In 1945 Sam Walton opened small chain franchises known as Ben Franklin Franchises which were a successful move for him (Hardeep, Rizwan and Avtaar). He always looks for deals with suppliers but retailers tend to fail in getting a good price which gave him a momentous idea of transferring the discounts to retailers rather than putting in pocket (Frank). This led to opening of Wal-Mart in November 1962 by Saw Walton in Rogers, Arkansas (Hardeep, Rizwan and Avtaar). It first Initial Public offering (IPO) came in market in 1970 and after mid 70s the company started to grow. The formation of company introduced two new concepts to retailing world that is hypermarkets which sells everything under one roof and secondly, supercenters which are scaled down super markets (Hardeep, Rizwan and Avtaar). By 1991, Wal-Mart was the largest retailer of U.S. with around 1700 stores nationwide (padmaraj). In 1992 the owner, Sam Walton died and H. Lee Scott took the position. In 1999, the company’s stock was named number one on DOW (Hardeep, Rizwan and Avtaar).
The store operates with different divisions that are: McLane’s, Neighborhood markets, International, Sam’s club, Supercenters and Distribution Centers (Hardeep, Rizwan and Avtaar).
McLane’s was the largest distributor in nation of food and merchandise to convenience stores which was sold in 2003 to focus purely retail business. Neighborhood markets could date back to 1998 when such stores started offering all types of goods and merchandise under one roof. Wal-Mart expanded internationally and focused global positioning. The Sam’s club division was basically a club formed for cash and carry operations which required membership and would provide members with extra benefits.
Wal-Mart is the largest private employer in the world with number of employees in 2008 estimating around 2,100,000. In terms of revenue it is the world largest public corporation with net sales of $ 401.24 indicating a revenue that is almost 50% higher than its nearest competitive companies combined revenue indicating the huge business Wal-Mart have earned throughout the period (Wal-Mart Stores, Inc.). Moreover, a study conducted shows that Wal-Mart revenue will exceed $500 billion by 2010 (Promo).
The company has a strong market position with a network of 8,900 stores serving millions of customers in three segments in the retail industry. The product portfolio comprises of a huge range of brands and merchandise including groceries, apparels, electronics and other appliances. Among the stores being operated 54% are located in US while its major international stores are situated in Central and South Americas and even China. Furthermore, the company plans to add 150-165 Wal-Mart stores in 2010 of which majority will be Wal-Mart supercenters (Wal-Mart Stores, Inc.).
The summarization according to chapter 4 was not possible due to unavailability of chapter
|Average collection period||3.16||3.43|
|Total Asset Turnover||2.30||2.45|
|Fixed Asset Turnover||3.86||4.19|
The ratio analysis of the company helps in determining the position of the company in terms of its profitability, liquidity, market position, etc. The ratio of the company shows some positive signs of growth.
Starting from current ratio an increase is seen. Current ratio basically highlights the amount of assets company hold for every $1 of liability. This figure is better if assets are higher but this has a negative case too that is higher assets means more money tied up in business. The figures shows that current ratio increase from 0.8 to 0.9 which shows that company have raised their assets showing a positive signs by holding more assets in terms of liabilities. Quick ratio identifies the amount of asset excluding stock which can be easily convertible to cash. The scenario that is identified from figures is indicating that the company holds a lot of inventory which usually is not good for a firm but the industry in which Wal-Mart is operating need to have good stock in hand so as to avoid shortage and lost customers.
The next important ratio is average collection period, this ratio highlight the number of days it takes for a sales to be converted into cash. The higher the better for this ratio irrespective of whatever industry a business is operating. As far as Wal-Mart is concerned it also showed an increase from 3.16 days to 3.43 days. Even though the increase in nominal yet a positive sign, moreover, 3-4 days is good collection period for a company indicating that not much of their cash is being tied up in receivables.
The OIROI ratio takes into account the operating income of the business and highlights the effectiveness of the management to generate operating income from firm’s assets. The more the better it is for business and investors. An improvement is seen in this ratio also showing management’s commitment towards the firm and its goals.
The fixed asset and asset turnover ratios partly explains the same concept that is how efficiently assets or fixed assets are being used. That is how much sales is generated from $1 amount assets or fixed assets. Both the ratios of the company have shown increment demonstrating the continuous efforts of the company increase sales and reduce costs.
The inventory turnover ratio suggests how many times the inventory is replenished during an accounting period. The company’s inventory turnover is above 8 times which is due to large amount of transactions which helps in replacing the inventory a higher number of times. These large transactions are due to discounted prices being offered to retailers which help them in managing a good profit, therefore, retailers also prefer to purchase in hefty bulk amount so as to gain more on it.
The debt ratio is almost constant for the company thus it signifies that 60% of debt is used as a source of finance to build up assets for the company. The rest could be either through retained earnings or profits re-employed. Usually the lower the ratio the better is it but this does not illustrate that no debt should be used else all the funds will be used in building up assets and less will be left for business operations.
Last and one of the most important ratios is return on equity which is of interest to many people around especially investors. Because investors are interested in the return they get for whatever they are investing. The lower the ratio the least attractive the company is. Wal-Mart on the other hand showed an increase from 21% to 21.20% thus indicating that for every investment of $1, investor will receive 0.21 cents. A return of more than 20% in such an economical scenario is demonstrating a good performance by the company.
The stock prices of all three companies have shown a dip mainly due to economical situation prevailing. While comparing the stock prices of three companies the graph shows that Wal-Mart showed a decreasing trend in past 5 years even though it picked up the pace after the third quarter of FY2008 and touched a peak of $60, after which it declined to below $50. As far as Target Corporation’s stock history is concerned the company showed a decreasing trend at increasing rate was not able to recover much except from little ups. Moreover, there stock price is lowest among the companies mentioned. Lastly, Sears Holding Corporation, another direct competitor of Wal-Mart showed an unstable trend throughout the period with the highest stock price among three of around $200 throughout the 5-year period but after touching the peak it kept on decreasing and reaching a value below Wal-Mart. Yet both the stock’s prices are nearby with a minor difference among them but from the decreasing trend one can judge that Sears Holding is more risky as fell from higher percentage as compared to Wal-Mart. Therefore, it can be concluded that the stock of Wal-Mart is more stable as compare to others but for investors who want to gain from short term trading for them Sears Holding stock is better.
Key Assumption for Forecasting Cash Flows
- To forecast accrued liabilities CAGR of net sales is taken due to its direct relationship with sales.
- It is assumed that no further investment is conducted in foreign operation expansion
- Commercial papers are paid off
- Company did not purchased anymore stocks
- As exports sales are not known it is assumed that there is no foreign exchange gains or losses
- Forecasting of deferred income tax is conducted on average growth
From the analysis conducted above regarding the forecasted balance sheet, ratio analysis and forecasted cash flow statement it is judged that the company has excellent growth chances and business opportunities that are being availed by the management efficiently. The company has shown positive results in terms of its liquidity and return on equity ratios which are most important ratios for a company and investor. And improvement in them will attract investors towards the company and this improvement is achieved mainly because of continuous efforts being made to reduce costs and increase sales. Moreover, the company being a leader has not taken things easily even though they rule the market by a greater margin yet efforts are being made to tap new areas and way to reduce costs and provide consumers and retailers with the maximum benefit possible.
Additionally, not only increasing its local sales the company is also focusing on expanding its operations internationally and the sales have been rising internationally also thus indicating that the company is in its growth stage and still have lot of potential which needs to be tapped.
Moreover, the figures and analysis highlight that the company is being more and more efficient in terms of utilizing their assets and plus they have enough cash flows to manage further expansions in terms of opening up new stores and clubs. In fact the company has declared that they are likely to invest around $15 billion in new stores and clubs (Financials).
The company is utilizing their profits in expansion strategy so as to secure their future and to stay ahead of their competitors by selling at discounted rates in bulk quantity. Thus it is one of the most profitable company to invest in looking at the current scenario of the economic conditions prevailing around the world especially USA. Plus the investment in Wal-Mart stocks is worthwhile as the company outperformed during the period when the world was sinking and not a single sector was left unaffected, even though the sales showed an increment at decreasing trend yet did not decreased. Thus the move to invest in such a huge company is profitable and less risky as compared to others.
Financials. Wal-Mart profit rises on strong international sales. 2010.
Frank, T.A. “A Brief History of Wal-Mart.” 2006. Web.
Hardeep, et al. “Walmart.” 2010. Web.
Ji-hye, Yun. “Saving people money so they can live better.” 2009. Web.
padmaraj, kaushal. “Wal-Mart.” 2010. Web.
Promo. “Wal-Mart Sales to Reach $500 Billion By 2010: Study.” 2005. Web.
Wal-Mart Stores, Inc. “Wal-Mart Reports Financial Results for Fiscal Year and Fourth Quarter.” 2009. Web.