Analysis of Walmart’s capital cost, capital structure and valuation

Team Member:

Introduction:
The changes of long- and short-term financing in the financial market have a great
impact on the capital structure. So it is very important to understand the capital
structure of an enterprise. At the same time, by analyzing the capital structure, we can
choose the best capital structure among several feasible capital structure schemes. Not
only can this reasonably arrange the capital structure, it can reduce the overall cost of
capital of the enterprise and the rational arrangement of the capital structure can
obtain financial leverage benefits, but also the rational arrangement of the capital
structure can increase the value of the company. Next is our analysis of Wal-Mart’s
capital structure

Capital Structure Choices

1. Evaluate the company’s recent financing choices. How are investments being
financed? Retained earnings? Can any pattern be attributed to industry norm, or to
other factors?

recent financing choices

The reason why Wal-Mart can develop into the world's largest chain retail enterprise.
Its financing method can be roughly divided into three stages.

The first stage: Survival in the cracks: from the village shop to the regional leader.
From the beginning of the establishment of FY1963 to FY1980, the revenues ranged
from USD 45 million in FY1971 to USD 1.258 billion in FY1980, with a CAGR of
44.92%; net profit from USD 1.65 million to USD 41 million, with a CAGR of
42.96%.
In the first stage, through stock financing, in the fierce competition in the discount
store industry, Sam did not flinch. He knew that the only way out of being swallowed
was to actively expand. Therefore, the number of Wal-Mart stores from 1 in 1962 to 2
in 1965, 9 in 1967, and 38 in 1970, with a total turnover of 44.29 million US dollars.
Because the expansion required a lot of money and Sam borrowed millions of dollars,
the heavy debt forced Wal-Mart to go public in 1970.

The second stage: ten years of excellence: expand to the whole country and become
the largest retail company in the United States. From FY1981 to FY1991, the
company's sales surpassed Sears. In this stage, the revenue was from US$1.655 billion
to US$32.601 billion, CGAR was 34.72%; the net profit was from US$56 million to
US$1.291 billion, and CGAR was 36.94%.

The 1980s can be described as the "Golden Decade" of Wal-Mart's development. The
company realized the development of regionalization to nationalization through
endogenous + extension. At this stage, the company's revenue increased from
US$1.655 billion in FY1981 to US$32.602 billion in FY1991, with a CAGR of
34.72%; net profit from US$56 million to US$1.291 billion, with a CAGR of 36.94%.

During this period, Wal-Mart has repeatedly adopted the "gradual filling" strategy for
local expansion, and does not advocate leapfrog cross-state development and mergers.
That is, first develop in a state, and after the state is full, then open a new store in the
next neighboring state, and the new store must be within a radius of more than 500
kilometers of the logistics center.

At the same time, Wal-Mart is also actively acquiring companies in the same industry.
The growth in the number of stores has achieved an unprecedented breakthrough.
While expanding its stores, it has not forgotten to increase the number of logistics
centers to maintain efficient logistics distribution. In August 1981, Wal-Mart acquired
Big K, a discount department store in the southern United States. The company had a
total of 120 branches in nine states in the southeast. Through this acquisition, Wal-
Mart entered the southeast region. In a swift way, it was ahead of Kmart, the nation's
largest discount department store chain, at the time, occupying a pre-emptive
advantage and removing a major competitor in the southeast. Since then, Wal-Mart
stores have been distributed across 13 states, and sales revenue jumped to US$2.4
billion, making it the second-largest discount department store chain in the country at
that time.

The third stage: the road to internationalization: to enter overseas and become the
world's retail hegemony. FY1992 company has embarked on the international road so
far (FY2018), this stage of revenue from 43.887 billion U.S. dollars to 500.343 billion
U.S. dollars, CGAR was 9.81%, net profit from 1.609 billion U.S. dollars to 10.523
billion U.S. dollars, CGAR 7.49%.

