MSC Thesis Walmart Financial Analysis ALAM Samsul

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Financial Analysis of Retail Business Organization: A Case of Wal-Mart Stores,

Inc.
Thesis · July 2016

DOI: 10.13140/RG.2.2.29808.53768
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MODELO DE CARÁTULA PARA LA PRESENTACIÓN POR ESCRITO DEL
TRABAJO FIN DE MÁSTER
Facultad de Ciencias Económicas y Empresariales
Curso 2015 /2016
Convocatoria: julio
UNIVERSIDAD DE EXTREMADURA
FACULTAD DE CIENCIAS ECONÓMICAS Y EMPRESARIALES
Financial Analysis of Retail Business Organization:

A case of Wal-Mart Stores, Inc.
TRABAJO PRESENTADO PARA OPTAR AL TÍTULO OFICIAL DE

MÁSTER UNIVERSITARIO DE INVESTIGACIÓN EN ECONOMÍA, GESTIÓN Y COMERCIO INTERNACIO-
NAL POR LA UNIVERSIDAD DE EXTREMADURA
POR
SAMSUL ALAM
TUTELADO POR
RAMÓN SANGUINO GALVÁN
ASCENSIÓN BARROSO MARTÍNEZ
BADAJOZ, JULIO DE 2016

Dedication
To my Father Surju Miah and Mother Fatema Begum, without whose sacrifices and
contributions I could not complete this work and reach this position. They are my actual mentor
who teaches me first how to overcome obstacles and go ahead. They are the real hero I have
ever seen in my life.
Sincere respect and love for you, Ma and Abba, always! I wish you good health and long
life.
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Acknowledgments
At the very beginning, I would like to express my deepest gratitude to the Almighty Allah
for giving me the strength, knowledge, wisdom, and ability to carry out this research work and
the composure to finish it within the scheduled time.
I want to pay my special thanks to my Supervisor Dr. Ramón Sanguino Galván, the
professor and head of the Department of Business Administration and Sociology of the
University of Extremadura, and the co-director of the FERC Spanish Discussion Group. He
continuously guided and directed me to complete this work successfully. Again, I am indebted
to my co-supervisor, Dr. Ascensión Barroso Martínez, the director of the master's degree,
doctoral theses at the same department of the same university relentlessly assisted me in
improving the paper. Both of them given me total support, instructions, mentoring, and
encouragement in helping me accomplish my thesis.
I convey my humble gratitude to Dr. Juan Monterrey Mayoral, Professor, Department of

Financial Economics and Accounting, School of Economics and Business Sciences, University
of Extremadura, Badajoz, Spain, for his lessons to improve this report.
I thank those who allowed me to use their published and unpublished data in this
research.
I also express my gratitude to my family members; I am especially indebted to my parents

for their provision, love, care, and prayers.
This research work is not free from limitations. Despite the utmost care, there might still
be some minor mistakes, including typing errors; I apologize for these mistakes.
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Funding
This research work was funded by the ERASMUS MUNDUS LEADER Scholarship awarded
for Action 2, Cohort-1 in the academic session 2015-2016, a project of the European
Commission. Thing funding was sanctioned for conducting Master’s by Research degree in
Economics, Management and International Trade with a major in International Accounting
and Finance in the University of Extremadura, Badajoz, Spain.
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Preface
This work was conducted as a Master Thesis carried out by the author under the
supervision of Ramón Sanguino Galván as the principal supervisor and Ascensión Barroso
Martínez as a co-supervisor for the official title Master’s Degree in Research in Economics,
Management, and International Trade with a major in International Accounting and Finance. The
thesis was held at the University of Extremadura, Badajoz campus, Spain, under the School of
Economic and Business Sciences. The final defense was completed on 12th July 2016 with
outstanding remarks. As part of the partial completion of the degree, this thesis was conducted
on the world’s largest retailing organization “Walmart,” in the United States of America. The aim
of conducting this study was to analyze the present financial condition and future valuation and
forecasting. This thesis is helpful for economic research scholars, graduate students working in
the related field, financial market analysts, retail business stakeholders, and more.
Samsul Alam
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TABLE OF CONTENTS
DEDICATION ............................................................................................................................................................ I
ACKNOWLEDGMENTS .......................................................................................................................................... II
FUNDING .................................................................................................................................................................. III
PREFACE ................................................................................................................................................................. IV
TABLE OF CONTENTS .......................................................................................................................................... V
LIST OF FIGURES ................................................................................................................................................. VI
LIST OF TABLES ................................................................................................................................................... VI
LIST OF EQUATION............................................................................................................................................. VII
ABSTRACT ............................................................................................................................................................ VIII
CHAPTER-ONE: INTRODUCTION ............................................................................................................................10
CHAPTER-TWO: THEORETICAL FRAMEWORK .................................................................................................13
2.1 OVERVIEW OF RETAILING ..................................................................................................................................... 13

2.2 RETAILING IN THE WORLD VS. THE USA ............................................................................................................ 14
2.3 WALMART ANALYSIS: CRITICS AND PRAISE FROM LITERATURE........................................................................ 16
CHAPTER-THREE: PRESENTATION OF WALMART ............................................................................................20
3.1 BRIEF HISTORY ...................................................................................................................................................... 20

