Walmart Ltd Financial Analysis

Introduction

Sam Walton founded Walmart Company several years ago. Its foundation was based on one mission, enhancement of quality and price control. The company has more than 8,400 stores in 15 countries around the world and has managed to employ two million employees who are serving 200 million customers and members weekly. Since its formation, the company has successfully succeeded in provision of high quality products at low prices.

It has gone several changes and subsequently grown tremendously to emerge a multinational enterprise. The company’s growth has been attributed to its mission and it has succeeded in achieving its goals and objectives and in particular one principal goal-saving people’s money to make them live better. The company has put forward three priorities namely growth, leverage and returns that will help enhance shareholder’s value (Walmart 2010¹). These three go in line with the company’s mission and that is what has kept the company alive as well as maintaining company’s good reputation.

Corporate Structure of Walmart

The President who is also the Chief Executive Officer (CEO) heads the company. Its current CEO is Michael T. Duke. The corporate structure of the company consists of the CEO and his subordinates and the management board of the company, which is headed by the chairman. The management board through voting process selects the CEO (Walmart 2010¹). The company has had various CEOs since its formation including Lee Scott who was succeeded by Mr. Duke.

The company’s management has never been enthusiastic about the company’s future the management team is more focused towards executing a strategic plan driven by the company’s three priorities (growth, leverage and returns) that are thought to play an important role towards the growth of shareholder’s equity (Libby, 2010²). The growth is intended to expand the company’s trading activities all over the world and the leverage level of the company is achieved through maintaining faster growth of operating income at a higher rate than sales and operating expenses at the lowest rate possible.

Walmart’s SWOT Analysis

SWOT analysis entails analyzing company’s strengths, weaknesses, opportunities and threats that the company might be vulnerable to. It gives a comprehensive analysis of the company’s possibility of growth in future and its ability to absorb an unexpected economic shock e.g. economic recession (Weygandt, Kimmel & Kieso, 2009³). The Walmart’s strengths can be viewed from a financial perspective. Financial documents available indicate that the company has been making profits over the past years and no losses have ever been witnessed. As it was observed, there have been positive cash flows for the last three years meaning that the company is financially stable and can easily cater for its long-term financial needs and obligations.

In addition, the strength of Walmart can be viewed from the performance of its business activities. The company has been sub-divided into three segments, which is a form of marketing integration (horizontal) and the losses from one segment can be offset by profits from other segments. For instance, when Walmart club attained a negative growth rate in its 2010 operating income, the overall growth in operating income was positive since other segments had made a considerable growth rates in their operating incomes.

One of the weaknesses of the company is that its current liabilities for the year 2010 are more than current assets an indication of company’s insolvency. This is a dangerous position for the company especially small enterprises (Nikolai, Bazley & Jones, 2009⁴). In addition, Walmart is characterized by supplementing its capital through borrowing. For instance in 2009 and 2010, the company issued long-term bonds of $6.6 and $5.5 billion respectively. This is a major weakness for a company and it can lead to its indebtedness. So many opportunities are available for Walmart and that is one of the reasons why the company seems to have high growth prospects.

The company has already identified potential markets for its products from different countries and the company’s products have a history of high demand all over the world. These opportunities are propelled by the company’s goodwill, which has persisted over the years. As the current CEO of the company points out, he is so impressed by the opportunities ahead of them both in the United States and around the world. Despite the company’s potential growth prospects, the company’s image is facing some threats that may diminish its reputation. For example, the company is facing many legal suits that can easily spoil its reputation of many years.

There is a case in which its former employees for allegedly violating wage-hour regulations through failure to provide rest breaks have sued the company and meal breaks to them. The company cannot establish the actual loss incurred in pursuing those cases and is spending huge amounts of money. In addition, the firm was again sued in the year 2006 in which the petitioners alleged that the institution refused to compensate class associates for all hours worked and prevented them from assuming their complete meal and rest breaks (Walmart 2010⁵). These are among many cases pending in court concerning the company. They pose a threat to the company in the sense that the outside community and especially people with vested interests in the company might develop negative attitude towards the company.

