Questions for Wal-Mart case study.
1. Assess the financial health of Wal-Mart based on the analysis of the companys financial
statements.
2. Based on any additional available information (including annual reports and 10-K
filings) assess the economic conditions (as of the time of the case), the industry key
success factors and key competitive situation, and Wal-Marts strengths and weaknesses.
3. Develop a pro-forma income statement for Wal-Mart for the fiscal year ending January
31, 2006. Assume the following (in addition to the information in the case): selling,
general and administrative expenses at 17.3% of anticipated net sales; interest on debt at an
average of 4%; similar number of shares outstanding as of January 31, 2005. State any
other key assumptions. How profitable do you think Wal-Mart will be? Will Wal-Mart
need to increase its reliance on external borrowing?
4. Determine the intrinsic value of Wal-Mart tion a per share basis) using the dividend
discount model (DDM). Assess the value based on three forms of the DDM: the constant
growth version, an assessment based on three years of projected dividends and a projected
future stock price, and the three-stage DDM. Clearly state any assumptions including an
estimation of Wal-Mart investor required returns.
5. Determine the intrinsic value of Wal-Mart tion a per share basis) using Price – Earnings
(P/E) approach. As part of your analysis, you will need to determine an appropriate
forward-looking P/E multiple. Clearly state any assumption.
6. Based on your analysis, as Richard Martin, what recommendation would you make?
Justify your recommendation and reconcile any differences in your valuation assessments
(based on different methods).
Introduction
Wal-Mart is more than just another large company. Every week, over 130 million
customers visit Wal-Mart stores worldwide, making it the worlds largest retailers. It is the
largest corporation in the world, with total revenues of $285 billion for fiscal year ending
January 31, 2005. A leader in the discount industry, it has continued to specialize in selling
discounted household goods. The company has approximately 1.3 million employees
working at 3,100 locations in the United States and 1,000 locations in Mexico, Puerto
Rico, Canada, Argentina, Brazil, China, Korea, Germany, and the United Kingdom.
Currently the company is broken down into four divisions: Wal-Mart Supercenters,
Discount Stores, Neighborhood Markets, and SAMS Club Warehouses. Wal-Marts motto,
Everyday Low Prices, is present is each of the divisions. The magnitude and global
presence of Wal-Mart allows it to be a dominant player in the retailing market place.
During the past decade, as Wal-Mart sharply expanded its number of stores in the United
States, it increasingly encountered resistance from local communities. Opponents of
Wal-Mart have tried to block its entry on many grounds, including the prevention of urban
sprawl, preservation of historical culture, and protection of the environment. Mega
retailers, such as Wal-Mart, are expanding their product variety by focusing on groceries
and pharmaceutical drugs. To combat the market intrusion, Walgreen, CVS, and other drug
stores are adding groceries to their shelves. The mass merchandising industry is only
getting larger as the major players are offering more selection to gain a competitive edge.
Many companies like Wal-Mart are expanding by acquisitions. Competition within the
industry itself does not present a formidable threat to Wal-Mart Inc. because of its size and
profitability. Some of its direct competitors are Target, Kroger, and Costco. In summary,
Wal-Mart is ahead of the competition and the leader in the industry with a secure market
position. It is essential that fundamental relationships within the industry and the
companys environment be analyzed by Rachel Martin early in 2006 in order to efficiently
evaluate Wal-Mart, its stock and, the correct valuation of the companys stock.
1. Analysis of the Financial Health of Wal-Mart for Calendar Years 2003 (FYE1/31/2004)
and 2004 (FYE 1/31/2005)
Ratios are very helpful in determining the financial health of a company. They can provide
indicators if a company is in financial trouble or moving in a positive direction and
experiencing growth.
The two years average current ratio for Wal-Mart is 0.91. Wal-Marts current ratio is less
than one, which means that by selling out its current assets in an emergency, it still would
not be able to cover its liabilities. Wal-Marts current ratio is low because of its heavy
reliance on short-term debts and commercial papers to finance its operations. This ratio
would have a heavy bearing on the investor motivation to invest in Wal-Mart. The fear of
not being able to cover its liabilities in the event of an unforeseen circumstance may deter
investors from purchasing the stock.
The higher the ratio is, the better the company financing. The two years average quick
ratio for Wal-Mart is 0.26 .Wal-Marts lower quick ratio is caused by Wal-Marts high
investment in inventory. Its quick ratio is low because of its dependence on current
liabilities. However, Wal-Marts high inventory is needed because if they do not have the
item in stock the customer will go to the competition. It is well known that keeping a
customer is cheaper than getting new ones, thus Wal-Mart does not want to lose any of its
customers.
The higher the Debt to Equity ratio is, the riskier the firm. Wal-Mart borrowed more
money proportionally to equity during the last two years. Any debt, which companies issue
or take, becomes a liability to the company and these risks are directly transferred to the
shareholders. Therefore, it is inherent that the more debt financing, the more risk is
present.
It is critical, however, to understand the type of firm being analyzed, the industry, and the