3.2 CORPORATE PROFILE ............................................................................................................................................ 21
3.3 BUSINESS DYNAMICS AND FINANCIAL TRENDS .................................................................................................. 21
CHAPTER-FOUR: WALMART MARKET ANALYSIS .............................................................................................22
4.1 PERFORMANCE METRICS ...................................................................................................................................... 22

4.2 COMPETITIVE CIRCUMSTANCES ........................................................................................................................... 25
4.3 MAJOR COMPETITORS PROFILE ........................................................................................................................... 27
4.3.1 Competitive Advantage ............................................................................................................................. 28
4.4 SWOT ANALYSIS OF WALMART ........................................................................................................................... 28
4.5 MICRO-LEVEL ANALYSIS (PORTER´S FIVE FORCES MODEL) ............................................................................ 29
4.5.1 Threat of substitute products and services ......................................................................................... 29
4.5.2 Threat of new entrants ............................................................................................................................. 29
4.5.3 Competitive rivalry within the industry ............................................................................................... 29
4.5.4 Bargaining power of customers .............................................................................................................. 30
4.5.5 Bargaining power of suppliers ................................................................................................................ 30
4.6 MARKET RISK ......................................................................................................................................................... 30
4.6.1 Currency Risk .............................................................................................................................................. 30
4.6.2 Strategy and Competitive Forces ........................................................................................................... 31
CHAPTER-FIVE: HISTORICAL FINANCIAL DATA AND FREE CASH FLOW FORECASTS ......................32
5.1 FINANCIALS............................................................................................................................................................. 32
5.1.1 Key Ratios .................................................................................................................................................... 33
5.1.2 Free Cash Flow Forecasts ....................................................................................................................... 34
5.1.3 Persistence and Sustainability of Historical Financial Data .......................................................... 36
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CHAPTER-SIX: WALMART VALUATION AND COMPARISON ..........................................................................40
6.1 CONCEPTUAL APPROACH TO VALUATION ............................................................................................................ 40

6.2 PERPETUAL GROWTH RATE .................................................................................................................................. 40
6.3 WEIGHTED AVERAGE COST OF CAPITAL (WACC) ............................................................................................. 42
6.3.1 Calculating Cost of Equity, Ke ................................................................................................................. 42
6.3.2 Calculating Cost of Debt, Kd .................................................................................................................... 43
6.3.3 Calculating Weighted Average Cost of Capital (WACC) ................................................................... 44
6.4 TERMINAL VALUE................................................................................................................................................... 45
6.5 FUNDAMENTAL VALUE .......................................................................................................................................... 46
6.6 MARKET VALUE (MV) ............................................................................................................................................ 47
6.6.1 Market Capitalization ................................................................................................................................ 47
6.6.2 Enterprise Value (EV) ................................................................................................................................ 50
6.7 COMPARISON .......................................................................................................................................................... 50
CHAPTER-SEVEN: ANALYSIS, RECOMMENDATION, AND CONCLUSION ...................................................52
7.1 FUNDAMENTAL ANALYSIS AND RECOMMENDATION ........................................................................................... 52

7.2 CONCLUDING REMARKS ........................................................................................................................................ 56
REFERENCES .........................................................................................................................................................58
APPENDIX ...............................................................................................................................................................64
APPENDIX 1: RETAIL BUSINESS IN THE WORLD VS. USA ........................................................................................ 64