Walmart’s products

Walmart Company is a retail company. It does not manufacture original goods and is actively involved in selling its products directly to the customers. Through its mission of making savings simple for the members and customers, the company has excelled in provision of exciting and high quality goods including healthcare goods, fresh food (fruits, vegetables and other consumable agricultural products), office products and equipments, electronic goods (television sets, radios and fridges) and other general consumables.

All these and many others are accessible through the company’s retail outlets both in US and in other countries where the company operates its subsidiaries (Canada, India, Mexico, and Brazil among other countries). The company deals with all goods stocked by common supermarkets. The company is driven by one production principle- incurring the least cost possible while buying, operating at the least possible and selling the goods at the lowest price possible affordable to consumers (Barry & Jamie, 2004⁶).

Geographical location(s) of Mart Company

The company is located in United States of America though it has subsidiaries in other countries outside US. It is sub divided into three segments, Walmart US, Walmart International and Sam’s club. Walmart US consists of the company’s mass merchant in US and is the mother for all other subsidiaries and it operates under the “Walmart” brand. The international segment entails foreign company’s operations while Sam’s Club consists of warehouse membership clubs located in the US. Therefore, the headquarter of the company is In US where considerable number of stores exists. All the branches operate separately and they can be termed as both investment and profit centers (Nikolai, Bazley & Jones, 2009⁷).

This is well demonstrated from the case study that shows company’s fiscal years end differently in different companies. For example, Walmart US and Canada branches have their fiscal years ending 31 January while all the others end in 31 December. Therefore, each subsidiary branch accounts for its revenue and costs independently from the country it operates. The company has even gone step further and established mergers in various countries as a strategy to secure huge markets and make market penetration easier.

The industry within which Walmart Company operates

The company operates in a retail industry where it provides final goods to consumers directly. It specializes in the provision of essential goods to the ultimate consumer. Therefore, the company carries out its trading activities in a highly competitive market and the quality services determine its competitive position. The company does not produce goods in any way and it buys already manufactured goods that it may then make some slight adjustments like branding which is a marketing strategy to improve the marketability of its goods. The control of its inventories is facilitated by huge number of stores maintained by the company and in particular US where there is huge number of warehousing facilities (Walmart 2010⁸). This enhances the efficiency of its operations and ensures the availability of goods throughout.

Why Walmart Company was chosen as the most preferred company

One of the reasons behind choosing Walmart Company over the other companies is that it provides a comprehensive financial analysis. The company has adequately provided all the relevant financial documents necessary for data analysis. In addition, the company has fully complied with General Accepted Accounting Principles (GAAP) in preparation of these statements and therefore they reflect the true picture of the company. The presentation of these statements has been done in manner that can facilitate judgment of a company at a glance.

Again, the reports provided cover the company’s performance for a number of years thus making it easier to make comparison of the company’s performance in different years. The supporting information has been availed citing the reasons for company’s performance in specific years. Another reason for choosing this particular company is that, it is a huge multinational company operating in a highly competitive environment and so it gives detailed information on the best strategies to implement to survive in an industry characterized by so many competitors and still emerge the most preferred goods provider to many consumers (Walmart 2010⁹).

Finally, the company is driven by so realistic goals that it has successfully achieved for instance, besides carrying out its trading activities; it is very committed towards achieving sustainability goal of protecting the environment through cutting its green house gas emissions at significant rate and provision of relief support to the societies that have been struck by catastrophes. This means the company is more committed towards contributing in sustainable development (Nikolai, Bazley & Jones, 2009¹⁰).

The company’s major competitors

As pointed out earlier, the company operates in a very competitive industry both in US and other countries served by the company globally. This poses a very big challenge and the companies in such an industry survive on the principle of survival for the fittest. There are so many suppliers of similar goods offered by Walmart and failure to formulate appropriate decisions can easily lead to the company’s exit out of the market.

