Wal-Mart Financial Analysis: Ratios, Valuation & Investment

Company Overview and Recent News

Wal-Mart was the brainchild of Sam Walton, an entrepreneur who owned a number of variety stores before deciding to strike out on his own. The modern Wal-Mart was founded in 1962. Walton was a skilled merchandiser who sought to drive traffic to his stores by being the lowest-cost seller in the area. This was critical because he initially operated in small towns that lacked larger competitors. He needed to entice shoppers to forgo the long drive to bigger stores, and low prices were the key. From there, the chain expanded quickly. Even into the 1980s Wal-Mart remained a regional operation, but the discount retailing industry enjoyed rapid growth through the 1990s (Wal-Mart.com, 2009). Wal-Mart did more than just ride that wave — it sold the surfboard. Wal-Mart today is the world's largest company, with a market cap of $194.2 billion (MSN Moneycentral, 2009). The firm operates in the discount retail sector, selling a wide range of consumer goods under the Wal-Mart and Sam's Club brands. The company is also active internationally, with major operations in Mexico, Canada, China, and other nations.

One notable news item regarding Wal-Mart concerns the company's push into organic and natural foods. This move generated considerable controversy for a number of reasons. First, it was expected to drive down prices of organic foods, reducing margins for producers. Critics also feared that Wal-Mart would lobby to lower organic labeling standards and would begin importing organic produce from China to compete with U.S.-farmed products (Gogoi, 2006).

A second news item concerns Wal-Mart's profitability during the economic downturn. The company fared very well, a direct function of its low-cost strategy. The firm recorded profit figures above expectations and gained market share at the expense of competitors. Same-store sales continued to improve, and the firm adopted a short-term strategy of retaining the new customers it had acquired as a result of the downturn (Rosenbloom, 2009).

Profitability Ratios: Wal-Mart vs. Target

Wal-Mart has superior profitability ratios compared with rival Target. On the surface, Target's higher gross margin might appear to be a strength, but it is in fact a weakness. When examined more closely, that superior gross margin translates to only a marginally superior operating margin, and the two firms ultimately post the same net margin. This means that Wal-Mart is the more efficient of the two companies and operates with a lower cost structure.

That lower cost structure gives Wal-Mart a competitive advantage over Target. In the discount retailing business, being the lowest-price competitor is a source of sustainable competitive advantage. Because Wal-Mart takes a lower gross margin than Target, it is able to offer lower prices and thereby attract more customers — yet still extract the same amount of profit per dollar of revenue as Target.

Wal-Mart's margins compare well with those of the industry as a whole, though the probable impact of a company of Wal-Mart's size on industry averages should not be overlooked. The company uses its exceptional cost control to simultaneously offer lower prices to consumers and maintain competitive profit levels — a sustainable advantage, particularly over Target.

Works Cited

Block, Stanley, and Geoffrey Hirt. Foundations of Financial Management, 12th ed. McGraw-Hill Irwin.

Gogoi, Pallavi. (2006). Wal-Mart's Organic Offensive. Business Week. Retrieved May 6, 2009.

MSN Moneycentral. (2009). Wal-Mart financials. Retrieved May 6, 2009.

MSN Moneycentral. (2009). Target financials. Retrieved May 6, 2009.

MSN Moneycentral. (2009). Stock charts. Retrieved May 6, 2009.

Rosenbloom, Stephanie. (2009). Wal-Mart Profit Tops Expectations. New York Times. Retrieved May 6, 2009.

Wal-Mart.com. (2009). About Us / Company History. Retrieved May 6, 2009.

Yahoo! Finance. (2009). Bond yields. Retrieved May 6, 2009.