APPENDIX 2: .................................................................................................................................................................. 67
LIST OF FIGURES
Figure 1: Fundamental analysis of capital market orientation ...................................................................... 11
figure 2: Organizational framework of walmart financial analysis ............................................................... 12
figure 3: Different segments of walmart ................................................................................................................ 21
figure 4: Type of currency risk .................................................................................................................................. 30
figure 5: Walmart revenue flow for different years ............................................................................................. 36
figure 6: Walmart operating and net income for different years .................................................................... 36
figure 7: Walmart gross margin and operating margin of different years ................................................... 37
figure 8: Walmart historical earnings per share and dividend per share ................................................... 37
figure 9: Walmart historical free cash flow ........................................................................................................... 38
figure 10: Walmart fcf per share, fcf percentage of sales, and net income................................................. 38
figure 11: Walmart forecasted free cash flow from 2017 to 2026 ................................................................. 39
figure 12: Input source of cost of equity and cost of debt ............................................................................... 42
figure 13: Walmart historical dividend yield ........................................................................................................ 55
LIST OF TABLES
Table 1: UK retail sector in 2014 ............................................................................................................................. 13
table 2: Wholesale and retail sector in the UK, 2014 ........................................................................................ 13
table 3: Retail industry volume insider and institutional holdings at % of total share outstanding . 14
table 4: Top 10 retailers worldwide, 2012 ............................................................................................................. 15
table 5: E-commerce activity among the top 250, 2012 ................................................................................... 15
table 6: Product sector profile and level of globalization by product sector, 2012 .................................. 16
table 7: The USA retail industry's direct and total national impact, 2009 ................................................ 16
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table 8: Walmart debt ratings by the different rating agency ......................................................................... 18
table 9: Walmart different segments’ sales revenue .......................................................................................... 22
table 10: Walmart’s net income proposition......................................................................................................... 22
table 11: Comparison with fundamental ratios for two years ........................................................................ 22
table 12: Annual rates of change (per share) ....................................................................................................... 23
table 13: Earnings per share and dividend paid ................................................................................................. 23
table 14: Walmart financial performance .............................................................................................................. 23
table 15: Walmart financial performance and industry and sector-wise comparison ............................ 23
table 16: Walmart profitability .................................................................................................................................. 25
table 17: Current valuation ....................................................................................................................................... 25
table 18: Comparison of the top 4 retailers in the world in 2015 ................................................................. 26
table 19: Competitive rivalry within the industry ............................................................................................... 26
table 20: Walmart competitors ................................................................................................................................. 26
table 21: Walmart growth and comparison with significant competitors ................................................... 27
table 22: Walmart swot analysis .............................................................................................................................. 28
table 23: Walmart strategic direction ..................................................................................................................... 31
table 24: Historical FCF from 2006 to 2016 ........................................................................................................ 34
table 25: Forecasted FCF from 2017 to 2026 ...................................................................................................... 35
table 26: Walmart month covered call option return model ........................................................................... 42
table 27: Pro forma financial performance ........................................................................................................... 42
table 28: Walmart tax rate for five consecutive years ....................................................................................... 44
table 29: Walmart historical wacc ........................................................................................................................... 45
table 30: Walmart terminal value and necessary value calculation ............................................................. 45
table 31: Walmart terminal value calculation ..................................................................................................... 46
table 32: Walmart terminal value and fundamental value for different estimated years ...................... 47
table 33: Comparison of historical enterprise value .......................................................................................... 50
table 34: Walmart peer group in food & staples retailing ................................................................................ 51
table 35: Most recent ratings changes of walmart ............................................................................................. 53
table 36: Walmart multiple valuation model ........................................................................................................ 53
table 37: Related retail business recommendation ............................................................................................ 54
table 38: Investment decision for walmart and its major competitors ........................................................ 55
LIST OF EQUATION
Equation 1: Price vs. Value calculation ................................................................................................................. 11
equation 2: Calculation of free cash flow .............................................................................................................. 34
equation 3: Value calculation ................................................................................................................................... 40
equation 4: Compound annual growth rate calculation .................................................................................. 41
equation 5: Beta calculation ..................................................................................................................................... 43
equation 6: Cost of equity calculation .................................................................................................................... 43
equation 7: Cost of debt calculation ....................................................................................................................... 44
equation 8: Calculation of effective tax rate ......................................................................................................... 44
equation 9: Terminal value calculation for walmart .......................................................................................... 46
equation 10: Fundamental value calculation for walmart ............................................................................... 47
equation 11: Market value calculation................................................................................................................... 48
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Financial Analysis of Retail Business Organization: A case of Wal-Mart
Stores, Inc.
ABSTRACT
Wal-Mart Stores, Inc., the world’s largest retail company, has been operating its
business under a critical situation by being matured for some market seg-
ments, concentrating on the earning stagnation by changing sentiment towards
stalwart in the coming days. The main objective of this study is to present the
ins and outs of retail business in the world, especially in the United States of
America (USA), and present Walmart’s financial performance making the im-
portant valuation of the company as well as showing competitive circumstances
which are essential in the eye of the financial market analyst, investors, and
customers. The finding of this detailed descriptive study with sufficient finan-
cial analysis and comparative variables is that Walmart is the lucrative choice
for the past, present, and future investors with the estimation of terminal value
at the end of the fiscal year 2026 estimated US $580 billion and the fundamen-
tal value of US $735 billion. The assumption is made on in-depth financial
analysis with reliable data and calculation. The result of this study shows that
due to the emergence of stronger competitors and for being matured, Walmart is
not performing as expected by investors, but its gigantic market size and capi-
tal will make it capable of doing business profitably over a longer period of
time. The ultimate decision given in this study for the investors is to buy. This
study gives the future researcher a basis for further theoretical and empirical
research on this industry-leading company.
Key Words: Walmart, Financial Analysis, Retail Industry, Market Analysis,

Valuation
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RESUMEN
Wal-Mart Stores, Inc., la mayor empresa minorista del mundo, ha estado ope-
rando su negocio bajo situación crítica en algunos segmentos del mercado. El
objetivo principal de este estudio es presentar los comercio al por menor en el
mundo, especialmente en los Estados Unidos de América y el rendimiento fi-
nanciero actual de Walmart, así como hacer la valoración importante de la em-
presa, que para los analistas del mercado financiero, inversores y clientes. El
hallazgo de este estudio descriptivo detallado con análisis financiero y las va-
riables comparativas, muestra que Walmart es la opción lucrativa del pasado.
La estimación del valor terminal del año 2026 para Walmart, estima un valor
de US $580 millones y el valor fundamental de US $735 millones. Se hace la
suposición de análisis financiero en profundidad con datos fiables y cálculo.
Este estudio muestra que, debido a la aparición de competidores más fuertes y
por ser madurado, Walmart no está funcionando como se esperaba por los in-
versores, pero su tamaño de mercado y el capital harán que sea capaz de ha-
cer negocios de manera rentable en un período de tiempo más largo. La deci-
sión última propuesta en este estudio para los inversores es comprar. Este es-
tudio proporciona el futuro investigador una base sobre la que hace aún más
base de investigación teórica y empírica de esta empresa líder en la industria.
Palabras Clave: Walmart, análisis financiero, la industria al por menor, aná-