One important philosophy that has contributed to company’s success is that of satisfying the customers first but not profit making motive. The company is facing stiff sales competition from supermarkets, warehouse clubs, and specialized stores-national, regional and international chain stores. There is also competition coming from retailers operating internet-based markets and some catalogue businesses.

The competition is not only informed of market penetration through provision of goods but also in form of looking for strategic sites where to put up extra retail outlets and employee attraction and retention who are referred to as ‘associates’ in Walmart Company. The physical location of a company or any business enterprise is an important since the buyer’s convenience plays a major role as far as movement of goods is concerned.

There is competition for the available space in which the company wants to put up new outlets. In addition, the employees of an organization have a significant influence on the nature of services the company is offering in the market. Expertise and high skills are essential requirements that every market player in the industry is striving to get. There are no specific companies that can be cited as posing competition to Walmart Company. The competition here is perfect since there are many market players in the industry and the goods being offered are similar (Weygandt, Kimmel & Kieso, 2009¹¹). In such a scenario, quality becomes an important factor of all the demand determinant factors and Walmart has successfully succeeded in achieving this.

Financial statements analysis for Walmart Company

The financial statements for Walmart Company consist of accounts of Walmart stores in US and its subsidiaries in other parts of the world. In preparation of these statements, intercompany factors have been neglected in consolidation.

Income statement analysis

The income statement of a company comprises of several income and expenditure components. The table below gives an overview of the company’s financial position since 2006 and any changes that might have occurred and the reasons behind their occurrences. All other subsequent summery will be based on this document (figure 1.0) various components of income statement of the company are discussed below.

Total revenue

The total revenue for a company is equivalent to the total sales. The total revenue for the year 2010 grew by 1 percent, a slightly lower growth rate as compared to the previous year 2009 when the rate was 7.3 percent. The growth rate was attributed to a number of factors including increased customer traffic, extensive international activities and the opening of a new marketing subsidiary in Chile (Walmart 2010¹²). This small growth rate was a result of $ 9.8 billion unfavorable currency exchange rate in the company’s international segments as compared to $2.3 billion in the fiscal year 2009 when the growth rate was a little bit higher. A higher growth rate in 2009 was also driven by international expansion activities and substantial increase in store sales.

Despite currency exchange rates effects, net sales from the international segment as a percentage of the company’s total revenue increased in fiscal years 2010 and 2009 respectively (Walmart 2010¹³). It is also suspected that currency exchange rate fluctuations may continue affecting foreign segment’s total revenue in the coming years. Comparable store sales which measure how the existing US stores have performed in terms of sales growth for a given period over the corresponding duration in the previous year is major contributor towards the company’s total revenue. There was a decline of 0.8 percent of comparable store sales in fiscal year 2010 in the United States as compared to growth rate of 3.5 percent in fiscal year 2009.

The decline was largely due to deflation in some goods categories and lower fuel prices. Similar outlets in the United States in the year n 2009 were those reordered in the year 2008 because of rise in consumer traffic and mean operation size per consumer. The decline in sales growth rates of comparable stores is due to the fact that, as the company opens new stores in the United States, these new stores thus deserting the existing stores are absorbing the customers. However, the company hopes that the impact of new stores on comparable store sales will eventually stabilize as the time goes by.

Operating profit

Operating profit is arrived at by subtracting the cost of sale and operating, selling, general and administration expenses from the total revenue. The company’s “objective is to grow operating profit at a higher rate than total revenue and operating expenses at lower rate” (Nikolai, Bazley & Jones, 2009, p.2¹⁴). During the fiscal year 2010, operating expenses grew by 2.7 percent as compared to fiscal year 2009 while the growth in net sales was 1.0 percent over the same period. This faster rate in operating expenses than net sales was due to higher health benefit costs and advertising expenses. Also in 2009, operating expenses increased at a faster rate of 9.3 percent compared to fiscal year 2008 when the net sales grew by 7.3 percent. This was attributed to higher costs in legal suits, utility costs and huge corporate expenses.

