4.1 Profitability and Risk Analysis of Walmart Stores
Walmarts fiscal year ends at the end of January of each year. Despite Walmarts convention of referring to its year ending January 31, 2016, as its fiscal 2016, we will follow the common practice of referring to it as 2015 since 11 of the 12 months fall within 2015. This same convention holds true for Carrefour and Target in Part B of this case.
PART A: Walmart Stores (Walmart) is the worlds largest retailer. It employs an everyday low price strategy and operates stores as three business segments: Walmart Stores U.S., International, and Sams Club.
1. Walmart Stores U.S.: This segment represented 62.3% of all 2015 sales and operates stores in three different formats: Discount stores (104,000 average square feet), Super-centers (178,000 average square feet), and Neighborhood Markets (42,000 average square feet). Each format carries a variety of clothing, housewares, electronic equipment, pharmaceuticals, health and beauty products, sporting goods, and similar items, and Supercenters include a full-line supermarket. Walmart U.S. stores are in all 50 states; Washington, D.C.; and Puerto Rico. Discount stores are in 41 states, Supercenters are in 49 states, and Neighborhood Markets are in 31 states. Customers also can purchase many items through the companys website at www.walmart.com.
2. International: The International segment includes wholly owned subsidiaries in Argentina, Brazil, Canada, Chile, China, India, Japan, and the United Kingdom; majority-owned subsidiaries are in Africa, Central America, and Mexico. The merchandising strategy for the International segment is similar to that of the Walmart U.S. segment.
3. Sams Clubs: Sams Clubs are membership club warehouses that operate in 48 states. The average Sams Club is approximately 134,000 square feet, and customers can purchase many items through the companys website at www.samsclub.com. These warehouses offer bulk displays of brand name merchandise, including hard goods, some soft goods, institutional-size grocery items, and certain private-label items. Gross margins for Sams Clubs stores are lower than those of the U.S. and International segments.
Walmart uses centralized purchasing through its home office for substantially all of its merchandise. It distributes products to its stores through regional distribution centers. During fiscal 2015, the proportion of merchandise channeled through its regional distribution centers:
Walmart Discount Stores, Supercenters, and Neighborhood Markets 79%
Sams Club (nonfuel) 69%
International 77%
Exhibit 4.43 sets out various operating data for Walmart for 2013 through 2015. Exhibit 4.44
presents segment data. Exhibit 4.45 presents comparative balance sheets for Walmart for 2012 through 2015 (an extra year to enable average balance computations when necessary), Exhibit 4.46 presents comparative income statements for 2013 through 2015, and Exhibit 4.47 presents comparative statements of cash flows for 2013 through 2015. Exhibit 4.48 presents selected financial statement ratios for Walmart for 2013 through 2015. The statutory income tax rate is 35%.
Required
a. What are the likely reasons for the changes in Walmarts rate of ROA during the three-year period? Analyze the financial ratios to the maximum depth possible.
b. What are the likely reasons for the changes in Walmarts rate of ROCE during the three-year period? Note: Requirements c and d require coverage of material from Chapter 5.
c. How has the short-term liquidity risk of Walmart changed during the three-year period?
d. How has the long-term solvency risk of Walmart changed during the three-year period?
