Looking into Walmart

Looking Into WAL-MART

The Company

Every week, 100 million customers visit Wal-Mart stores worldwide, making it the world's largest retailers. A leader in the discount industry, Wal-Mart posted $218 billion in sales last year as it continued to specialize in selling discounted household goods. The company has 1.3 million employees working at 3,200 locations in the United States and 1,100 locations in Mexico, Puerto Rico, Canada, Argentina, Brazil, China, Korea, Germany, and the United Kingdom. Wal-Mart aims to instill its logo, "Everyday Day Low Prices" in each and every division. Currently the company is broken down into four divisions: Wal-Mart Supercenters, Discount Stores, Neighborhood Markets and SAM'S Club Warehouses. The magnitude and global presence of Wal-Mart allows it to be a dominant player in the retailing market place. It is essential that fundamental relationships within the industry and the company's environment need to be analyzed in order to efficiently evaluate the correct market price for the company's stock (WMT (NYSE)).

Industry Outlook

Household products, retail drugs stores, and personal care segments are expected to produce above-average revenue growth and increase market share in the coming months. The uncertainty between the U.S. and global economies should not affect the sector because many of the products are basic necessities. The retail sector is expected to perform in line with the overall market in the next 6-12 months.

Mega retailers such as Wal-Mart are expanding their product variety by focusing on groceries and pharmaceutical drugs. To combat the market intrusion, Walgreen, CVS and other drug stores are adding groceries to their shelves. The mass merchandising industry is only getting bigger as the major players are offering more selections in order to gain a competitive edge. Many companies like Wal-Mart, Carrefour, Royal Ahold and Kroger are expanding by acquisitions. The industry is getting larger while the number of members is declining.

Porter's Five Forces

Stable growth, expertise management, operating efficiency, and competitive pricing make Wal-Mart a strong company when assessed using Porter's Five Forces Model. The model helps to evaluate the company by looking at the bargaining power of the suppliers and buyers, the threat of substitute products or services, the potential threat of new entrants and the rivalry among existing firms. Wal-Mart relies heavily on these 5 factors to ensure long lasting relations and customer satisfaction.

Suppliers

Wal-Mart, being a dominating customer to its suppliers, uses this as an advantage for them. The company is the largest customer to companies such as Kraft Foods, Gillette, and P&G. In order to maintain and satisfy Wal-Mart as a customer, suppliers are willing to provide favorable payment terms, discounts, and priority delivery dates. These mutual business relations are evident throughout Wal-Mart's increasing success.

Buyers

Due to the fact that Wal-Mart is not monopolistic, the goods offered are substitutable by competing organizations. It is the size of its stores and the wide selection it carries daily, not to mention the quality emphasis it place on merchandises that allows it to rank high in customer preference. Contrary to belief, customers of Wal-Mart have bargaining power since Wal-Mart strives to satisfy its customers by matching the prices of any of its competitors. As Wal-Mart's growth and profitability have shown, customers are mostly satisfied with the chain's low prices and convenient locations.

Threat of New Entrants

New entrants are always possible, but to seriously compete with Wal-Mart they will need enormous capital. The company is expanding rapidly leaving less room for new competitors. For the fiscal year ending 2004, the company plans to open 45 to 55 new discount stores and 200 to 210 new Supercenters domestically. Wal-Mart International plans to open and or expand 120-130 units in existing markets becoming a global phenomenon. With sales increasing at 12.3% in 2003, potential competitors to this market will have to act quickly and have a highly effective business model to enter the Wal-Mart dominated market.

Competition

Competition within the industry itself does not present a formidable threat to Wal-Mart Inc. The company is larger and more profitable that the other few direct competitors, namely Target, K-Mart which faced bankruptcy, and Costco who competes with Wal-Mart's SAM'S Club division. Target represents the robust competitor for Wal-Mart but unlike Wal-Mart, Target aims to sell upscale and trendier merchandise. With 1,494 stores owned by Target Corp. domestically, it does not present a major threat to Wal-Mart global stores, but fair competition to the domestic stores. In summary, Wal-Mart is ahead of the competition and overall, the leader in the industry with a secure market position.

Beyond the fundamentals of the company's position within the industry, financial ratios like the After tax profit, Return on Assets (ROA), Return on Equity (ROE) and current quick ratio need to be derived. This is to determine a more accurate financial valuation of the company in comparison to the stock price. In addition, evaluating the financial ratios of Wal-Mart would be most pertinent in the provision of a fair stock valuation of the company.

Profitability Ratios

After-tax Profit Margin

The After-tax profit margin is an income statement ratio. This ratio is formulated by dividing the annual net income by the annual sales revenue (turnover). This ratio simply reflects the profit margin a company obtains from its products and services. A high ratio does not necessarily mean that a company is performing well, as different industries have varying profit margins. However, within an industry this figure is more relevant. For instance, comparing two similar firms, a firm with a higher ratio will generally be more cost efficient, as it has extracted more profit then the other company.

Net income/Sales (Dollar amounts in million)

Industry Average = 3.48%

(From http://yahoo.multexinvestor.com)

2003: 8,039/244,524=3.29%

2002: 6,671/217,799=3.06%

2001: 6,295/191,329=3.29%

2000: 5,337/165,013=3.23%