In the fiscal year 2010, the objective of growing operating income at a faster rate than total revenue was not achieved. Operating profit grew by 5.1percent as compared to 2009 when the net sales grew by 1.0 percent over the same duration. This fulfillment was met by Walmart US together with other foreign segments. Sam’s Club segment failed to meet this objective, which was primarily due to $174 million charged to restructure its operations and shut down of its ten clubs (Walmart 2010¹⁵).

In fiscal year 2009, the same company’s objective was not met as the operating profit grew by 3.9 percent as compared to fiscal year 2008 when total revenue went higher by 7.3 percent over the same period. The Walmart US and Sam’s cub did not meet this objective because of huge operating expenses and the international segment did not meet this objective because of weakening currency exchange rate and pursuit of certain legal suits.

Free cash flow

This is the “difference between operating activities of operations in progress and payments for property and equipments generated in that period” (Earnest, 2004, p.13¹⁶). There was an upward free cash flow of $ 14.1 billion in 2010, an increase from $ 11.6 billion in the previous fiscal year. This was attributed to improvement in operating results and proper management of inventory. However, free cash flow is not recognized as a GAAP financial measure under the SEC’s rules. Financial analysts suggest that free cash flow should be seen as a supplement rather than a substitute for income from business activities in progress as a measure of its performance and net income accruing from operating activities that indicate how liquid a business is.

In addition, free cash flow is limited by its definition. Cash flow calculation however, differs from company to company depending on the company’s policies (Earnest, 2004¹⁷). A number of ways of computing free cash flow do have been developed. Consequently, it is not easy to compare Walmart’s free cash flow to those of other corporations except there is an understanding that the firms in question have used the same method of calculation.

Income from continuing operations

Income from continuing operations for the years 2010, 2009 and 2008 were $ 14.9b, $ 13.8 b and $ 13.3 b respectively. The increase was primarily due to effective tax rate decline in 2010compared to 2009 because of $ 372 million in net tax benefits. This was because of the repatriation of some specific non-United States income that resulted in the upsurges of consumption of Unites States overseas tax credits.

Return on Investment (ROI)

It is one of the “significant measures because it helps investors assess how effectively the company is employing their assets. ROI is likely to fluctuate over time as the management tries to balance long-term potential strategic plans with any possible short-term effects” (Mervyn, 2001, p.35¹⁸). Walmart Company posted a ROI of 19.3 percent for both financial years 2010 and 2009. ROI is the attuned in service returns (working yield added to interest profits, reduction and rent expenses) for a specific fiscal year divided by the average principal put in for the given year under consideration.

ROI is a non -GAAP financial measure. Return on Assets (ROA) is taken to be a monetary appraisal that meets the terms with GAAP and for that reason the most favored gauge while computing the monetary dimension. Even though ROI is a customary monetary metric, a variety of ways exists for computing firm’s ROI. The company’s ROA for the fiscal year 2010 was 8.9 percent as compared to 8.4 percent in the previous fiscal year.

Earnings per Share (EPS): This is the “amount earned by shareholders per each unit share invested in the company” (Mervyn, 2001¹⁹). It is an indicator of company’s performance since its payment that is in form of dividends tells how a company has performed financially. EPS has increased from $ 3.35 in 2009 to $ 3.72 in 2010. This means that there is an improvement in financial performance of Walmart Company. This was attributed to the company’s expansionary activities and decreased operating expenses.

