Wal-Mart - the Largest Retailing Chain and a Business Leader in the Retail Industry - Case Study Example

? Wal-Mart a) Introduction Wal-Mart is the largest retailing chain and a business leader in the retail industry. It is also one of the largest employers in America, Mexico and Canada. Wal-Mart has above 8600 retailing agents under 59 diverse subsidiaries in 15 nations around the globe. Wal-Mart employs over 2 million people across the world (Walmart Announces Capital Strategy to Drive Global Growth; Next Year's Capital Spending to Increase Slower Than Sales). In 2010 it generated sales of approximately $405 billion (Wal-Mart 2010 Financial Report, 21). In US, Wal-Mart operates over 4,300 stores and also operates the Sam’s Club chain. Wal-Mart Stores US have different subsidiaries namely Wal-Mart Discount Stores in 692 locations, Wal-Mart Supercentres in 2933 locations, Wal-Mart Neighborhood Markets in 183 locations, SAM’s CLUB in 609 locations and small format stores. In Argentina, Wal-Mart has 4 subsidiaries with 64 retail chain units. Wal-Mart has 10 subsidiaries in Brazil with 484 units in their retail chain. Wal-Mart Canada has 2 subsidiaries with 325 units of retail outlets. In Chile, there are 285 units in their retail chain under 6 subsidiaries. In China Wal-Mart have 6 subsidiaries under which there are 338 units. In Costa Rica Wal-Mart have 4 subsidiaries with a retail chain of 183 units. Under Mexico y Centroamerica there are 3 subsidiaries also performs business in El Salvador with 78 retail chain units. In Germany, Wal-Mart had 85 stores which were taken over by Metro and now Wal-Mart has no operational activities in Germany. (Wal-Mart abandons German venture) In India Wal-Mart have 6 retail chain units under the subsidiary called as Best Price. Mexico y Centroamerica also operates at Guatemala, Honduras and Nicaragua with 177 units, 58 units and 62 units of retail outlets under them. In Mexico Wal-Mart have 1789 retail outlets under 6 subsidiary of Walmart de Mexico y Centroamerica. In Puerto Rico Wal-Mart have 54 retail outlets under 4 subsidiaries. While, in UK the subsidiary of Wal-Mart is known as Asda and 536 retail chain units operates under 4 subsidiaries. Whereas, in Japan Seiyu Groups operates 413 retail outlets of the Wal-Mart chain under 5 subsidiaries. Among these subsidiaries of Wal-Mart in the various nations mentioned above were under taken by Wal-Mart with the help of acquisitions, some of them are Asda, the Seiyu Ltd., Seiyu Group, etc. (International Operations) For Wal-Mart if we divide the geographic region of operation as International and US market. Then it will be evident that, the Net Sales value of Wal-Mart in US exceeded over $260 billion and 3,804 retail units for the year of 2010-11. The operating income also increased by 3.1% to $20 billion (approx). While the consolidated net sales figure of Wal-Mart in the 15 countries they are operating net sales value amounted to $109 billion and 4,557 retail units for the year 2010-11. The net sales also grew by 12% and the operating income increased by $5.6 billion. The net sales value of Sam’s Club was $49 billion and 609 retail units for the year 2010-11. The increase in net sales was 3.5% over the previous year. (Wal-Mart 2011 Annual Report, 4-9) b) Wal-Mart’s Foreign Exchange (FX) Risk Management Policy Is centralized or decentralized? A firm opts to take risk for maximizing their profit on their areas of unique expertise. While, a firm with non-financial activities tries to minimize their foreign exchange risk and interest rate risk (Wallace, 2). Wal-Mart as a retail management chain operates in US and 15 other countries. As per the Foreign Currency Translation policy of Wal-Mart “The assets and liabilities of all foreign subsidiaries are translated using exchange rates at the balance sheet date. The income statements of foreign subsidiaries are translated using average exchange rates. Related translation adjustments are recorded as a component of other accumulated comprehensive income.” (Reimer, 774) This shows that all the financial transaction systems are controlled from the top level management in US which shows that Wal-Mart has a centralized system of FX risk management. What types of exposure are measured and managed? The risk exposure can be classified into transaction, translation and operating exposure. Changes in the