Wal-Mart at the New York Stock Exchange - Essay Example

Wal-Mart at the New York Stock Exchange Introduction Wal-Mart is listed at the NYSE (New York Stock Exchange) as WMT. It is headed by Mike Duke who is the CEO and President of the company (Annual report 2011, 1). The company’s stock price as of July 6, 2011 was $53.39 per share (finance.yahoo). The stock’s trading range over the last 52 weeks is between $48.16 and 57.90 (finance.yahoo). Their dividend rate is $1.46 and yield is 2.7% (finance.yahoo). The company’s registered office is at 702, SW Eighth Street, Bentoville, AR 72716-8611, US (finance.yahoo). As per the company’s Annual report 2011, their “fiscal year ends on January 31st for US and Canadian operations and December 31st for other countries” (16). The company is one of the biggest retailers in the world and deals in various products ranging from food items and clothing to electronics and pharmaceuticals. It operates through three business segments – Walmart US, Walmart International and Sam’s club. The company has operations in all states of the US besides 11 other countries including the developing economies like China and India (50). Ernst and Young LLP are Wal-Mart’s independent auditors. The auditors in their report have stated that the internal controls over the financial reporting are satisfactory and as per accounting principles as of January 31, 2011 and that the statements presented in the annual report provide fair financial position of the company as a whole for both the years 2010 and 2011. Industry outlook The retail industry is one of the most competitive and unpredictable industries. With the world becoming a global village, it has become imperative that organizations in this sector reach out to unexplored geographical locations earlier than their competitors to take advantage of the new markets. For this they need to be quick to adapt to the new cultures of these markets. This sector also has competition from technological innovations in communication. Since it has now become easier to get in touch with the customer through internet, companies need to utilize these facilities to the fullest and at the earliest. Environmental concerns are also the issues which the companies in this sector cannot ignore. Future plans As per the CEO, Duke “the company has five point priorities – growth by adding customers…..expanding the company sustainability effort” (D’Innocenzio and Bartels). Expansion within the US remains his top priority as well. The company plans to increase its Sam’s Club membership by improving customer experience for its members. They also plan to increase transparency is price.. Wal-Mart is also planning to expand web presence to more geographical locations. Wal-Mart US is experimenting with new formats and is planning to launch Walmart Express to start with. Walmart international is targeting to increase new space by 23 to 24 million square feet in emerging markets this year. Income Statement analysis The company uses multi-step income statement. The company’s gross margin was at 25.26% in 2011 as against 25.4% in 2010. This shows that the gross profit did not show much change as a percentage of sales over the two years. In absolute numbers, the gross profits for 2011 and 2010 (in millions) were $106,562 and $103, 641respectively. Income from operations before income tax (in millions) was $23,538 in 2011 and $22,118 in 2010. The increase in both these incomes is attributable to increased sales due to its expansion into new markets and increase in number of stores. The company increased its floor space by 3.4% during the financial year 2011 (Annual Report 17). Favorable exchange rate also helped the sales figure to increase (17). One more reason for this increase is the reduction of effect of the financial crisis in US markets. Cash Flow statement analysis Cash Flow statement shows that the net cash (in millions) provided by the operating activities for 2011, 2010 and 2009 was $23,643, $26,249 and $23,147 respectively. This shows that though there was an increase in the cash flow in 2010 over 2009, there was a decline in 2011. However, in all the years, the cash flow from operations is higher than the net income. One major contributor to the increase in cash flow in 2010 over 2009 is the reduction in inventory levels ($184 million invested in inventory in 2009 vs. $2,213 million inflows from inventory in 2010); whereas the opposite trend (i.e. an increased investment in inventories) has caused the free cash flows to decline in 2011. Another reason for this decline over 2010 period is the tremendous increase in accounts receivable in 2011 (only $297 million receivables in 2010 vs. $733 million in 2011). From the cash flow statement it can be seen that the company has mostly invested in property