Various Accounting policies applicable in Walmart Company’s financial statements

Accounting policies are origins of Accounting used to evaluate how transactions are reported in the financial documents. They are prepared to take into account Accounting Standards Board pronouncements and other relevant accounting standards (Mervyn, 2001²⁰). Various accounting policies reflected in Walmart company are;

• Revenue recognition policy: This policy asserts that the revenue is reported in the financial statements in the fiscal year in which that revenue has been realized. According to this principle, all expenses incurred during a certain period must be matched with the revenue earned during the same period. Walmart Company has fully complied with this policy by ensuring all revenues are accounted for in specific periods in which they have occurred. No instances have been reported in which some revenues have been left out or carried forward for some specific fiscal years.
• Expense recognition policy: This policy holds that costs associated with particular sales or service revenue for instance cost of sales, sales discounts should be accounted for when sale or service revenue similar to those costs are realized regardless of whether the cost in question has been incurred or not (Libby, 2010²¹). In addition, costs not linked with particular sales or service revenue (e.g. Director’s salary, medical expenses) should be accounted for when incurred or when related service or good is used. All expenses in Walmart Company are only reported during and when they occur. That is they have only been recognized and recorded during the periods when these expenditures have been incurred.
• Extra ordinary items in Walmart Company: These are gains or losses incorporated in an organization‘s financial documents in most cases are not ordinary or usual occurrences. They occur due to unpredictable or unexpected events. These items are usually dealt with separately so that they do not tamper with organization’s regular earnings. In the case of Walmart Company, such instances have been reported for some times for example the company’s Sam club segment shut down some ten clubs that represented company’s losses.

Taxation policy in Walmart Company

Determination of provision for revenue taxes requires excellent judgment for the application of sophisticated tax laws. Walmart Company records all the benefits accruing from unexpected tax positions in their financial documents after asserting that the unpredictable tax positions will withstand any obstacle in case the taxing authorities make any adjustments (Walmart 2010²²). If facts and situations change, certain probabilities are reassessed and any changes are maintained in the financial documents appropriately. Judgment is recommended to assess the correct timing and amounts that can be deducted. Walmart has never reported any losses but rather gains have been realized as reported in the financial statements.

Comparative Analysis of the major items of the Income Statement for five-year period

The major items in the financial statement include Gross profit, operating expenses, operating income, depreciation, amortization, and cost of sales among others (Mervyn, 2001). For the past five years, since 2006, these items have been varying greatly in Walmart Company. Gross profit margin, which is gross profit as a percentage of total revenue, has exhibited considerable growth in every year. As shown in figure 1.0, there has been growth of 24.8 percent, 24.2 percent and 24.0 percent in financial years 2010, 2009 and 2008 respectively. Walmart based in the United States and global section produced moderately higher gross earnings scope than Sam’s Club division.

The increase in gross profit margin for the financial year 2010 was facilitated by extensive focus on excellent merchandising strategies and proper management of inventory in Walmart US and Sam’s club. The growth in financial year 2009 as compared to 2008 was because of less mark down operations and lower inventory shrinkage. These improvements were brought about by merchandising initiatives that led to increased space allocation, excellent pricing strategies and efficient supply chains improvements.

In financial year 2010, the international segment’s gross profit margin went higher by 0.2 percent as compared to the previous year. This was due to currency exchange rate fluctuations. In 2009, this same growth went down by 0.2 percent as compared to previous year (Walmart 2010²³). The reason for this decline was due to lower margin fuel revenue in UK and enhancement of lower pricing strategy in Japan. Generally, the gross profit has been growing tremendously over the past years in Walmart Company and this is primarily due to expansion of business activities that make the company enjoy economies of scale hence cutting down production costs per unit.

Operating income too has been increasing since the financial year 2006. In fiscal year 2006, it was $ 18693 million while in fiscal year 2010 the figures were $ 23,950. The company has been striving to grow the operating income at a higher rate than total revenue and operating expenses. Walmart has achieved this since there has never been a negative growth rate on the part of operating income. This is due to provision of high quality goods and competitive services from its associates.

The net sales for the Walmart have also been increasing though unlike other items the growth rate has been declining from the past years as shown from figure 1.0. The growth was highest in 2007 when the company recorded a growth rate of 11.6 percent and since then the growth has been declining up to 2010 when the company recorded the worst growth rate of 1.0 percent. This decline has been caused by closure of ten clubs of Sam’s club and loss of customers from the existing warehouses who are being absorbed by newly created warehouses in US.