cash flow which is generally the outcome from the existing contractual obligations involving foreign currencies are known as transaction exposure. Whereas, operating exposures are the changes in expected future cash flows resulting from an unanticipated change in the future exchange rate. Translation exposure is mainly the changes in owner’s equity in the consolidated financial statements caused by changes in exchange rates (Eldomiaty, 2). Transaction exposure lays an impact on daily transaction owing to the fluctuations of exchange rate valuation of the two vital components of balance sheet. So, for Wal-Mart all these exposures i.e. transaction, translation and operating exposures are measured and tried to be regulated. If we observe a simulation case we will be able to understand that the world-wide currency phenomenon will be acting as a backdrop to gain knowledge about the Operating exposure risk. The first thing which will be present is the intense pressure from US to China for re-valuing Yuan. Second emerging phenomenon is taken as the short term debt of $2 trillion which US treasury requirements for refinancing. In this regard, for the first phenomenon let us assume that Wal-Mart was sourcing manufactured goods of $9 billion from China and $1.2 billion from India. The Chinese suppliers of Wal-Mart will face a FX ‘negative operating risk’ due to the revaluation of Yuan. As, the Chinese suppliers were getting $9 billion from Wal-Mart, now revaluation means the Chinese currency will become expensive. Hence more dollars need to be paid for the same amount of Yuan than before. The same dollar will earn lesser Yuan or more dollars will be needed to earn the same Yuan. Hence, suppliers who were getting more Yuan previously will get less Yuan now. With this revaluation of Yuan Wal-Mart’s future cash flows as well as profits will be affected. So, after revaluation of Yuan the sourcing from China would not be much attractive proposition for Wal-Mart. Hence, Wal-Mart will approach to other Asian countries for greener pastures. This will create a scenario for emerging economies like India expect a lot of orders will be coming to them and a positive operating risk will be generated. So, many manufacturers of Singapore and Middle East will anticipate emergence of India as a destination for sourcing and express their interest in shifting production to India. Secondly, if we focus on the value of US dollar it will be observed that due to huge debts the value of USD will plummet which is inevitable. This depreciation of dollar will be very encouraging for the Chinese suppliers whereas it will act as an inhibitor to the Indian economy as the positive operating risk no longer will exist and the enthusiasm of Indian suppliers will cease. (Tambi) Wal-Mart uses financial derivative instruments for non-trading and hedging purposes which will enable them to manage its exposure to foreign exchange rates. These derivative instruments for the hedging programs expose the firm to market risk and credit risks. Market risk is the phenomenon when there is a possibility of revaluation of the financial derivative instruments. This revaluation of financial derivative product also is greatly initiated by the varying value of the underlying hedged item. While, credit risk is the possibility when a party does not fulfill the terms and condition of the contract and violates the contract. These financial derivative instruments mainly enable Wal-Mart for measuring the interest to be paid as well as received and they are generally non-representative of the firm’s exposure to credit risk. The monitoring of credit risk by Wal-Mart is done by establishing approval procedures; it also includes setting of concentration limits by the counterparty; reviewing the credit ratings and requiring collateral most of the time in terms of cash when appropriate. Most of the transactions of Wal-Mart are with counterparties those are rated AA- or better by the credit rating agencies which are nationally recognized. (Wal-Mart Risk Management Policy) How has “Other Comprehensive Income”, an equity account, changed in recent years? Comprehensive income attributable to Wal-Mart is “The change in equity [net assets] of a business enterprise during a period from transactions and other events and circumstances from non-owner sources which are attributable to the reporting entity. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners, but excludes any and all transactions which are directly or indirectly attributable to that ownership interest in subsidiary equity which is not attributable to the parent.” This comprehensive income attributable by Wal-Mart Stores Inc. to the company also increased during the year of 2009 to 2010 and from the year 2010 to 2011. (Wal-Mart Stores Inc. (WMT) | Statement of Comprehensive Income) The other comprehensive income or the equity account also changed which is clearly visible from the balance amounts of Feb 01, 2008, Jan 31, 2009 and Jan 31, 2010 and shows an increasing trend. Balances of Feb 1, 2008 Amounts in Million No. of Shares Common stock Capital in excess of par Retained Earnings Accumulated other Comprehensive Income (loss) Total Wal-Mart Shareholders Equity Non-controlling interest Total equity As Adjusted 3,973 $397 $3,028 $57,022 $3,864 $64,311 $1,939 $66,250 Consolidated net income - - - 13,381 - 13,381 499 13,880 Other comprehensive income - - - - (6552) (6,522) (371) (6,923) Cash dividends ($0.95 per share) - - - (3,746) - (3,746) - (3,746) Purchase of Company stock (61) (6) (95) (3,315) - (3,416) - (3,416) Other 13 2 987 2 - 991 (273) 718 (Consolidated Statements of Shareholders Equity) Balances-January 31, 2009 Amounts in Million No. of Shares Common stock Capital in excess of par Retained Earnings Accumulated other Comprehensive Income (loss) Total Wal-Mart Shareholders Equity Non-controlling interest Total equity As Adjusted 3,925 $393 $3,920 $63,344 (2688) $64,969 $1,794 $66,763 Consolidated net income (excludes redeemble noncontrolling interest) - - - 14,370 - 14,370 499 14,869 Other comprehensive income Cash dividends ($1.09 per share) - - - - 2618 2618 64 2,682 Cash dividends ($0.95 per share) - - - (4,217) - (4,217) - (4,217) Purchase of Company stock (145) (15) (246) (7,136) - (7,397) - (7,397) Purchase of redeemable noncontrolling interest - - (288) - - (288) - (288) Other 6 - 417 (4) - 413 (177) 236 (Consolidated Statements of Shareholders Equity) Balances – January 31, 2010 Amounts in Million No. of Shares Common stock Capital in excess of par Retained Earnings Accumulated other Comprehensive Income (loss) Total Wal-Mart Shareholders Equity Non-controlling interest Total equity As Adjusted 3,786 $378 $3,803 $66,357 (70) $70,468 $2,180 $72,648 Consolidated net income (excludes redeemable noncontrolling interest) - - - 16,389 - 16,389 584 16,973 Other comprehensive income - - - - 716 716 162 878 Cash dividends ($1.21 per share) - - - (4,437) - (4,437) - (4,437) Purchase of Company stock (280) (28) (487) (14,319) - (14,834) - (14,834) Other 10 2 261 23 - 240 (221) 19 Balances 3516 $352 $3,577 $63,967 $646 $68,542 $2,705 $71,247 (Consolidated Statements of Shareholders Equity) c) Hedging Transactions used for the risk exposures encountered by Wal-Mart Stores Inc.: Wal-mart Stores Inc faces risk exposures to translational, transactional as well as economic risks. The company mainly focuses on using derivatives that include the interest rate swaps and cross currency swaps thus hedging the risks by exchanging the interest rates and currencies in one country against another country’s currency. That is, through the swaps instruments, the company can exchange interest rates in one country with rates of another country or currency amounts in one country with amounts in another country. However, the use of financial derivatives for hedging makes the company to face market and credit risks. Market risk occurs when there is a possibility of the value of derivative instrument to change. On the other hand, a credit risk might occur if the any of the parties do not fulfill their terms (Walmart 2010 Annual Report, 39). Fair value instruments: As per some agreements of swaps, the company is capable of swapping the fair value of fixed rate debt by paying floating rate interests and gaining fixed rate interests. The interest rate swaps of the company undergoing this process are referred to as fair value hedges (Walmart 2010 Annual Report, 40). Net investment instruments: The net investment of the company in the United Kingdom is hedged by the cross currency interest rate swaps that the company can gain. Changes in fair value of derivative instruments are recorded in accumulated losses that offset currency translation adjustments (Walmart 2010 Annual