Description of Walmart Inc. and Competition & Equity Report

Week 8 Final Project – Written Equity Report

Description of Walmart Inc. and Competition/Industry Overview

Walmart Inc. (formerly Wal-Mart Stores, Inc.) headquartered in Bentonville, Arkansas was founded by Sam Walton in 1962. Walmart is an American multinational retail corporation that operates a chain of hypermarkets, discount department stores, and grocery stores. (Form 8-K). As of January 31, 2018, Walmart has 11,718 stores and clubs in 28 countries. (Form 10-K). Walmart’s mission is to help people around the world save money and live better.

Walmart’s business strategy as stated in Item 1 of its Form 10-K is to lead on price, differentiate on access, be competitive on assortment and deliver a great experience. The emphasis of being a price leader is to earn the trust of customers through the company’s ability to provide a broad assortment of quality products and services at everyday low prices (“EDLP”). The acronym “EDLP” is core to how Walmart conducts business. Everyday low prices, along with everyday low costs (“EDLC”), is Walmart’s promise or commitment to price items at low prices, and control expenses to ensure cost savings are passed along to its customers every day. (Form 10-K).

There are many publicly traded U.S. and international companies that are considered competitors to Walmart in the discount, grocery and online shopping (e-Commerce) markets. When determining Walmart’s top three competitors, it is important to consider how competitors rank in the markets that Walmart reside. With respect to Walmart being the number one Fortune 500 retail company and number one ranked discount store, Target Corporation is one of Walmart’s top competitor because they are the second largest discount chain in the United States. Target’s market capitalization is $41.8 billion dollars compared to Walmart’s $298.8 billion dollars (D&B Hoovers).

The Kroger Company is another top competitor to Walmart in the grocery industry. The Kroger Company is the largest supermarket chain by revenue ($115.34 billion in fiscal year 2016) and the second largest general retailer behind Walmart (Wikipedia). The Kroger Company is ranked 18th in Fortune 500 operating 3,900 stores under various banners, including 2,800 supermarkets (D&B Hoovers).

The third top competitor to Walmart is Amazon.com, Inc. Amazon is ranked number 12 in Fortune 500 and is the world’s largest internet company by revenue and market capitalization (D&B Hoovers). Walmart is also in the e-commerce industry and is seeking future growth in this sector.

Financial Analysis

In reviewing Walmart’s financial statements, an analyst would look at the company’s balance sheet, income statement and statement of cash flows. Walmart reported total assets of $198.825 billion (B) in FY2017 with $58B in current assets and $141B in noncurrent assets accounting for the total. Property, plant and equipment represented 76.32% of total assets in FY2017. (BS Exhibit 1). In comparison, Target reported $37.4B, Amazon $131.3B and Kroger $36.5B in total assets. Inventories comprised the largest current asset balances over the four-year period (FY2014-2017) for Walmart, Target and Kroger, while cash represented the largest current asset balance for Amazon averaging $23.5B over four years. (Morningstar.com).

The current ratio is the most common liquidity ratio. The current ratio is used to measure a company’s ability to pay back its liabilities with its assets. Walmart’s current ratio was 0.86 compared to Kroger’s 0.80, Target’s 0.94 and Amazon’s 1.04 FY2017 current ratios reported, respectively. (Morningstar.com). The debt-to-equity ratio is a leverage ratio that measures a company’s debt relative to the total value of its stock. The debt-to-equity ratio is used to gauge the extent to which a company is taking on debt to increase its value by using borrowed money to fund projects. A higher debt-to-equity ratio is often associated with higher risk. In FY2017, Walmart reported a debt-to-equity ratio of 0.55 which was considerably favorable compared to Target’s 1.01, Amazon’s 1.37 and Kroger’s 1.77 ratios. Walmart’s debt-to-equity ratio has remained constant over the last three years. (Ratios Exhibit 4 and Morningstar.com).

Walmart reported $485.9B in total revenues compared to Target’s $69.5B, Amazon’s $177.9B and Kroger’s $115.3B in FY2017. Walmart’s gross profit margin over the last four years has averaged 25.11%, while Target, Amazon and Kroger have averaged four-year gross profit margins of 29.6%, 33.7%, and 21.6%, respectively. Walmart’s consolidated net income (less minority interest) as a percentage of total revenues or net profit margin was 2.81% in FY2017. The 2.81% profit margin reported was favorable versus Amazon’s 1.71% and Kroger’s 1.70% profit margins, but unfavorable compared to Target’s 3.94% profit margin. (IS Exhibit 2, Ratios Exhibit 4 and Morningstar.com).

The statement of cash flow is comprised of operating, financing and investing activities. Operating activities represent the amount of money a company brings in from ongoing, business activities. Walmart and its competitors all reported positive operating cash flows in FY 2017. Walmart reported $31.5B in net cash provided by operating activities versus $5.4B, $18.4B, and $4.3B for Target, Amazon and Kroger, respectively. Net cash used in investing activities was shown in all companies with investments in property and equipment accounting for much of the capital spending for Walmart, Target and Kroger over the last four years. In addition to investments in property and equipment, Amazon reported significant cash expenditures in net acquisitions ($14B) and purchases of investments ($14B) during FY2017. Regarding financing activities, dividends paid and repurchase of treasury stock accounted for most of Walmart’s spending, while long-term debt repayment and repurchase of treasury stock were responsible for Target and Kroger’s financing activities uses of cash. Conversely, Amazon reported a positive cash flow in its financing activities as proceeds received from long-term debt issuances ($16.2B) exceeded long-term debt repayments ($6.4B). (Statement of Cash Flows – Exhibit 3 and Morningstar.com).

Risk/Opportunity Analysis

Analysts can review the company’s risk factors by looking at Item 1a and Item 7a content found in Walmart’s 10-K. When considering Walmart’s Item 1a risk factors, analysts should note those risk factors that adversely impact the company’s business, results of operations, financial condition, and liquidity. Risks can be categorized as strategic, operational, financial, and legal, tax, regulatory, compliance, and reputational. (Risk Factors).

Domestic and international economic conditions are considered strategic risks since they impact financial performance. Interest rates, labor, healthcare, unemployment, outside competitors, and market