Three year review of Walmart income statement. Income statement analysis covering 2009, 2010, and 2011. Ratio calculation of gross margin and profit margin. Analysis of low margins and importance of cost controls. Tax variability is also noted, as well as the liquidation of discontinued operations. Also notes new smartphone check out applications as the newest attempt to cut costs and improve customer experience.
Walmart Income Statement
Analysis of Wal-Mart Income Statement 2009-2011
Broad Overview
Wal-Mart operates retail stores classified into the three categories of Walmart U.S., Walmart International, and Sam's Club. International sales account for 26% of net sales, while Sam's Club is just 11.8% (Walmart, 2012, p. 17). An initial perusal of Wal-Mart's income statement evidences the staggering scale of its retailing operations. In 2011, revenues from both retail receipts and club memberships rose 4.3%, over 2009 figures, to nearly 422 billion (USD). Operating income demonstrates a steady incremental increase reflective of consistent management and cost control practices. Lastly, the income from continuing operations reflects a consistent incremental increase with each passing year.
Based upon a general overview of the Walmart income statement, it appears that the firm is financially healthy and consistently capturing accounting profits. Review of the accompanying notes reveals that Walmart does not include the costs of their warehouse and distribution facilities in their cost of sales, therefore benchmarking their gross profit margin to competitors may present a skewed view of the firm (Walmart, 2012, p. 36).
2009-2011 Yearly Analysis
Initial reviews of net sales highlights that retail receipts are increasing; yet membership, and other income, is waning. Net sales comprise less than 1% of overall revenues, however the decline may be indicative of changing customer buying habits or some other shift in the market. In 2009, membership income totaled 3.167 billion (USD) of revenues, but has declined nearly 8.5% to 2.897 billion (USD) in 2011.
Cost of sales figures have held relatively steady at 75.8% of net sales for 2009, while improving slightly to 75.3% in 2011. Consistency in the cost of sales to net sales implies that inflation is not eroding profitability and increased revenues are not the result of any abnormal discounting of prices. Walmart has built their reputation on the "everyday low price" slogan, while competitors are fettered to running sales to drive revenues, therefore customers have come to expect their prices are the lowest available (Business Insider, 2012).
The areas representing the most variation relate to discontinued operations and income taxes. Discontinued operations increased income by 146 million (USD) in 2009, decreased it by 79 million (USD) in 2010, and increased it by 1,034 million (USD) in 2011. The affect of such dramatic variance from shutting down particular activities and sale of the corresponding resources ripples through the income statement to increase, or decrease, the earnings per share for each year. While the continuing operations of Walmart demonstrate an admirable consistency, the firm continues to experiment with new stores, markets, and product services that do not always prove profitable or sustainable. The notes to their annual report indicate that the discontinued operations were related to a venture in Germany (Walmart, 2012, p. 45).
The tax section of the income statement represents the second area of notable variance. In 2009, current taxes represented 31.45% of income from operations, yet the effect of deferred taxes increased the effective rate to 34.18%. Similarly in 2010, current taxes accounted for 34.55% of income from operations, and the effect of deferred taxes decreased the effective rate to 32.35%. However, in 2011, current taxes were just 28.48%, and the effect of deferred taxes was to increase that burden to 32.2%. The firm is liable for tax at the local, state, federal, and international levels, therefore any tax levy changes ripple through the firm's operations (Walmart, 2012, p. 45). Exposure to the various taxing entities is not an item the firm has control over, however tacking advantage of arbitrage opportunities within the tax code is.
Margins on Operations
Walmart as a discount retailer, noted by their tagline strategy of "Everyday Low Prices" is profitable due to efficient operations, but primarily through high volume. The reliance upon a high volume and low cost strategy means that maintaining operating margins is of paramount concern. In light of foreign currency risks and inflation, the operating margin ratios (see Table 1) represent a stable pricing and cost structure.
Table 1: Walmart Operating Margin, figures in millions of USD (Walmart, 2012, p. 11).
2009
2010
2011
Net Revenue
404,254
408,085
421,849
Cost of Sales
303,941
304,444
315,287
SG&A Exp.
77,546
79,639
81,020
Operating Margin
5.63%
5.88%
6.05%
The operating margins represent the percentage of net sales available to cover all other costs associated with the firm.
The profit margin of Walmart illustrates the level of efficiency that must be maintained to be profitable. In the context of a global economic slowdown, Walmart's low cost strategy has delivered both increasing sales and improved margins (see Table 2).
Table 2: Walmart Profit Margins, figures in millions of USD (Walmart, 2012, p. 11).
2009
2010
2011
Net Income
13,381
14,370
16,389
Net Revenue
404,254
408,085
421,849
Profit Margin
3.31%
3.52%
3.89%
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