and equipment (capital expenditure) as well as in business acquisitions in all the three years. However, there was no acquisition activity in 2010. Major financing has been done through long term borrowing in 2011. If we look at the cash flow from financing activities we can see that the company has increased its long term debt by $5,840 million. In 2010 also issuance of long-term debt was the major source of financing. Accounting policies Notes to consolidated financial statements for the year ending 2011 contain the following headings - Summary of significant accounting policies, Accounting change, Net Income per common share, Share based compensation, Restructuring changes, Accrued liabilities, Short-Term borrowings and long-term debt, Fair value measurements, Derivative financial instruments, Taxes, Accumulated other comprehensive income(loss), Legal proceedings, Commitments, Retirement-related benefits, Acquisitions, investments and disposals, Segments, Subsequent events and Quarterly financial data (unaudited) Financial ratios analysis Looking at the company’s current ratio of 0.89 and 0.86 (Table 1), we can see that the current assets do not adequately cover the current liabilities. However, for retail companies, which do most of the business in cash and have high inventory/working capital turnover, the realization of cash is much faster than say a heavy machinery company. The company is maintaining a negative working capital with current assets at $51,893 (Summary of significant accounting policies) in 2011 and $48,032 (Summary of significant accounting policies) in 2010 while current liabilities at $58,484 and 55,543 for respective years. This further signifies the above discussion. Thus, Wal-Mart looks adequately covered for short term liabilities. The return on equity ratio shows an improvement in 2011, from 20.39 in 2010 to 23.91 in 2011. This shows that the company management has been able to improve return for the equity holders and is a positive sign. There is a slight drop in the total assets to sales ratio in 2011 (from 2.39 in 2010 to 2.34) (Table 1). This shows that there is a drop in the efficiency with which the company has been managing its assets to generate revenues. The rate earned on total assets was 8.43% in 2010 and 9.07% in 2011 (Table 1). This shows that the company has been able to improve its return on total assets. The PE ratio for January 2011 was 12.54 and for January 2010 it was 14.40 (ycharts.com).This shows that the investor’s expectation of the company’s growth was lower in 2011 as compared to 2010. Conclusion Wal-Mart has a tradition of innovation and change. It has always ensured that it follows the EDLP (Every Day Low Prices) policy at all its outlets and has one of the best supply chain management systems to get maximum cost benefits. The company has also been focusing on sustainable supply chain techniques. For example the company is planning to start a “green rating” system which will help consumers understand the magnitude of the environmental impact of the product they are buying (Gutierrez). Thus, the company has positioned itself to remain a leader even in the future. Its major competitors – Tesco and Carrefour, are far behind in terms of sales and market capitalization. The buyback of shares by the company also shows that the company is in a financially strong position despite low sales over the last two years. Thus, I expect the company to perform even better in the current fiscal and do not see the growing completion to hinder its growth over a long period. Reference “Annual report 2011 – Wal-Mart”. Wal-Mart Stores Inc. June 3, 2011.pdf. finance.yahoo.com, “Wal-Mart Stores Inc”, yahoofinance.n.d.Web. July 7, 2011. http://finance.yahoo.com/q/pr?s=WMT D’Innocenzio, Anne and Bartels, Chuck. “Wal-Mart CEO pushes plan to keep retailer growing”. Associated Press. June 3, 2011.Web. July 7, 2011 http://www.msnbc.msn.com/id/43267689/ns/business-consumer_news/t/wal-mart-ceo-pushes-plan-keep-retailer-growing/ Gutierrez, David. “Wal-Mart to label products with green rating”.Natural News.March 31, 2010.Web.July 7, 2011 http://www.naturalnews.com/028476_Wal-Mart_green_products.html ycharts.com. “Wal-Mart stores PE Ratio”. Ycharts.n.d. Web. July 7, 2011. http://ycharts.com/companies/WMT/pe_ratio Appendix Table 1 (Own calculations except P/E ratio. All inputs to formulae have been taken from the Annual report 2011- Wal-Mart)   2011 2010 Formulae Total sales to Total Assets 2.34 2.39 Total revenues/Total Assets ROI-return on equity 23.91 20.39 Net Income/Equity Current Ratio 0.89 0.86 Current assets/current liabilities Working capital ratio 47.84 40.56 Cost of sales/Working capital Rate earned on total assets 9.07% 8.43% Net Income/Total Assets P/E ratio 12.54 14.40 Market price per share/EPS Read More