The third stage: the road to internationalization: to enter overseas and become the
world's retail hegemony. Since FY1992, Wal-Mart opened its first Sam member store
in Mexico City, marking Wal-Mart's official entry into overseas markets.
Subsequently, the American, European, and Asian markets were occupied through
mergers, acquisitions, joint ventures, and self-construction. Although the road to
internationalization was not smooth, overall, it achieved good results and eventually
became the overlord of the world’s retail industry. By the beginning of 2018, Wal-
Mart already had 6,360 overseas branches, and the proportion of international net
sales rose from 1.82% in FY1995 to 23.82% in FY2018.

Source: http://www.wal-martchina.com/walmart/history.htm

Retained earnings
The following figure is based on the formula of undistributed profit = surplus reserve
+ undistributed profit. We have summarized the curve chart obtained after the 2019
Wal-Mart financial report.
Walmart retained earnings trend chart

Unit: yuan
Resource: https://stock.qianzhan.com/us/zichanfuzhai_wmt.n.html
Current and historical operating margin for Walmart (WMT) over the last 10
years. The current operating profit margin for Walmart as of April 30, 2020
is 2.67%.

Can any pattern be attributed to industry norm, or to other factors?

I think that Wal-Mart has combined its own advantages and disadvantages and
developed a financing model that belongs to the development of its own company. No
copy of any company model, just adapt to the market and adjust strategy according to
the company's stage.

2.What is the company’s current capital structure?

Walmart total assets from 2006 to 2020. Total assets can be defined as the sum of all
assets on a company's balance sheet.
 Walmart total assets for the quarter ending April 30, 2020 were $236.495B,
a 7.84% increase year-over-year.
 Walmart total assets for 2020 were $236.495B, a 7.84% increase from 2019.
 Walmart total assets for 2019 were $219.295B, a 7.22% increase from 2018.
 Walmart total assets for 2018 were $204.522B, a 2.87% increase from 2017.
Walmart cash on hand from 2006 to 2020. Cash on hand can be defined as cash
deposits at financial institutions that can immediately be withdrawn at any time, and
investments maturing in one year or less that are highly liquid and therefore regarded
as cash equivalents and reported with or near cash line items.

 Walmart cash on hand for the quarter ending April 30, 2020 was $9.465B,
a 22.57% increase year-over-year.
 Walmart cash on hand for 2020 was $9.465B, a 22.57% increase from 2019.
 Walmart cash on hand for 2019 was $7.722B, a 14.3% increase from 2018.
 Walmart cash on hand for 2018 was $6.756B, a 1.62% decline from 2017.
Walmart long term debt from 2006 to 2020. Long term debt can be defined as the sum
of all long term debt fields.

 Walmart long term debt for the quarter ending April 30, 2020 was $64.192B,
a 27.86% increase year-over-year.
 Walmart long term debt for 2020 was $64.192B, a 27.86% increase from
2019.
 Walmart long term debt for 2019 was $50.203B, a 36.33% increase from
2018.
 Walmart long term debt for 2018 was $36.825B, a 12.36% decline from 2017.
Dividend Policy

1.How much has this company paid in dividends over the last few years?

According to Walmart’s 2019 financial report, the dividend payable under the current
balance sheet is US$82,647 million.

2.Who is the average stockholder in this firm? Does he or she like dividends or
would they prefer stock buybacks?

Name of institution or fund Number of holdings Holding stock

market value (100
million US dollars)
The average stockholder in this firm are Bank Of New York Mellon Corp and
Alliancebernstein L.P.、Legal & General Group Plc. They are more inclined to hold
for a long time.

3.How well can this firm forecast its future financing needs? How valuable is
preserving flexibility to this firm?

As the world's largest retail chain company, Wal-Mart predicts financing needs
through the supply chain.
Although Wal-Mart belongs to the retail industry, it has never stopped pursuing high
technology and has continuously tried to apply advanced technology to its business.
For example, as early as 1987, Wal-Mart built the world’s largest civilian satellite
communications system in the United States, even larger than the telecommunications
giant American Telegraph and Telephone Company; when competitors realized the
importance of informatization and began to work hard, Wal-Mart has been equipped
with information systems including satellite monitoring system, customer information
management system, distribution center management system, financial management
system, personnel management system and other technical means in 4,000 retail
stores around the world.

In this way, thanks to the leading global information system, Wal-Mart is able to
exchange information and exchange data on products distributed to stores and
suppliers in various industries around the world at any time. Specifically, Wal-Mart
can check the inventory, shelves, sales, etc. of each product in more than 10,000
stores around the world within an hour; at the same time, as long as it is seen in Wal-
Mart’s satellite communication room, You can understand the sales situation
throughout the day, find the total amount credited to the credit card that day, and the
number of sales in any area, any store, or any commodity. At the same time, when the
product is found to be in the lowest inventory in Wal-Mart's system, it will issue a
purchase reminder to the supplier to realize automatic ordering of the product.
Through this high-tech operation, the relationship between Wal-Mart and suppliers
has been further strengthened, and at the same time, the planning of orders in the
procurement process, the accuracy of market forecasts, the efficiency of supply chain
operations and the inventory turnover rate have been greatly improved.

On the other hand, holographic supply chain management has created Wal-Mart's
efficient logistics and distribution. From the perspective of the distribution center,
according to the research report of Industrial Securities, Wal-Mart's informatization
began in the early 1980s. At that time, Wal-Mart's electronic data exchange system
has matured. Then, with the completion of satellite network construction, Wal-Mart's
distribution center gradually established a data exchange system based on satellite
technology. Then, the Internet wave struck, and the informatization of Wal-Mart's
distribution center was further developed, and the distribution center, suppliers,
transportation system, and various stores were fully and effectively connected.
Coupled with highly modernized mechanical operations such as product selection,
packaging, and sorting, quality improvement and efficiency are more obvious.

From the perspective of the transportation system, since 1978, Wal-Mart has always
adhered to the concept of its own fleet and drivers, rather than outsourcing
transportation to professional transportation companies like many large retail
companies. The benefit brought by this is the flexibility of logistics, and then continue
to provide the best logistics distribution services for first-line stores, to better promote
the global sales of goods. At the same time, Wal-Mart also makes full use of the
global positioning system to carry out all-round monitoring of vehicles at any time,
which can accurately lock the position of trucks and products, thereby improving
operating efficiency.

From the perspective of replenishment and terminal systems, thanks to the coverage
of information, Wal-Mart can know the inventory geometry of each store at any time,
the geometry of the goods in transit, the geometry of the goods retained in the
distribution center, etc. These data It can enable the logistics distribution center to
make timely and accurate replenishment of stores, and can also predict future market
trends based on past data. At the same time, in any link of merchandise sales, the
business status of the merchandise can be instantly grasped, which facilitates the
dynamic management of merchandise inventory in stores at Walmart, keeps the
storage of merchandise at a reasonable level, and reduces unnecessary inventory
backlog ,save costs.

4. Are there any significant bond covenants that you know of on the firm's
dividend policy?
At present, Wal-Mart has a bond contract, but it is impossible to know the specific
terms. The official did not announce

 
Cost of debt and Equity
A. Cost of Common Equity
1.Calculate the cost of equity using (ks) the Gordon Constant Growth Model. You
must show your calculations and identify your sources.
D1
ks  g
P0

a. The recent dividend D0 is 1.75%

b. The dividend growth rate g (TTM) is 1.96%
c. May be projected as a trend of past dividends D1 is D1= D0(1+g) =
1.75%(1+1.96%)=1.78%
d. Nestle’s current stock market price P0 is 122.11

D1
ks  g
the Gordon Constant Growth P0 =1.974%

Source: https://cn.investing.com/equities/wal-mart-stores-ratios
2.Calculate the cost of equity using the Capital Asset Pricing Model. You must show
your calculations and identify your sources. k s = kRF + bs(kM - kRF )

a. The risk-free rate of return kRF is (assuming a month’s rate of return on US

Treasury bills) 0.122%
b. 5-year return on market portfolio is 8.12%
c.The company's beta is currently 0.3
So Nestlé’s cost of equity is
k s = kRF + bs(kM - kRF ) = 0.122%+0.3(8.12%-0.122%)=3.29%

B. Cost of Long-Term Debt (Bonds) The company you are studying must have at
least one issue of long-term debt (bonds) outstanding.

1.The number of periods, N, until the bond matures is 25 days.

2.Now the company's rating in Moody's is Aa2

C．Cost of Preferred Stock.

We do not see data in the preferred stock column of Walmart’s profit statement for
2019.

 Optimal Capital Structure

1.Wal-Mart's financing method can be summarized as regional filling + extended
M&A.
a. Area filling: "Gradually fill" strategy. For local expansion, we do not advocate
leapfrog cross-state development and mergers. That is, first develop in a state, and
 after the state is full, then open a new store in the next neighboring state, and
continue to develop.
b. Extended M&A: A large-scale acquisition of companies in the same industry. For
example, a "Snake Swallow Elephant" merger event was staged in August 1981.
Wal-Mart acquired Big K, a discount department store in the southern United
States, and obtained a total of 120 branches of the company, with the number of
stores ranging from 330 in FY1981 to 491 in FY1982. Since then, Wal-Mart has
been expanding for a long time through endogenous exhibition stores and
extended M&A.

2. At the same time, the company is particularly sensitive to social changes, with
particular emphasis on the application of emerging technologies. Wal-Mart's pursuit
of technology has always been far ahead of its competitors. In 1969, Wal-Mart
purchased the first computer to support daily business and established an inventory
management system; the informationization of the distribution center began in the
early 1980s, and then Wal-Mart launched a private satellite in 1987 to provide
satellite technology for the distribution center. stand by. The continuous development
of science and technology has enabled Wal-Mart to achieve a comprehensive and
effective connection between the center and its suppliers, transportation system, and
various storefronts. According to the book "From Country Stores to World Retail
Giants: A Comprehensive Analysis of Wal-Mart's Success", due to Wal-Mart's use of
these advanced technologies, distribution costs fell from 3% of its sales in the early
1970s to later 1.3%, the distribution cost of its competitors is generally 5% of sales,
Kmart 8.75%, and Sears is 5%.

3. The supporting factors behind the daily low prices are inseparable from the strict
control of costs and expenses. Reduce operating costs: Wal-Mart offices are
notational decoration, employees go out to stipulate that two people live in a hotel;
store equipment is based on energy saving and cost reduction considerations. All Wal-
Mart employees strive to cut costs from top to bottom. This makes Wal-Mart's
operating costs much lower than competitors in the same industry. Reduce marketing
and advertising costs: stores do not do too much promotional advertising, new stores
are opened near the old store, so you can save advertising costs. Before FY1992, due
to strict cost control, SG&A/revenue declined year by year, to 15.23% in FY1992, but
after Wal-Mart entered internationalization, SG&A/revenue generally climbed to
21.29% in FY2018.

4. Format innovation: hypermarkets to community stores, discount stores to mass

retailers

Wal-Mart attaches great importance to the innovation of business formats. Each

business model launched is at the forefront of the industry, mainly including discount
stores, shopping malls, Sam's member stores and community store formats. The
combination of these formats makes Wal-Mart successfully occupy high, middle, and
high levels. Low-end market.

