Walmart financials

This analysis shows that the financing need will be $ billion, and that the net income will account for $13.749 billion of that. Wal-Mart will then need to find additional financing of $3.257 billion in order to fund its operations for the coming year.

Part II.

The sustainable growth rate for Wal-Mart is the ROE * (1-dividend payout ratio). The ROE for Wal-Mart last year was $13643 / $80535 = 16.9%

The dividend payout ratio, the dividend per share divided by the EPS, was $2.00 / $4.40 = 45.4%

This means that the sustainable growth rate for Wal-Mart is 16.9 * (1-.454) = 9.2%

Over the past two years, Wal-Mart did not experience sales growth. There was sales growth in 2017, but in 2016 the company's revenues fell. The 2017 rebound only got Wal-Mart back to where it was in 2015.

What we see is that Wal-Mart's growth rate is well below its sustainable growth rate. The company is going to have trouble paying its dividend without taking on more financing. Clearly, the company has relatively low leverage so it can take on more debt in order to finance the dividend (and the share buybacks it has been engaging in as well), but the reality is that Wal-Mart is paying out too much relative to what it should be given its growth rate. As a low-growth company, with limited growth upside at this point, Wal-Mart is going to have to take on financing. The company grew for years, and a lot, so the dividend probably made sense. And it has not been increasing that much of late, but clearly there is a disconnect between the growth rates that Wal-Mart is currently experiencing and its payout ratio.

Part III.

Even though Wal-Mart is a massive company and a leader in its space, that does not mean that it without weaknesses. And there are certainly threats. In fact, on balance, Wal-Mart has a lot of strengths, some key weaknesses, few really good opportunities, and many threats. The threats are exposed by the reality that slim margins and slow growth have left Wal-Mart is a somewhat vulnerable position financially. That said, this is still a very well-run company, and that means that Wal-Mart can find a way out of its situation, especially if it can effectively identify new opportunities that it is able to exploit by leveraging those strengths. The only really significant downside to that thinking is that Wal-Mart`s competitors are also among the best-run companies in the world, and they will doubtless put pressure on Wal-Mart – it won`t be able to get competitive advantage for long.

Strengths

Weaknesses

Opportunities

Threats

Marketing

Tight margins

Global expansion

Competition

Supply chain mgmt.

HQ location (HR)

HQ2?

China slowdown

Corporate culture

Sam's Club / online laggard

Emerging technology

Increasing costs in key supplier markets

There are a few things that Wal-Mart does exceptionally well. First, it markets itself very well. It has one of the highest-valued brands in the world, and the Wal-Mart is brand has very high visibility in most of its markets. The brand strength is supported with the strong association that the brand has with being a low cost provider, if not the lowest cost. There is evidence to suggest that Wal-Mart is not the lowest cost provider, but many people think that they are. So marketing has long been a position of strength for the company.

In order to support the strategy of being a low cost provider, Wal-Mart has developed supply chain excellence. The company is a technological leader in supply chain, introducing RFID, cross-docking, and now it is even exploring how it can leverage blockchain in its supply chain (Purdy, 2017). This technological leadership has allowed it to maintain its reputation for low cost, and that in turn is a key demand driver for the company.

The corporate culture ends up being a positive for Wal-Mart. Though it is externally much-derided, internally the company actually appears to have a pretty good culture. There is a gap between management and the rank-and-file workers, but even the latter group appears to be happy, in the sense that they are often the right fit for their roles. This allows the company to maintain needed staffing levels – it has around 2 million employees so maintaining staffing levels is a constant challenge. Having a culture that attracts workers, especially at that lower level, is a critical piece.

Weaknesses

One of the major weaknesses in Wal-Mart's strategy is that it operates on very tight margins. There are two key implications for this. First, it means that the company is susceptible to shocks in demand; it will lose money if demand does anything unexpected. Second, the company makes far less money than other companies of its size, or even its competitors. Wal-Mart's net margin is lower than that of Target or Costco in most years, and much lower than that of Amazon, another of its major competitors.

As retail shifts towards technology as a key driver, Wal-Mart's Arkansas location has become a drag on its ability to attract the best and brightest. While it remains a fairly prestigious company for which to work, the best and brightest call their own shots as to where to live, and Arknasas is not usually at the top of that list. The company has made some moves to address this – it has 5000 people in IT in California, but it also has recently announced expansion in Arkansas, so this appears to be a perpetual weakness that it faces.

While the company's flagship brand is the industry leader, Wal-Mart has been unable to dominate other businesses the same way. This might related back to the talent problem, but Costco is eating Sam's Club's lunch, and Amazon has opened up a massive lead on Wal-Mart.com, and these are two of the areas that Wal-Mart had previously targeted as key opportunities. The lack of ability to transfer what it does well into other, related sectors, should be concerning to shareholders, as the number of geographical expansion opportunities starts to dwindle.

Opportunities

There are still opportunities for geographical expansion. The company can still look to India, Russia, Brazil and a few other large markets for growth (Worstall, 2017), but the reality is that most of the best markets have already been tapped out. This is the reason why the projected growth for Wal-Mart is basically in line with historic growth rates; there are few new big opportunities left for the company.

Amazon recently announced it would be opening HQ2. This is something Wal-Mart in particular might wish to consider. Yes, it has doubled down on Bentonville, but the reality is that setting up a second headquarters is not unreasonable, and if it does this in a more desirable area, it can cast a much wider net in terms of hiring. That alone provides better opportunity either for growth or to shore up digital or Sam's Club.

Emerging technologies also present opportunity for Wal-Mart. Whether it is blockchain, artificial intelligence, or something else, there might be opportunity for Wal-mart to extract more efficiency gains to extend its margins, or find new revenue opportunities. This is especially the case if the company can be ahead of the competition in the adoption and mastery of such new technologies. It might only gain a year or two, but that is the nature of the business, and even then that would deliver solid returns to the shareholders.

Threats

There are several threats that could derail Wal-Mart's progress. One such threat is from competition. Wal-Mart thought it was closing the gap on Amazon a few years ago, but that turned out not to be the case. Wal-Mart's flagship brand has been targeted by a lot of retailers, and its slim margins make it vulnerable.

China is one of the biggest markets for Wal-Mart, and there is evidence of economic slowdown there. In the US, Wal-Mart performed better in the last recession, as many consumers traded down. In China, Wal-Mart is not trading down, so a slowdown there would cause Wal-Mart's customers to trade down to other things, or stop buying. Either scenario could affect revenues in one of the company's top markets. It could be argued that the same might happen in Mexico, especially if NAFTA gets cancelled, making it more difficult for Wal-Mart to move goods from the US to its Mexican stores.

A third threat is increasing cost of goods sold. For a company with slim margins that makes low prices a key part of its strategy, an increase in COGS is a serious threat. But China is getting more expensive (Morris, 2015), and no country is really ready to take over a supplier of low cost goods. Some goods might shift – to Vietnam or India, for example – but for a lot of goods China has efficiencies of scale and expertise that other countries cannot match. Thus, if the cost of doing business increases in China, there isn't much that Wal-Mart can do other than pay more.