2014 2013 4,516 Exhibit 4.43 Walmart Stores Operating Data (Integrative Case 4.1, Part A) 2015 Walmart Discount Stores, Supercenters, and Neighborhood Markets (U.S.) Number 4,574 Square footage (millions) 689.6 Sales per square foot $432.68 Operating income per square foot $ 27.68 International Number 6,299 Square footage (millions) 372.2 Sales per square foot $331.56 Operating income per square foot $ 14.36 Sam's Club (Domestic) Number 655 Square footage (millions) 87.6 Sales per square foot $597.37 Operating income per square foot $ 19.93 680.1 $423.54 $ 31.37 4,203 659.1 $423.92 $ 33.06 6,290 367.6 $370.40 $ 16.79 6,107 358.2 $381.11 $ 14.39 647 86.5 $596.88 $ 21.43 632 84.4 $599.22 $ 21.53 2014 2013 59.9% 29.3 60.5% 28.6 10.9 100.00% 10.8 100.00% Exhibit 4.44 Walmart Stores Segment Profitability Analysis (Integrative Case 4.1, Part A) 2015 Sales Mix Walmart Discount Stores, Supercenters, and Neighborhood Markets 62.9% International 26.0 Sam's Club 11.10 100.00% Walmart Discount Stores, Supercenters, and Neighborhood Markets Operating profit margin 6.40% Total assets turnover 2.89 ROA 18.51% International Operating profit margin 4.33% Total assets turnover 1.67 ROA 7.25% Sam's Club Operating profit margin 3.34% Total assets turnover 3.74 ROA 12.47% 7.41% 2.84 21.05% 7.80% 2.83 22.06% 4.53% 1.69 7.67% 3.77% 1.60 6.04% 3.59% 3.69 13.25% 3.59% 3.60 12.93% Exhibit 4.45 Walmart Stores Balance Sheets (amounts in millions) (Integrative Case 4.1, Part A) 2015 2014 2013 2012 ASSETS Current assets: Cash and cash equivalents Receivables, net Inventories Prepaid expenses and other Total current assets Property and equipment Less accumulated depreciation Property and equipment, net $ 8,705 5,624 44,469 1,441 60,239 176,958 (66,787) 110,171 $ 9,135 6,778 45,141 2,224 63,278 177,395 (63,115) 114,280 $ 7,281 6,677 44,858 1,909 61,185 173,089 (57,725) 115,364 $ 7,781 6,768 43,803 1,588 59,940 165,825 (51,896) 113,929 11,096 (4,751) 5,239 (2,864) 5,589 (3,046) 5,899 (3,147) 6,345 16,695 6,131 $199,581 2,375 18,102 5,455 $203,490 2,543 19,510 6,149 $204,751 2,752 20,497 5,987 $203,105 $ 2,708 38,487 19,607 521 2,745 $ 1,592 38,410 19,152 1,021 4,791 $ 7,670 37,415 18,793 966 4,103 $ 6,805 38,080 18,808 2,211 5,587 Property under capital lease and financing obligations: Property under capital lease and financing obligations Less accumulated amortization Property under capital lease and financing obligations, net Goodwill Other assets and deferred charges Total assets LIABILITIES AND EQUITY Current liabilities: Short-term borrowings Accounts payable Accrued liabilities Accrued income taxes Long-term debt due within one year Capital lease and financing obligations due within one year Total current liabilities Long-term debt Long-term capital lease and financing obligations Deferred income taxes and other Commitments and contingencies Equity: Common stock Capital in excess of par value Retained earnings Accumulated other comprehensive income (loss) Total Walmart shareholders' equity Nonredeemable noncontrolling interest Total equity Total liabilities and equity 551 309 64,619 38,214 5,816 7,321 287 65,253 40,889 2,606 8,805 69,345 41,771 2,788 8,017 1,491 327 71,818 38,394 3,023 7,613 519 332 317 1,805 90,021 (11,597) 80,546 3,065 83,611 $199,581 323 2,462 85,777 (7,168) 81,394 4,543 85,937 $203,490 323 2,362 76,566 (2,996) 76,255 5,084 81,339 $204,751 3,620 72,978 (587) 76,343 5,395 81,738 $203,105 Exhibit 4.46 Walmart Stores Income Statements (amounts in millions) (Integrative Case 4.1, Part A) 2015 Net sales $478,614 Membership and other income 3,516 Total revenues 482,130 2014 2013 $482,229 