13.94%

Dividend Yield

2.3%

2.73%

1.16%

Source: Fidelity Investments; Morningstar Reports (July 2016)

Economic Outlook

According to Agnese (2016), overall primary trends for the Food & Staples Retailing Industry include the following: 1) accelerated sales growth as a result of moderate consumer staples inflation combined with an improving macroeconomic environment; 2) pricing and profit margin pressures that have eased due to cost cuts and operating leverage; and 3) better utilization of capital in a low interest rate environment to increase shareholder value (p. 5). In addition, the Sub Industry trends for Hypermarkets and Super Centers appear positive with the opportunity to gain market share given the price advantage compared to more traditional formats (Standard & Poor’s NetAdvantage, 2016).

Specifically, the economic outlook for Wal-Mart within the industry remains positive as they employ everyday low pricing known as an EDLP strategy that allows the company to offer its grocery products at lower prices compared with other players in the industry. Consequently, Wal-Mart is able to “flex its bargaining muscle to ensure a steady, recurring stream of customers for its goods, making Wal-Mart synonymous with inexpensive” which also keeps constant pressure on competitors (Wal-Mart Stores, Inc. SWOT Analysis, 2016).

Key Financial Indicators

Based on the key financial