Report, 40). Cash flow instruments: The interest rate risk of some of the non-U.S. dominated debt can ne hedged by the company’s paying for fixed rates and receiving floating rates of interest (Walmart 2010 Annual Report, 40). Time frame in managing risk: When the company exercises derivative financial instruments to hedge its risks, the terms of contract and the duration is quite close to the item of hedging that provides a high level of risk reduction and correlation (Walmart 2010 Annual Report, 39). Thus if Wal-mart uses derivatives, the time frame required o manage risks would largely depend on the duration of time decided by the agreements of the swaps or other derivative instruments contracts. Investment, Funding and Other Price issues at Wal-mart: Wal-mart has plans to lower its prices, create jobs and work with stakeholders thus investing in other companies like Massmart Holdings Limited. The company has also made investments in other companies like Yihaodian which is an eCommerce business in Chins. Thus the company can be found to fund its investments on such transactions that would lead the company to higher position. The company by making use of derivatives is capable of reducing the risks that it may get exposed to through such similar transactions. In another case Wal-mart Canada had announced plans for price reductions (Walmart Corporate). The use of derivatives helps the company by hedging the different risks thus facilitating the company in making investments, as well encounter price risks. d) What is the extent of the company’s offshore and Euro-market funding and investing activities? When Wal-Mart first offered the Eurobonds there was a big rush within the investors in Europe to participate in it. After one and a half hour of the issuing it was recorded that book closed at 6.2 billion euro in which 300 accounts participated. Among those 300 participants 10 orders were of more than 100 million euro. Many companies throughout Europe were interested on Wal-Mart’s Eurobonds as well as the fund managers, hedge funds, banks, insurance companies and pension funds. (Walmart: Winning a better deal, 2) After entering the Portuguese market through acquisition strategy there was a very strong opposition from the European retailers. As mentioned earlier, in France Carrefour gave a steep competition and in Germany Wal-Mart had to sell over the assets to Metro as the German market was not enough strong and the competition with Metro was making both the firms weak. They also planned to move on to smaller countries like Austria, Chez Republic, Belgium, Holland and Luxembourg to acquire market (Ferreira, 22). A detail of Wal-Mart’s business extent can be observed from the geographic retail chain unit break up mentioned earlier in the introduction of the paper. To understand the future plans of expansion and investment of Wal-Mart the vision of their International leader is very important. Doug McMillon, International President and CEO of Wal-Mart stated that "Our capital investment for next year will drive new store growth with particular emphasis in the emerging markets of China, Brazil and Mexico." He also mentioned "Through a combination of comparable store sales, new store square footage and continued earnings performance, we will continue to shape our international portfolio to drive both growth and improving returns. We will also continue to evaluate acquisitions to enter priority markets and to build scale in existing markets." (Walmart Announces Capital Strategy to Drive Global Growth; Next Year's Capital Spending to Increase Slower Than Sales) Wal-Mart will spend a capital between $13.5 and $14.5 billion for fiscal year 2012 and their international investment continues with the focus of gaining a strong foothold on the emerging markets. In the ending of fiscal year Jan. 31, 2011 Wal-Mart expects they have added 32.5 million sq. ft. world-wide, compared to the addition of space amounting to 34 million sq. ft. in the former year. Wal-Mart also expects to add their global footage between 34.5 and 35.5 million sq. ft. in the fiscal year 2012. They are also investing aggressively on organic growth, these new stores will add 21 million sq. ft. space and between 23-24 million sq. ft. next year. (Walmart Announces Capital Strategy to Drive Global Growth; Next Year's Capital Spending to Increase Slower Than Sales) e) Conclusion