3,422 485,651 $473,076 3,218 476,294 360,984 97,041 24,105 365,086 93,418 27,147 358,069 91,353 26,872 2,027 521 Cost of sales Operating, selling, general, and administrative expenses Operating income Interest: Debt Capital lease and financing obligations Interest income Income from continuing operations before income taxes Total provision for income taxes Income from continuing operations Income from discontinued operations, net of income taxes Consolidated net income Less consolidated net income attributable to nonredeemable noncontrolling interest Consolidated net income attributable to Walmart (81) 21,638 6,558 15,080 2,161 300 (113) 24,799 7,985 16,814 285 17,099 2,072 263 (119) 24,656 8,105 16,551 144 16,695 15,080 (386) 14,694 (736) 16,363 (606) 16,022 2013 $ 16,695 (144) 16,551 Exhibit 4.47 Walmart Stores Statements of Cash Flows (amounts in millions) (Integrative Case 4.1, Part A) 2015 2014 Consolidated net income $ 15,080 $ 17,099 Income from discontinued operations, net of income taxes (285) Income from continuing operations 15,080 16,814 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Depreciation and amortization 9,454 9,173 Deferred income taxes (672) (503) Other operating activities 1,410 785 Changes in certain assets and liabilities, net of effects of acquisitions: Receivables, net (19) (569) Inventories (703) (1,229) Accounts payable 2,008 2,678 Accrued liabilities 1,303 1,249 Accrued income taxes (472) 166 Net cash provided by operating activities 27,389 28,564 Payments for property and equipment (11,477) (12,174) Proceeds from disposal of property and equipment 635 570 8,870 (279) 938 (566) (1,667) 531 103 (1,224) 23,257 (13,115) 727 Proceeds from disposal of certain operations Other investing activities Net cash used in investing activities Net change in short-term borrowings Proceeds from issuance of long-term debt Payments of long-term debt Dividends paid Purchase of Company stock Dividends paid to noncontrolling interest Purchase of noncontrolling interest Other financing activities Net cash used in financing activities Effect of exchange rates on cash and cash equivalents Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of period 246 (79) (10,675) 1,235 39 (4,432) (6,294) (4,112) (719) (1,326) (513) (16,122) (1,022) (430) 9,135 $ 8,705 671 (192) (11,125) (6,288) 5,174 (3,904) (6,185) (1,015) (600) (1,844) (409) (15,071) (514) 1,854 7,281 $ 9,135 (138) (12,526) 911 7,072 (4,968) (6,139) (6,683) (426) (296) (260) (10,789) (442) (500) 7,781 $ 7,281 2014 2013 Exhibit 4.48 Walmart Stores Financial Ratio Analysis (Integrative Case 4.1, Part A) 2015 Profitability Ratios ROA 8.30% Profit margin for ROA 3.47% Total assets turnover 2.39 Cost of goods sold/Sales 74.87% Operating, selling, general, and administrative 20.13% expenses/Sales Interest expense (net of taxes)/Sales 0.34% Income tax expense (excluding tax effects of 1.55% interest expense)/Sales Accounts receivable turnover Inventory turnover 8.1 Fixed assets turnover 4.1 ROCE 18.15% Profit margin for ROCE 3.05% Capital structure leverage 2.49 9.16% 3.85% 2.38 75.17% 19.24% 8.93% 3.82% 2.34 75.18% 19.18% 0.33% 1.82% 0.32% 1.87% 77.8 72.2 8.1 4.1 20.76% 3.37% 2.59 70.9 8.1 4.1 21.00% 3.36% 2.67 0.88 Risk Ratios Current ratio Quick ratio Accounts payable turnover Cash flow from operations to current liabilities ratio Long-term debt to Long-term capital Total liabilities/Total assets ratio Cash flow from operations to total liabilities ratio Interest coverage ratio 0.93 0.22 9.37 42.18% 34.50% 58.11% 23.46% 9.2 0.97 0.24 9.64 42.44% 33.60% 57.77% 23.71% 10.6 0.20 9.51 32.95% 35.39% 60.27% 19.00% 11.1 