lisis de mercado, valoración
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Financial Analysis of Retail Business Organization: A case of Wal-Mart Stores, Inc. | Samsul Alam
CHAPTER-One: INTRODUCTION
R
etail business is one of the prominent sectors worldwide. Privately owned multi-
store retail chains in the USA can publicly trade on the stock exchange. However,
about 90% of USA retail stores are single-store. They account for less than half of
all retail sales. The USA's 2nd largest sector contributes about 12% of employment, US $3.8
trillion, and US $4.2 trillion, including foods in sales (Marcilla, 2014). Retail trade ranked sec-
ond out of the seven industries studied on the preparedness index. This index provides an
overall benchmark of how Australian industries compare, based on their digital adoption rates
and relative preparedness for the future (Optus, 2013). The retail sector spends by consumers
in-shop and online that consumers in the UK spent around the US $605 billion in 2014. The
wholesale sector involves those businesses that supply shops. The retail sector in recent years
is under pressure because of the evolution and growth of supermarkets, online retailing, and
recession. The data provided for retail sector for UK in 2014 found output US $144 billion
(5.6%), employment 2,789,000 (10%), business 300000 (5.7%) where for Wholesale sector it is
found that the wholesale output was US $94 billion (3.7%), employment 1,123,000 (4%), busi-
ness 300000 (2.5%) (Rhodes, 2015). In 2015, e-commerce sales were the US $341.7 billion, a
14.6% increase from 2014, where total retail sales increased 1.4%, which was 7.3% of total re-
tail sales. USA retail e-commerce sales for the 4th quarter of 2015 calculated was the US
$107.1 billion, a 32.2% increase from 3rd quarter of 2015 that is 14.5% increase from 4th quar-
ter of 2014 while the total sales increase increased 1.6%. E-commerce sales accounted for
8.6% of total sales in the 4th quarter of 2015 (U.S. Department of Commerce, 2016). Multi-
channel retailers dominate today’s retail landscape. These multiple channel operations enjoy
both benefits and face many challenges (Zhang et al., 2010). The ever-growing sector needs
systematic analysis; hence there are numerous researches done based on the retail business.
Realizing the need to analyze retail business, the researcher considers the world’s largest retail
business, Walmart Stores, Inc.
This study attempts to present Walmart in-depth, especially showing the financial data
analysis, future growth prospects, and possible forecasts. This study aims to present the fun-
damental research at the industry level. Company level showing in depth the financial condi-
tion of Walmart Stores, Inc., and give an overview of the retail market for sustainability and
consistency for growth (market efficiency). Again, this study aims at helping enhance financial
concerns’ (investors, competitors, and market analysts) understanding about the company.
The SWOT analysis and recommendations for future expansion strategy for Walmart and pur-
chasing decisions for investors are also shown.
The study contributes to the related sector, retail firms, Walmart itself, and other stake-
holders by providing important past financial performance and future forecasts. The valuation
is essentially crucial for financial investors as well as retail sector analysts. The overall re-
search is a source for conducting a forthcoming study in the related field for financial analysts
and other business researchers.
The financial performance of a retail company should be analyzed in light of how its seg-
ment and competitors fared. The analysis should be based on both qualitative (business strat-
egy such as concept and format, target market, real estate, merchandising and store presenta-
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tion, technology, management expertise) defining where the company stands and quantitative
(The income statement: sales, gross profit margin, operating profit margin, net income, and net
profit margin; The statement of cash flows; The balance sheet: liquidity, inventory trends, oth-
er items) getting down to basics-that may vary from company to company and from segment to
segment. The company’s prospects should be assessed with the part, retail industry, and the
economy (Souers, 2011, March 24).
This is a descriptive study based solely on secondary data. These data are based on the
company website, annual reports of different years, financial websites, journal articles, news-
papers, and book chapters. These were both quantitative and qualitative data used to prepare
the whole study. This study is based on two analyses (Financial & Fundamental) as follows:
Figure 1: Fundamental analysis of capital market orientation
This study is based on some scholars in the field of financial investment approach and
theory. British-born American economist and professional Benjamin Graham (1894-1976)
considered the father of “value investing,” who taught an investment approach at Columbia
Business School in 1928. He wrote a book published in 1949, The “Intelligent Investor” ("Ben-
jamin Graham," 2016, April 5). He was influenced by Warren Edward Buffett (1930 - ), an
American business magnate and the world’s most successful investor, to enroll in that Univer-
sity (Biography.com, n.d.). This analysis includes price, which reflects objective measure as
well value reflects subjective measure hence,
Equation 1: Price vs. Value calculation
𝐸 (𝑥)
P≡V≡
𝐾
Thus, price (P) is the representation of value (V) advocated by American Nobel laureate in
Economics (2013), Eugene Fama (1939 - ). He is referred to as the father of modern finance
("Vita--Eugene F. Fama," 2015, May). The division of expectation or expected value is the
weighted average value of a random variable by the average weight.
The report is fragmented into several sections, which are also divided into some sub-
sections. The remaining area of this study is to present earlier theoretical approaches in the
field of retail. The central part of the study is based on Walmart's business Presentation, where
history, corporate profile, and market dynamics are described. Then the market of Walmart is
analyzed based on the competitive forces, SWOT analysis, Strategy, market risk, and more.
The remaining parts are based on the presentation of historical financial data and free cash
flow forecast. Valuation is made showing WACC, market value, and fundamental importance of
Walmart. Finally, fundamental analysis, recommendation, and conclusion are given. These
sections essentially focus on Efficient Market Hypothesis, Basics of Consolidated Accounts,
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Key Ratios, Valuation and Cost of Capital Basics, Value Drivers, Analysis. The valuation using
financial Analysis would reflect in the chart below:
Figure 2: Organizational Framework of Walmart Financial Analysis
Source: Drake and Fabozzi (2012)
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CHAPTER-Two: THEORETICAL FRAMEWORK
2.1 Overview of Retailing
F
irstly, assuming the necessity of defining the sector, the retail sector iThe economic
sector consists of individuals and companies involved in selling finished goods to
the end consumers (Marcilla, 2014). The retail industry can be divided into special-
ized and non-specialized, where non-specialized stores sell a variety of products such as su-
permarkets, department stores, or convenience shops. In 2013, the non-specialized retail sec-
tor accounted for 20% of retail business in the UK, 51% of retail turnover, and 47% of em-
ployment (Rhodes, 2015, October 2). Data on the retail sector can also be analyzed in terms of
the wholesale and retail industries.
Table 1: UK retail sector in 2014
Output Employment Businesses Employment Businesses

(USD in (USD Thou- (USD in Output (% (% of GB (% of UK
Particular Billion) sand) Thousand) of UK total) total) total)
Retail 141.3 2,789 300 5.60% 10.00% 5.70%
Wholesale 92.63 1,123 132 3.70% 4.00% 2.50%
Source: Rhodes (2015)
The table below shows economic output (Gross Value Added), employment, and business-
es in the wholesale and retail sectors.
Table 2: Wholesale and retail sector in the UK, 2014
Output (USD Employment Businesses Output (% of Employment Businesses (%

in Billion) (USD Thou) (USD Thou) UK total) (% of GB total) of UK total)
282.6 4,410 539 11.30% 15.80% 10.30%
Source: Rhodes (2015, October 2)
The retail industry possesses high competition, a wide range of businesses, logistical and
execution risks affected by macroeconomic factors like unemployment. Some global retail key
industry characteristics include a high-performance standard, high fixed cost, multiple growth
models. The markets are local or regional in nature, seasonality and fashion risk, influenced
by consumer spending, unemployment, and mass traffic (Taylor, Chambers, & Smith, 2011,
June 30). Retail business models innovations are best viewed as the changes in design com-
ponents of (i) how the activities are organized, (ii) the type of activities that are executed, and
(iii) the level of participation of the actors engaged in performing those activities. There are six
significant ways to achieve business innovation that enhance value creation and appropria-
tion, including (i) Operational efficiency, (ii) Operational effectiveness, (iii) Customer lock-in
[Value appropriation], (iv) Customer efficiency, (v) Customer effectiveness (vi) Customer en-
gagement [Value creation] (Sorescu, Frambach, Singh, Rangaswamy, & Bridges, 2011). There
are six perspectives in retail innovation: (i) reducing effort for customers, (ii) consumers as in-
novation drivers, (iii) business model innovation, (iv) brand development – own brands as in-
novation drivers, (v) education, training, and skills, and (vi) emerging technology systems (Eu-
ropean Commission, 2014). Significant changes in the recent retailing sector help retailers,
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service providers, and manufacturers improve their practices and processes in several areas.
These include: setting and optimizing prices, promotion management, launching new prod-
ucts, assortment planning, category management, inventory planning, and control, brand
management, services marketing, loyalty management, channels, and supply chain manage-
ment, coordinating franchises, and integrating bricks and clicks environments (Grewal & Levy,
2007). Effective retailing in the culturally rich and highly successful retail environment (Amer-
ican Girl Place) contexts is an intensely romantic affair. The centrality of retail place in utopian
branding experience acts as a link between cultural concept and strong retail brand ideology
(Borghini et al., 2009)
“Tough economic times and emerging technologies are prompting consumers to

change their buying behaviour, and smart retailers are responding with innova-
tive in-store offerings” (Cho & Trincia, 2012, p. 47).
2.2 Retailing in the World vs. the USA

The result of a statistic of top 250 retailers in the world done by Deloitte (2014) in 2012
shows that the aggregate retail revenue of the top 250 companies was US $4.29 trillion and
average revenue was US $17.15 billion; minimum revenue US $3.80 billion required to be
among 250. The composite revenue growth was 4.9%, and from 2007 to 2012 combined CAGR
in revenue 4.6%; combined net profit margin 3.1%, return on assets 5.0%, revenue from for-
eign operations 24.3%, the average number of countries where retailers operated 10.0 and
63.2% with foreign operations. Some of the statistics for the world and USA are as follows:
Table 3: Retail Industry volume insider and institutional holdings at % of total share outstanding
Number of CEO Holding Institutional Insider Holdings Net

Industry Name Firms Holdings Margin
World USA World USA World USA World USA USA
Retail (Automo-
157 26 10.23% 1.44% 28.57% 75.94% 25.32% 9.32% 3.43%
tive)
Retail (Building
51 5 8.46% 0.09% 30.33% 63.76% 17.23% 11.54% 6.65%
Supply)
Retail (Distribu-
882 83 9.25% 8.72% 21.23% 57.70% 24.05% 20.71% 3.84%
tors)
Retail (General) 221 19 4.92% 3.35% 25.91% 77.88% 11.68% 8.89% 2.44%
Retail (Grocery
172 17 6.41% 5.90% 22.90% 55.74% 16.01% 19.66% 1.97%
and Food)
Retail (Online) 130 39 15.95% 11.74% 27.87% 50.91% 28.04% 26.72% 3.01%
Retail (Special
549 124 9.47% 5.16% 30.04% 66.79% 22.67% 13.70% 4.09%
Lines)
Total Market in
2162 313 9.24% 5.20% 26.69% 64.10% 20.71% 15.79% 3.63%
Retail Industry
Total Market 41889 7480 8.29% 5.53% 23.06% 47.40% 20.22% 14.71% 6.40%
Source: Damodaran (2016, January 5)
For more information regarding world and USA retailing, see Appendix 1.
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Table 4: Top 10 retailers worldwide, 2012
Rank Name of Com- Country Retail Retail Net Return Avg % Retail
pany of Origin Revenue Reve- Profi on As- Coun- Revenue
(USD Mil) nue Y- Margin sets tries of from For-
O-Y Opera- eign Oper-
Growth tion ations
Walmart Stores
1 USA 469,162 5.00% 3.80% 8.70% 28 29.10%
Inc.
2 Tesco PLC UK 101,269 0.50% 0.20% 0.20% 13 33.50%
Costco Whole-
3 sale Corporati- USA 99,137 11.50% 1.80% 6.50% 9 27.60%
on
4 Carrefour S.A. France 98,757 -5.50% 1.70% 2.90% 31 54.00%
5 The Kroger Co USA 96,751 7.10% 1.60% 6.10% 1 0.00%
Schwarz Unter-
6 nehmens Germany 87,236 6.60% n/a n/a 26 57.70%
Treuhand KG
7 Metro AG Germany 85,832 0.10% 0.20% 0.30% 32 61.60%
The Home De-
8 USA 74,754 6.20% 6.10% 11.00% 5 11.20%
pot, Inc.
Aldi Einkauf
9 GmbH & Co. Germany 73,035 7.50% n/a n/a 17 59.20%
oHG
Target Corpora-
10 USA 71,960 5.10% 4.10% 6.20% 1 0.00%
tion
$1,257,89
Top 10* 4.20% 2.80% 5.80% 16.3** 32.30%
2
$4,287,58
Top 250* 4.90% 3.10% 5.00% 10.0** 24.30%
7
Top 10 share of Top 250 retail rev-
29.30%
enue
Source: Published company data and Planet Retail (as cited in Deloitte, 2014)
* Sales-weighted, currency-adjusted composites
** Average
Table 5: E-commerce activity among the top 250, 2012
Particulars E-commerce Sales as Share of E-commerce Y-O-Y Sales

Retail Revenue Growth*
Top 250 7.70% 24.80%
Asia/Pacifi 6.20% 34.80%
Europe 5.20% 25.30%
Latin America 7.60% 19.50%
North America 11.70% 18.80%
Industry
Diversified 13.80% 21.90%
Fashion Goods 6.80% 24.40%
Fast-moving Consumer Goods 1.70% 26.30%
Hardlines & Leisure Goods 14.80% 23.80%
*Average for all companies in the sector with e-commerce sales
Africa/Middle East region excluded as most retailers did not report e-commerce sales or
did not have e-commerce operations
~ 15 ~
Table 6: Product Sector Profile and Level of globalization by product sector, 2012
Sectors No. of Average Share of Share of % of retail Average % of

Companies retail top 250 top 250 revenue countries single
revenues companies revenues from for- country
(USD in eign oper- operators
Mil) ations
Fashion 42 $9,013 16.80% 8.80% 29.80% 22.2 23.80%
Goods
Fast- 137 $21,360 54.80% 68.30% 23.30% 5.1 44.50%
moving
Consumer
Goods
Hardlines 52 $12,322 20.80% 14.90% 26.60% 13.1 26.90%
& Leisure
Goods
Diversifid 19 $18,001 7.60% 8.00% 22.60% 10.3 36.80%
USA retail companies among the top 100 in the world are: Walmart Stores, Inc. (1), Apple
Inc./apple stores (50), Dollar General Corporation (56), The Gap, Inc. (59), Meijer, Inc. (63),
Toys “R” Us, Inc. (68), J.C. Penney Company, Inc. (74), Staples, Inc. (76), Nordstorm, Inc. (86),
Whole Foods Market, Inc. (87), BJ’s Wholesale Club, Inc. (88), L Brands, Inc. (Foremarly Lim-
ited Brands, Inc.) (95) and Liberty Interactive Corporation (99) (Deloitte, 2014). The retail in-
dustry faced the experience of a decline in 2008 by 3.7%, which was the most significant drop
since 1980. As a result, some retailers like Circuit City, Steve, and Barry’s anchor stores
closed their business in March 2009. At that time, some reduced their selling price, e.g., Cost-
co reduced the average price by 40%, others cut jobs. For example, Marcy laid off employees,
but Walmart could generate huge sales, resulting in a high-profit experience (Yang, 2009, May
1). The USA retail industry is currently in crisis because of fast-moving competition and an ul-
tra-competitive global retailing environment. At the beginning of 2014, some largest retail
chains announced store closing, including Walmart, Costco, Home Depot, Best Buy, etc.
Table 7: The USA retail industry's direct and total national impact, 2009
USA National Impact % of USA Economy

Direct Impact Total Impact Direct Impact Total Impact
Establishments 3,617,486 11.90%
Employments (No. of Jobs) 28,113,476 41,620,604 16.30% 24.10%
Labor Income (USD in Bil) 770.1 1490 8.70% 16.90%
GDP (USD in Tril) 1.2 2.48 8.50% 17.60%
Source: Marcilla (2014)
2.3 Walmart Analysis: Critics and Praise from Literature

Walmart’s sale was greater than the world’s next three retailers combined namely Carre-
four (France), Home Depot (USA), and Metro (Germany). In the long run, Walmart’s impact on
local, national, and global economies will depend on the general-equilibrium responses of oth-
er firms, consumers, workers, and governments and the strategic interactions between these
players (Kmart, Target, or Costco) and Walmart (Basker, 2007). Walmart ranked number one
or two publicly traded companies in the USA and the world’s most important privately con-
trolled economic institution. It has a range of effects resulting from doing business in case of
wage rates, prices, and economies on a local, national, and global scale (Fishman, 2006). Last
~ 16 ~
TMT, Walmart generated US $484 billion revenue recognizing that if Walmart is a country as-
suming revenue equals GDP, it would be the world’s 28th largest country in the world. In that
period, Costco’s sales were US $117 billion, Target’s sales was the US $74 billion, Amazon US
$101 billion where only Walmart having 165% of Target, Costco and Amazon sales combined
with which is not only the difference but also had highest profit margins. These three compa-
nies have US $408 billion (around the US $300 billion of Amazon). In contrast, Walmart has
US $206 billion (Sure Dividend, 2016, January 29). Factor weighting regarding retail business
is Business and Cash Flow Volatility 10.0%, Market Presence 25.0%, Execution Ability 15.0%,
Financial Ratios 50.0%. The weighting 1 indicates Aaa (extremely stable), 3-Aa, 6-A, 9-Baa, 12-
Ba, 15-B, 18-Caa, 20-Ca. Moody’s analysis of retail companies focuses on four broad factors of
(i) Business and Cash Flow Volatility, (ii) Market Presence, (iii) Execution Ability, (iv) Financial
Ratios. According to Moody’s analysis Walmart Stores, Inc. positioned 21 with rating Aa2 (2.5
≤ x < 3.5) where Costco Wholesale Corporation positioned 4 having rating point A2 (5.5 ≤ x <
6.5), Target Corporation 19 with A2 (5.5 ≤ x < 6.5) and Dollar General Corporation 6 with Ba3
(11.5 ≤ x < 12.5) (Taylor, Chambers & Smith, 2011, June 30). Among the top 50 e-retailers in
2012, Walmart’s sales rank is 3rd with e-commerce revenue of US $7,500, a 1.6% of total retail
revenue and 20% growth rate where Costco’s position 18th e-commerce revenue of US $2,100,
a 2.1% of total retail revenue and 9% growth rate (Deloitte, 2014).
There are many researchers and financial analysts who made criticisms against Walmart.
Stone (1997) stated strong evidence that rural communities in the United States have been
more adversely impacted by the discount mass merchandisers (sometimes referred to as the
Walmart phenomenon) than by any other factors in recent times. The biggest challenge to the
retail industry coming from the world’s largest retailer: Walmart that the incumbent store lost
17% and a small proportion of customers account for the large proportion of losses, e.g., 10%
of households account for 45% of the stores’ lost revenue while 20% of the customer’s account
for almost 70% of the lost revenues (Singh, Hansen, & Blattberg, 2004). From 1988 to 1994,
Walmart’s supplier had less gross margin following pricing concessions (low-cost strategy and
lower returns as market strategy) and dependency model of market power. Small firms follow
the dependency model having lower gross margin, operating cost, and higher turnover. If these
firms consider the fixed effect, small manufacturers only benefit from higher turnover doing
business with Walmart (Mottner & Smith, 2009). Opening up the Walmart, country-level retail
employment reduces by about 150 workers implying each Walmart worker replaces about 1.4
retail workers, a 2.7% reduction in average retail work. It leads to a decline in country-level re-
tail earnings of approximately US $1.4 million, a 1.5% resulting in a backdrop of rising retail
work and lower employment growth (Neumark, Zhang, & Ciccarella, 2008). The economic im-
pact played by Walmart are net loss of jobs, loss of small businesses and fewer in number,
costs to taxpayers, and decline of the middle class (Angotti, Paul, Gray, & Williams, 2010).
Walmart employees earn lower average wages and receive less generous benefits than employ-
ees make from many other large retailers. Walmart’s opening leads to the swap of better-
paying jobs to less-paying jobs. It drives down wages for workers in competing industry seg-
ments like grocery stores. From 1992 to 2000, due to entry of a single Walmart store in a
country lowered average retail wages in that country by 0.5% to 0.9%, in the general mer-
chandise sector by 1% for each new Walmart store and the grocery store by 1.5% (Dube,
Lester, & Eidlin, 2007; Furman, 2005).
Walmart’s performance metrics emphasize three priorities: growth, leverage, and returns
for improving shareholders’ value. The growth priority focuses on sales through the compara-
~ 17 ~
ble store or club sales and unit square feet growth; leverage priority encompasses its objective
to increase operating income at a faster rate than the growth in net sales. It is done by improv-
ing managing, selling, general and administrative expenses at a slower pace. Its net sales
growth and return priority focus on efficiently employing its assets through ROI and managing
working capital and capital expenditure through FCF (SEC, 2013, January 31). Walmart’s
more than half revenue generates from grocery sales. Its financial success is based on low-cost
labor, limited health benefits, and leveraging of government subsidies. Walmart’s performance
has improved mainly for the adoption of new technologies and low prices obtained from ven-
dors. David Glass’s tenure was characterized by a business model aimed at increasing volume,
e.g., building new stores, increasing product variety, everyday low prices (EDLP), & high-
powered incentives for store managers. Lee Scott lessened EDLD and modified Walmart’s hu-
man resource practices by stimulating employees' opportunities to the social pressure. Finally,
the effectiveness of a business model does not depend on its design but its implementation
(Basker, 2007; Brea-Solís, Casadesus-Masanell & Grifell-Tatjé, 2014; Furman, 2005). Because
of Walmart's influence, post-entry supplier profit increased by 17.77%, where incumbents’
profits decreased only marginally for the total market.
Supplier shipment increase to 45% in markets, and profit increases are highest for needs
where incumbents offer a wide variety of products and carry items that Walmart does not sell
(Huang, Nijs, Hansen & Anderson, 2012). Walmart’s productivity is overwhelmed by its sophis-
ticated inventory systems to pricing innovations. It was the largest private employer in the
country, and 8 of 10 shoppers shopped at Walmart (Furman, 2005). Walmart does not hurt
workers in case of employment opportunities and compensation. It is not the prime cause for
the death of downtown of the increase in urban sprawl and USA import rise; hence it is neither
saint nor a foremost sinner (Carden, 2007; Vedder & Cox, 2006).
“Every Description of Walmart is built on Superlatives: it is the world’s largest

private employer, it generates the most sales, and it occupies the top spot in
many U.S retail categories – from food to footwear to toys and television set”
(Gereffi & Ong, 2007, p. 47).
According to Walmart Stores, Inc. (2015), Walmart believes in cash flows from continuing
operations and its current position. Access to capital markets will continue to be enough to
meet the operating cash needs, including a fund for seasonal buildups, capital expenditures,
dividend payments, and share repurchases. It has strong commercial paper and long-term
debt ratings that enable refinance debt, becoming the favorable rates in capital markets. As of
January 31, 2015, their outstanding long-term debts were illustrated in the following table:
Table 8: Walmart debt ratings by the different rating agency
Rating agency Commercial paper Long-term debt

Standard & Poor’s A-1+ AA
Moody’s Investors Service P-1 Aa2
Fitch Ratings F1+ AA
Source: Walmart 2015 annual report
According to Walmart's 2015 report, credit rating is subject to revision at any time. It is
not guaranteed to continue consistently over time. Credit ratings are affected by several factors
~ 18 ~
like changes in operating performance, economic environment, condition of the retail industry,
financial position including total debt and capitalization, and changes in business strategy.
The downgrade of credit ratings increases borrowing costs and impair the ability to access cap-
ital and capital markets. Walmart continually monitors its credit rating and long-term financ-
ing capacity using qualitative and quantitative factors. It calculates debt-to-total capitalization
as support of making long-term financing decisions where total capitalization is defined as
debt and shareholders’ equity. As of January 31, 2015, debt-to-total capitalization was 38.2%,
and January 31, 2014, was 42.6%.
Generally, in any country, Walmart starts its operation. It becomes successful in cases
like the UK, Canada, Mexico, Brazil, Argentina, China, but it is thought that its strategy failed
in two countries, Germany and South Korea. The reasons found dying in Germany started its
business in 1997 with the acquisition of two German companies Werkauf and Interspar. It be-
gins with a relatively small number of stores (95,) causing hamper economies of scale. Howev-
er, it was considerable enough to build reputation initially, lack consumer research, inade-
quate understanding of people, law, etc. By being aware of the German Location preferences to
shop, pricing regulations, the competitors they face, and the new differentiation strategy would
provide relief from such failure (Marcilla, 2014). Recently Walmart announced to shut down
154 locations in the USA, including 102 express locations, 23 neighborhood markets, 12
supercenters, 4 Sam’s Clubs, and others. Again, internationally it plans to close 115 stores in
Latin America. However, it expects to open new 50-60 supercenters and 85-95 neighborhood
markets in the USA in the fiscal year 2017, between 200 and 400 internationally. For this
purpose, around 16,000 associates will be involved (Downing, 2016, January 29).
~ 19 ~
CHAPTER-Three: PRESENTATION OF WALMART
3.1 Brief History
W
ith the mission “Save money. Live better.”, Sam Walton along with his brother
James Bud Walton founded Walmart in 1962. It becomes one of the world’s
largest retail and wholesale companies in various formats around the world.
They bought a store from Luther E. Harrison in 1950 in Bentonville, Arkansas of United States
(headquarters), progressing to winning the future of retail, incorporated on 31st October 1969,
and publicly traded on the New York exchange in 1972. From its inauguration, it has been
progressing dramatically. By 1970, it already had 18 stores and sales revenue of US $44 mil-
lion, and by 1980, it had 276 stores with sales revenue of US $1.2 billion. In the name of
Sam’s Wholesale Club, Sam’s Club started its journey. Under Sam Walton’s outstanding lead-
ership, