Walmart's annual operations and financial performance analysis

Walmart Performance

Wallie's ratios

Discuss Wal-Mart's performance over the three-year period.

Wal-Mart's sales growth slumped from 7.3% 2009-2008 to 1% from 2010 over 2009, but has increased again to 3.4% year-end 2011 over 2010 (Wal-Mart, 2012a, n.p.). This is a deep discount from years prior to the 2008 recession, when sales growth was 8.4% and 11.6% year over year in 2008 and 2007, respectably, but considering global macroeconomic conditions since that time, the increase from 2011 over 2010 suggests consumers are spending again. At the same time, operating income has continued to increase year over year, with per-share revenue growth and an increase in dividends, all while the firm has taken on more long-term debt and expanded fixed assets mostly it seems through opening new international units. This increase in long-term debt has driven a fall in owner equity with the result being a picture of a competitive multinational increasing its global presence which should increase earnings per share if increasing sales cover debt service given continued spending growth. Increasingly positive operating income even in the face of expanding debt supports the likelihood debt service will not overwhelm earnings per share, alongside 2011 operating expense falling back to 2009 levels after an increase in 2010, all while sales in U.S. retail stores have actually fallen, but were carried by increased sales at Sam's Club stores in that segment.

Discuss the major differences in financial performance over the three-year period.

The major difference as mentioned above is a significant increase in capital assets and debt as Wal-Mart expands the number of international retail stores. Inventories have increased after a fall in 2010, which probably reflects the addition of some 450 retail stores abroad, but which suggests sales growth rates should increase outside of the U.S. Negative U.S. retail sales growth rates coupled with an increase of 50 units in the U.S. may suggest Wal-Mart has achieved domestic saturation and reducing growth at home may deliver higher performance per unit. The most marked change has been a precipitous drop in net sales growth rates from 2009-2010, which fell by a factor of roughly 7x, but which has since picked up more than half that growth rate, significant given the expansion in number of stores abroad and declining revenues at home. At the same time, costs have fallen back to 2009 levels which suggests performance improvement which indeed shows up as positive operating income even given expanding debt.

Calculate two (2) financial ratios with the data provided.

Table 1: Current Ratio and Inventory Turnover

2011

2010

TCA

51893

48032

in U.S. $ (millions)

TCL

58484

55543

in U.S. $ (millions)

TCA/TCL

0.89

0.86

Current ratio

SALES

418952

405132

in U.S. $ (millions)

INVENT

36318

32713

in U.S. $ (millions)

S/I

11.54

12.38

Inventory turnover

Discuss the ratios you selected and what they tell you about Wal-Mart's performance.

A look at Wal-Mart's balance sheet (Wal-Mart, 2012b, p. 31) sheds a different light on the company's current liquidity situation: the company's current ratio is less than 1. What this means is that should the firm need to raise cash to cover operating costs and debt exposure, Wal-Mart will have to either liquidate inventory or issue more equity. The cash and equity position show that indeed the company has been buying back common shares, increasing inventories with the new stores, and should sales in those new stores perform better than U.S. stores, the result should be higher earnings per share as this debt is paid down. This depends on the liquidity of merchandise, and should the global economy take another abrupt correction, this debt and inventory exposure may result in short-term financial strain over the coming year. Inventory is reported at the lower of cost or permanently discounted retail (Wal-Mart, 2012c, p. 34), so increasing inventory turnover rate could generate less than total expense if further discounting became necessary. Prudent investors should pay close attention to performance in these new 450 retail units abroad, which could be supported by a turnaround in the U.S., but if incomes and spending go south in both sectors, the result could be the need to re-issue common stock with the resulting dilution in share value. Although turning inventory over ten times per year sounds impressive, that rate is slowing, perhaps dragged by U.S. negative sales growth, which supports healthy caution to see if Wal-Mart's expansion abroad plays out or not. If those sectors are less saturated and the company's assets of scale and brand edge out competition in those markets, this may be the time to get in and the increasing dividend payout and share repurchase suggest management is bullish over these prospects.