This paper shows that Wal-Mart is the largest retail chain of the world with a huge number of employees in US and 15 other countries mentioned earlier. Business strategy of Wal-Mart is to attain cost leadership and attract more and more customers by exploring new markets of the emerging countries. As Wal-Mart is working in different markets of different countries there is a huge scope of exchange rate fluctuations which increases financial risk and also the operating risk and Wal-Mart is readily susceptible to transaction, translation and operating risk exposures. So, to decrease transaction, translation and operating risk exposures Wal-Mart tries to manage their financial policies through a centralized system controlled from US by translating the daily assets and liabilities of the 15 countries by an average exchange rate. Wal-Mart’s top management uses the financial derivative instruments mostly to reduce the transaction, translation and operating risk exposures. Wal-Mart do not try to regulate the credit and market risk by using these financial derivative instruments as by using them there is a probability of increment in the market risk and credit risk. Wal-Mart have huge expansion plans for this coming two years for entering and acquiring the market of emerging countries like China, India and Brazil. They have also planned to invest capital between $13.5 -$14.5 billion and add their global footage between 34.5 and 35.5 million sq. ft. in the fiscal year 2012. This shows their intent and expected expansion in the global market to diversify the market and decrease the total business risk. (Walmart Announces Capital Strategy to Drive Global Growth; Next Year's Capital Spending to Increase Slower Than Sales) References 1. “Consolidated Statements of Shareholders Equity”, August 9, 2011 from: http://walmartstores.com/sites/annualreport/2011/financials/2011_Equity_Statement.pdf 2. Eldomiaty, Tarek, Transaction, Operating and Translation Exposures, 2009, August 9, 2011 from: http://xa.yimg.com/kq/groups/25792668/502826671/name/05-Transaction-Operating-Translation-Example-02.pdf 3. Ferreira, Joao. INTERNATIONAL PAPER WAL-MART IN EUROPE:PORTUGAL CASE, 2008, August 9, 2011 from: http://www.jpcanleferreira.com/jpcanleferreirawalmartineuropeportugalcase.pdf 4. “International Operations”, Walmart Corporate, August 9, 2011 from: http://walmartstores.com/pressroom/factsheets/ 5. “Notes to Consolidated Financial Statements”, Walmart 2010 Annual Report, Walmartstores, 2010, August, 10, 2011 from: http://cdn.walmartstores.com/sites/AnnualReport/2010/PDF/05_WMT%202010_Notes.pdf 6. Reimer, L. Jane, Financial Accounting, Delhi: Pearson Education India, 2007 7. Tambi, Amit, Foreign Exchange Risks in Global Supply Chains - what lies in store, 2010, August 9, 2011 from: http://it.toolbox.com/blogs/everything-anything-supply-chains/foreign-exchange-risks-in-global-supply-chains-what-lies-in-store-36173 8. Wallace, Jeff. Modern Corporate FX Risk Management, August 9, 2011 from: http://greenwichtreasury.com/download/GTA_Modern_Corporate_FX_Risk_Management.pdf 9. “Wal-Mart 2010 Financial Report” , August 9, 2011 from: http://cdn.walmartstores.com/sites/AnnualReport/2010/PDF/01_WMT%202010_Financials.pdf 10. “Wal-Mart Risk Management Policy”, Google Answers, August 9, 2011 from: http://answers.google.com/answers/threadview/id/524882.html 11. “Wal-Mart abandons German venture”, BBC NEWS (2006), August 9, 2011 from: http://news.bbc.co.uk/2/hi/business/5223432.stm 12. “Wal-Mart 2011 Annual Report”, 2011, August 9, 2011 from: http://walmartstores.com/sites/annualreport/2011/financials/Walmart_2011_Annual_Report.pdf 13. “Wal-Mart Stores Inc. (WMT) | Statement of Comprehensive Income”, Stock Analysis on Net, 2011 August 9, 2011 from: http://www.stock-analysis-on.net/NYSE/Company/Wal-Mart-Stores-Inc/Financial-Statement/Statement-of-Comprehensive-Income 14. “Walmart Announces Capital Strategy to Drive Global Growth; Next Year's Capital Spending to Increase Slower Than Sales”, Walmart Corporate, August 9, 2011 from: http://investors.walmartstores.com/phoenix.zhtml?c=112761&p=irol-newsArticle&ID=1482363&highlight= 15. “Walmart: Winning a better deal”, August 9, 2011 from: http://www.rbsbank.com.cn/docs/gbm/countrysites/china/en/Walmart_20A4_20HR.pdf 16. “Walmart Corporate”, Walmartstores, August, 10, 2011 from: http://walmartstores.com/ Read More