2014 2013 4,516 Exhibit 4.43 Walmart Stores Operating Data (Integrative Case 4.1, Part A) 2015 Walmart Discount Stores, Supercenters, and Neighborhood Markets (U.S.) Number 4,574 Square footage (millions) 689.6 Sales per square foot $432.68 Operating income per square foot $ 27.68 International Number 6,299 Square footage (millions) 372.2 Sales per square foot $331.56 Operating income per square foot $ 14.36 Sam's Club (Domestic) Number 655 Square footage (millions) 87.6 Sales per square foot $597.37 Operating income per square foot $ 19.93 680.1 $423.54 $ 31.37 4,203 659.1 $423.92 $ 33.06 6,290 367.6 $370.40 $ 16.79 6,107 358.2 $381.11 $ 14.39 647 86.5 $596.88 $ 21.43 632 84.4 $599.22 $ 21.53 2014 2013 59.9% 29.3 60.5% 28.6 10.9 100.00% 10.8 100.00% Exhibit 4.44 Walmart Stores Segment Profitability Analysis (Integrative Case 4.1, Part A) 2015 Sales Mix Walmart Discount Stores, Supercenters, and Neighborhood Markets 62.9% International 26.0 Sam's Club 11.10 100.00% Walmart Discount Stores, Supercenters, and Neighborhood Markets Operating profit margin 6.40% Total assets turnover 2.89 ROA 18.51% International Operating profit margin 4.33% Total assets turnover 1.67 ROA 7.25% Sam's Club Operating profit margin 3.34% Total assets turnover 3.74 ROA 12.47% 7.41% 2.84 21.05% 7.80% 2.83 22.06% 4.53% 1.69 7.67% 3.77% 1.60 6.04% 3.59% 3.69 13.25% 3.59% 3.60 12.93% Exhibit 4.45 Walmart Stores Balance Sheets (amounts in millions) (Integrative Case 4.1, Part A) 2015 2014 2013 2012 ASSETS Current assets: Cash and cash equivalents Receivables, net Inventories Prepaid expenses and other Total current assets Property and equipment Less accumulated depreciation Property and equipment, net $ 8,705 5,624 44,469 1,441 60,239 176,958 (66,787) 110,171 $ 9,135 6,778 45,141 2,224 63,278 177,395 (63,115) 114,280 $ 7,281 6,677 44,858 1,909 61,185 173,089 (57,725) 115,364 $ 7,781 6,768 43,803 1,588 59,940 165,825 (51,896) 113,929 11,096 (4,751) 5,239 (2,864) 5,589 (3,046) 5,899 (3,147) 6,345 16,695 6,131 $199,581 2,375 18,102 5,455 $203,490 2,543 19,510 6,149 $204,751 2,752 20,497 5,987 $203,105 $ 2,708 38,487 19,607 521 2,745 $ 1,592 38,410 19,152 1,021 4,791 $ 7,670 37,415 18,793 966 4,103 $ 6,805 38,080 18,808 2,211 5,587 Property under capital lease and financing obligations: Property under capital lease and financing obligations Less accumulated amortization Property under capital lease and financing obligations, net Goodwill Other assets and deferred charges Total assets LIABILITIES AND EQUITY Current liabilities: Short-term borrowings Accounts payable Accrued liabilities Accrued income taxes Long-term debt due within one year Capital lease and financing obligations due within one year Total current liabilities Long-term debt Long-term capital lease and financing obligations Deferred income taxes and other Commitments and contingencies Equity: Common stock Capital in excess of par value Retained earnings Accumulated other comprehensive income (loss) Total Walmart shareholders' equity Nonredeemable noncontrolling interest Total equity Total liabilities and equity 551 309 64,619 38,214 5,816 7,321 287 65,253 40,889 2,606 8,805 69,345 41,771 2,788 8,017 1,491 327 71,818 38,394 3,023 7,613 519 332 317 1,805 90,021 (11,597) 80,546 3,065 83,611 $199,581 323 2,462 85,777 (7,168) 81,394 4,543 85,937 $203,490 323 2,362 76,566 (2,996) 76,255 5,084 81,339 $204,751 3,620 72,978 (587) 76,343 5,395 81,738 $203,105 Exhibit 4.46 Walmart Stores Income Statements (amounts in millions) (Integrative Case 4.1, Part A) 2015 Net sales $478,614 Membership and other income 3,516 Total revenues 482,130 2014 2013 $482,229 