Walmart Financial Analysis: Growth, SWOT, and Strategy

Financing Needs and Net Income Projections

This analysis shows that the financing need will be approximately $17 billion, and that net income will account for $13.749 billion of that amount. Walmart will then need to find additional financing of $3.257 billion in order to fund its operations for the coming year.

Sustainable Growth Rate Analysis

The sustainable growth rate for Walmart is calculated as ROE multiplied by (1 minus the dividend payout ratio). The ROE for Walmart last year was $13,643 / $80,535 = 16.9%.

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

This means that the sustainable growth rate for Walmart is 16.9% × (1 − 0.454) = 9.2%.

Over the past two years, Walmart did not experience meaningful sales growth. There was sales growth in 2017, but in 2016 the company's revenues fell. The 2017 rebound only returned Walmart to its 2015 revenue level.

What this reveals is that Walmart's actual growth rate is well below its sustainable growth rate. The company faces difficulty paying its dividend without taking on additional financing. Walmart carries relatively low leverage, so it can absorb more debt to finance the dividend — and the share buybacks it has been engaging in — but the underlying reality is that Walmart is paying out too much relative to what its growth rate would justify. As a low-growth company with limited upside at this point, Walmart will need to secure external financing. The dividend may have made sense during the company's years of strong growth, and it has not increased dramatically of late, but there is a clear disconnect between Walmart's current growth rate and its payout ratio.

SWOT Overview

Even though Walmart is a massive company and a leader in its space, that does not make it immune to weaknesses or threats. On balance, Walmart has many strengths, some key weaknesses, relatively few strong opportunities, and a significant number of threats. Those threats are amplified by the reality that slim margins and slow growth have left Walmart in a somewhat vulnerable financial position. That said, Walmart remains a very well-run company, and that means it can find a way forward — especially if it can effectively identify and exploit new opportunities by leveraging its core strengths. The most significant caveat is that Walmart's competitors are also among the best-run companies in the world, and they will continuously pressure Walmart's competitive advantages.

The SWOT matrix can be summarized as follows:

Strengths: Marketing; supply chain management; corporate culture.

Weaknesses: Tight margins; headquarters location (talent attraction); Sam's Club underperformance and online lag.

Opportunities: Global expansion; potential second headquarters; emerging technology.

Threats: Intensifying competition; China economic slowdown; increasing costs in key supplier markets.

Strengths: Brand, Supply Chain, and Culture

There are a few things that Walmart does exceptionally well. First, it markets itself very effectively. It possesses one of the most highly valued brands in the world, with very high visibility in most of its markets. That brand strength is reinforced by a strong association with low-cost pricing — if not always the absolute lowest cost. There is evidence to suggest that Walmart is not always the cheapest option available, yet many consumers believe it is. Marketing has therefore long been a defining strength for the company.

To support its low-cost strategy, Walmart has developed supply chain excellence. The company is a technological leader in logistics, having pioneered the use of RFID and cross-docking, and it is now exploring how to leverage blockchain technology within its supply chain (Purdy, 2017). This technological leadership has allowed Walmart to sustain its reputation for low prices, which in turn serves as a critical demand driver.

Walmart's corporate culture also proves to be a positive factor. Though frequently criticized externally, the company appears internally to maintain a reasonably functional culture. There is a gap between management and rank-and-file workers, but even hourly employees often represent a good fit for their roles. This allows the company to maintain adequate staffing levels across its approximately two million employees — a constant operational challenge. Cultivating a culture that attracts workers, particularly at the frontline level, is a critical component of sustaining that workforce at scale.

References

2017 Walmart Annual Report. Retrieved December 22, 2017, from ).pdf

Investopedia. (2017). Sustainable growth rate. Retrieved December 22, 2017, from https://www.investopedia.com/terms/s/sustainablegrowthrate.asp

Morris, D. (2015). Will tech manufacturing stay in China? Fortune. Retrieved December 22, 2017, from http://fortune.com/2015/08/27/tech-manufacturing-relocation/

Purdy, C. (2017). Supermarkets are now using blockchain to keep food fresh. Quartz. Retrieved December 22, 2017, from

Worstall, T. (2017). Walmart expands again in India, but still not able to open stores, to consumers' detriment. Forbes. Retrieved December 22, 2017, from https://www.forbes.com/sites/timworstall/2017/04/30/walmart-expands-again-in-india-but-still-not-able-to-open-consumer-stores-to-consumer-detriment/#7f539f331173