(1)Discount store
Founded in 1962, the discount store is one of Wal-Mart's earliest developed formats.
The discount store is targeted at consumers of low-income families. At the beginning,
Sam also opened a discount store in a town of 8,000 people, and only sold products
that were sold instead of a full range of products. Later, the discount store opened in a
large town was to provide a full range of products and some food. . Although in the
United States, the number of Wal-Mart discount stores began to decline since FY
peaked in 1997 at 1960, but the sales of this format still account for a large proportion
of it. As of FY2018, there are only 400 Wal-Mart discount stores in the United States.

(2) Sam's Club

The second major format, Sam Member Store, is a membership storage store named
after Wal-Mart founder Sam Walton. The first Sam Member Store was founded in
1983. Sam's Club is for small businesses and other individual consumers who need to
buy in large quantities. Customers must pay a certain membership fee to become a
member of Sam's Club, and then enjoy different price discounts according to
consumption. Sam's member store is characterized by large packaging and low profit,
so that customers can enjoy low storage prices. Sam's Club offers a wide variety of
foods, including seafood, fruits and vegetables, snacks, and other food and non-food
items. In 1996, the first Sam member store landed in Shenzhen.

(3) Shopping Plaza

The third major shopping mall opened in 1988. The shopping mall is aimed at
consumers of low-income families and pursues the "one-stop" shopping concept,
which saves customers time and expense, and provides a unique shopping experience.
In 1996, the first Wal-Mart shopping mall opened in Luohu District, Shenzhen. As of
FY2018, Wal-Mart shopping malls in the US have reached 3,561, accounting for 75%
of the stores in all formats.

(4) Community store

The fourth main format is the community store. Founded in 1999, the community
store serves the resident population in the community. All configurations and designs
are closely integrated with the community’s consumption. Its product positioning,
store layout, Marketing planning also serves the community. It is mainly aimed at
upper-middle class household consumers. This consumption model is a supplement to
the first three retail formats in market segmentation. Its competition goal is to be close
to the community's food standard supermarkets, convenience stores, and other grocery
stores.

(5) Unique after-sale anti-rent model

During the rapid expansion period, Wal-Mart needed a lot of capital. In FY1979-
1996, its capital expenditure accounted for 5% of the average income, the average
operating cash flow/capital expenditure was only 60%, and free cash flow was
negative. The remaining 40% of capital expenditures stems from its long-term
liabilities on the one hand, and benefits from Wal-Mart's unique financing model, the
after-sale anti-lease model. Wal-Mart has set up a real estate development department,
which sells self-built properties at a low rent price. This unique financing method
eases Wal-Mart's dependence on external funds and locks in the rental price.

Valuation
Zacks Consensus currently expects WMT to achieve 3.2% revenue growth to reach
US$128.9 billion, while revenue in the third quarter of 2020 is expected to decline by
1.85% to US$1.06.

It is expected that Wal-Mart's third-quarter sales in the United States will continue to
grow, increasing 2.97% to 82.98 billion US dollars. Wal-Mart’s international sales are
expected to increase by 5.52% to $30.38 billion. The company's Sam's Club is also
expected to grow 2.61% in the third quarter to $14.9 billion.

Looking forward to the entire fiscal year, the company’s total sales are expected to
increase by 2.39% to US$526.69 billion, and earnings per share will decline by 1.43%
to US$4.84. Wal-Mart’s revenue in the US is expected to increase by 2.81% to
US$340.98 billion.

Currently, Wal-Mart's Zacks ranks second (purchase), and the revenue has been
higher than expected. In the previous four quarters of earnings, the company's
earnings per share averaged 7.32%. In addition, the retail giant's fiscal year 2020
forecast also has an upward trend.
 Reference

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[3] Demitrios Kalogeropoulos (Apr 3, 2020). Why Walmart Stock Gained 6% in March.
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[4]Nicholas Rossolillo (May 24, 2020). Walmart vs Target: Who's the E-Commerce Winner
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https://www.fool.com/investing/2020/04/03/why-walmart-stock-gained-6-in-
march.aspx

[5] Walmart Releases 2020 Annual Report and Proxy Statement. Retrieved from
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