3,422 485,651 $473,076 3,218 476,294 360,984 97,041 24,105 365,086 93,418 27,147 358,069 91,353 26,872 2,027 521 Cost of sales Operating, selling, general, and administrative expenses Operating income Interest: Debt Capital lease and financing obligations Interest income Income from continuing operations before income taxes Total provision for income taxes Income from continuing operations Income from discontinued operations, net of income taxes Consolidated net income Less consolidated net income attributable to nonredeemable noncontrolling interest Consolidated net income attributable to Walmart (81) 21,638 6,558 15,080 2,161 300 (113) 24,799 7,985 16,814 285 17,099 2,072 263 (119) 24,656 8,105 16,551 144 16,695 15,080 (386) 14,694 (736) 16,363 (606) 16,022 2013 $ 16,695 (144) 16,551 Exhibit 4.47 Walmart Stores Statements of Cash Flows (amounts in millions) (Integrative Case 4.1, Part A) 2015 2014 Consolidated net income $ 15,080 $ 17,099 Income from discontinued operations, net of income taxes (285) Income from continuing operations 15,080 16,814 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Depreciation and amortization 9,454 9,173 Deferred income taxes (672) (503) Other operating activities 1,410 785 Changes in certain assets and liabilities, net of effects of acquisitions: Receivables, net (19) (569) Inventories (703) (1,229) Accounts payable 2,008 2,678 Accrued liabilities 1,303 1,249 Accrued income taxes (472) 166 Net cash provided by operating activities 27,389 28,564 Payments for property and equipment (11,477) (12,174) Proceeds from disposal of property and equipment 635 570 8,870 (279) 938 (566) (1,667) 531 103 (1,224) 23,257 (13,115) 727 Proceeds from disposal of certain operations Other investing activities Net cash used in investing activities Net change in short-term borrowings Proceeds from issuance of long-term debt Payments of long-term debt Dividends paid Purchase of Company stock Dividends paid to noncontrolling interest Purchase of noncontrolling interest Other financing activities Net cash used in financing activities Effect of exchange rates on cash and cash equivalents Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of period 246 (79) (10,675) 1,235 39 (4,432) (6,294) (4,112) (719) (1,326) (513) (16,122) (1,022) (430) 9,135 $ 8,705 671 (192) (11,125) (6,288) 5,174 (3,904) (6,185) (1,015) (600) (1,844) (409) (15,071) (514) 1,854 7,281 $ 9,135 (138) (12,526) 911 7,072 (4,968) (6,139) (6,683) (426) (296) (260) (10,789) (442) (500) 7,781 $ 7,281 2014 2013 Exhibit 4.48 Walmart Stores Financial Ratio Analysis (Integrative Case 4.1, Part A) 2015 Profitability Ratios ROA 8.30% Profit margin for ROA 3.47% Total assets turnover 2.39 Cost of goods sold/Sales 74.87% Operating, selling, general, and administrative 20.13% expenses/Sales Interest expense (net of taxes)/Sales 0.34% Income tax expense (excluding tax effects of 1.55% interest expense)/Sales Accounts receivable turnover Inventory turnover 8.1 Fixed assets turnover 4.1 ROCE 18.15% Profit margin for ROCE 3.05% Capital structure leverage 2.49 9.16% 3.85% 2.38 75.17% 19.24% 8.93% 3.82% 2.34 75.18% 19.18% 0.33% 1.82% 0.32% 1.87% 77.8 72.2 8.1 4.1 20.76% 3.37% 2.59 70.9 8.1 4.1 21.00% 3.36% 2.67 0.88 Risk Ratios Current ratio Quick ratio Accounts payable turnover Cash flow from operations to current liabilities ratio Long-term debt to Long-term capital Total liabilities/Total assets ratio Cash flow from operations to total liabilities ratio Interest coverage ratio 0.93 0.22 9.37 42.18% 34.50% 58.11% 23.46% 9.2 0.97 0.24 9.64 42.44% 33.60% 57.77% 23.71% 10.6 0.20 9.51 32.95% 35.39% 60.27% 19.00% 1
