Walmart Investment Analysis: CAPM, WACC, and DuPont Review

Introduction: Walmart Stores, Inc. Overview

The publicly traded company selected for this investment analysis is Walmart Stores, Inc. Walmart, an American multinational retail firm, is the largest retail chain worldwide by revenue. The global organization operates as a chain of grocery stores, hypermarkets, and discount department stores. The retailer was founded in the 1960s and has over the years extended its operations to more than 25 countries across the world, including North America, Latin America, Europe, and Asia. Walmart is also one of the most valuable companies in the world.

Evaluation of Walmart's Board of Directors

Walmart Stores, Inc.'s board of directors has strong monitoring potential for assessing and examining the company's business operations. The combination of skills and qualifications among board members positions the board well to provide effective oversight and strategic guidance to management. At the time of analysis, there are 11 board members, 10 of whom hold senior-level leadership experience. With respect to strategy, the board provides oversight in four key areas: retail, marketing and brand management, technology and e-commerce, and global business. In each of these areas, at least three board directors offer oversight with relevant expertise. In the areas of governance — specifically legal matters and finance and accounting — five board members provide insight and guidance to management (Walmart, 2017).

Board representation should equitably reflect the trust that society vests in a large company such as Walmart, which has the authority to significantly influence the lives of many people inside and outside the organization. The structure of Walmart's board has both strengths and weaknesses. One strength is that board members cooperatively provide a fitting balance of distinguished leadership, diverse perspectives, strategic skills, and specialized experience relevant to the company's operations and strategic objectives. Members are carefully selected on the basis of outstanding professional accomplishment, extensive experience and knowledge, personal and professional integrity, the ability to make independent and analytical inquiries, an understanding of the business environment, and the willingness and ability to devote sufficient time to board responsibilities (Walmart, 2017).

Another advantage is that in the most recent financial year, Walmart's self-examination led to a restructuring of board committees. In previous years, the company had a single committee responsible for the broad scope of executive compensation, director nominations, and governance. These responsibilities have since been divided between two separate committees: the Compensation and Management Development Committee and the Nominating and Governance Committee. This change places greater emphasis on management development and on the appointment and refreshment of the board (Walmart, 2017).

However, there are also notable weaknesses. One downside is that the board previously comprised 15 individuals, which made the decision-making process time-consuming. Additionally, three board members belong to the founding family and may lack sufficient professional management experience, raising concerns about the quality of their strategic input (Walmart, 2017).

DuPont Analysis: Income Statements and Balance Sheets

Walmart faces significant competition from Target, the second-largest discount store retailer in the United States. Target operates just over 1,800 retail stores nationwide. Walmart's primary competitive strategy centers on low prices, while Target seeks to appeal to younger, image-conscious consumers. All investors wish to maximize the returns on their investments, and return on equity (ROE) is the standard measure of that return. A DuPont analysis provides insight into how a firm's ROE is generated by decomposing it into three elements: operating efficiency, asset effectiveness, and capital structure. The formula is as follows:

Return on Equity = (Net Income / Sales) × (Sales / Assets) × (Assets / Equity) = Net Income / Equity

i. Operating Efficiency = Net Income / Sales
2017: 14,293 / 481,317 = 0.030
2016: 15,080 / 478,614 = 0.032
2015: 17,099 / 482,229 = 0.035

ii. Asset Effectiveness = Sales / Assets
2017: 481,317 / 198,825 = 2.42
2016: 478,614 / 199,581 = 2.40
2015: 482,229 / 203,490 = 2.37

iii. Capital Structure = Assets / Equity
2017: 198,825 / 77,798 = 2.56
2016: 199,581 / 80,546 = 2.48
2015: 203,490 / 81,394 = 2.50

DuPont ROE Results — Walmart:
2017: 0.030 × 2.42 × 2.56 = 0.186 = 18.6%
2016: 0.032 × 2.40 × 2.48 = 0.190 = 19.0%
2015: 0.035 × 2.37 × 2.50 = 0.207 = 20.7%

i. Operating Efficiency = Net Income / Sales
2017: 2,737 / 69,495 = 0.039
2016: 3,363 / 73,785 = 0.046
2015: −1,636 / 72,618 = −0.023

ii. Asset Effectiveness = Sales / Assets
2017: 69,495 / 37,431 = 1.86
2016: 73,785 / 40,262 = 1.83
2015: 72,618 / 41,172 = 1.76

iii. Capital Structure = Assets / Equity
2017: 37,431 / 10,953 = 3.42
2016: 40,262 / 12,957 = 3.11
2015: 41,172 / 13,997 = 2.94

DuPont ROE Results — Target:
2017: 0.039 × 1.86 × 3.42 = 0.248 = 24.8%
2016: 0.046 × 1.83 × 3.11 = 0.262 = 26.2%
2015: −0.023 × 1.76 × 2.94 = −0.119 = −11.9%

The data used in these calculations were drawn from each company's annual financial statements. Several trends emerge from the comparison. First, Target's capital structure ratio is higher than Walmart's, indicating that Target finances its assets more heavily with debt rather than equity, while Walmart relies more on equity. This also means Target carries higher financial leverage and a riskier capital structure. Second, Walmart's asset effectiveness ratios are higher, indicating that Walmart is more efficient at generating sales from its asset base. Third, with respect to operating efficiency, Target slightly edges Walmart over the three-year period, suggesting it has been more effective at converting sales into profits (Godwin and Alderman, 2010).

The key comparative finding is that in fiscal years 2016 and 2017, Target achieved a higher ROE than Walmart. Walmart's ROE declined steadily from 20.7% in 2015 to 19.0% in 2016 and further to 18.6% in 2017. Target's ROE, by contrast, improved significantly — from −11.9% in 2015 to 26.2% in 2016 — before declining slightly to 24.8% in 2017. Overall, the analysis shows that Target was more efficient at generating returns for shareholders' equity relative to Walmart during this period.