Conclusion

The proper presentation of financial statements with full compliance of GAAP and other accounting principles gives the true picture of the company (Libby, 2010²⁴). How various financial documents in Walmart Company have been analyzed and presented gives detailed information of the company’s financial performance and its potential growth prospects. The company has excelled in achieving sustainability, growth and leverage goals. The expansionary plans have been successful and extended its retail services to several countries around the globe. It has emerged that the overall goal of customer satisfaction is very crucial when running a business and this is what has driven the company to where it is now.

References

Barry, E. & Jamie, E. (2004). Financial accounting and reporting. London: Prentice Hall.

Earnest, G. L. (2004). Principles of accountancy. New York, NY: Marshall Publishing Company.

Libby, R. (2010). Financial accounting. New York, NY: McGraw-Hill Companies.

Mervyn, L. K. (2001). Islam and accounting. Oxford: Wiley-Blackwell.

Nikolai, L. A., Bazley, J. D. & Jones, J. P. (2009). Intermediate accounting. Washington, Cengage learning.

Walmart Annual Report. 2010. Financial highlights. Bentonville: Prentice Hall.

Weygandt, J. J., Kimmel, P. D. & Kieso, D.D. (2009). Financial accounting. 7 Edn. New York, NY: John Wiley & Sons.

Footnotes

1. Walmart Annual Report. 2010. Financial highlights. Bentonville: Prentice Hall.
2. Libby, R. (2010). Financial accounting. New York, NY: McGraw-Hill Companie.
3. Weygandt, J. J., Kimmel, P. D. & Kieso, D.D. (2009). Financial accounting. 7 Edn. New York, NY: John Wiley & Sons.
4. Nikolai, L. A., Bazley, J. D. & Jones, J. P. (2009). Intermediate accounting. Washington, Cengage learning.
5. Walmart Annual Report. 2010. Financial highlights. Bentonville: Prentice Hall.
6. Barry, E. & Jamie, E. (2004). Financial accounting and reporting. London: Prentice Hall
7. Nikolai, L. A., Bazley, J. D. & Jones, J. P. (2009). Intermediate accounting. Washington, Cengage learning.
8. Walmart Annual Report. 2010. Financial highlights. Bentonville: Prentice Hall.
9. Walmart Annual Report. 2010. Financial highlights. Bentonville: Prentice Hall.
10. Nikolai, L. A., Bazley, J. D. & Jones, J. P. (2009). Intermediate accounting. Washington, Cengage learning.
11. Weygandt, J. J., Kimmel, P. D. & Kieso, D.D. (2009). Financial accounting. 7 Edn. New York, NY: John Wiley & Sons.
12. Walmart Annual Report. 2010. Financial highlights. Bentonville: Prentice Hall.
13. Walmart Annual Report. 2010. Financial highlights. Bentonville: Prentice Hall.
14. Nikolai, L. A., Bazley, J. D. & Jones, J. P. (2009). Intermediate accounting. Washington, Cengage learnin.
15. Walmart Annual Report. 2010. Financial highlights. Bentonville: Prentice Hall.
16. Earnest, G. L. (2004). Principles of accountancy. New York, NY: Marshall Publishing Company.
17. ibid.
18. Mervyn, L. K. (2001). Islam and accounting. Oxford: Wiley-Blackwell
19. ibid.
20. Mervyn, L. K. (2001). Islam and accounting. Oxford: Wiley-Blackwell.
21. Libby, R. (2010). Financial accounting. New York, NY: McGraw-Hill Companies.
22. Walmart Annual Report. 2010. Financial highlights. Bentonville: Prentice Hall
23. Walmart Annual Report. 2010. Financial highlights. Bentonville: Prentice Hall.
24. Libby, R. (2010). Financial accounting. New York, NY: McGraw-Hill Companies.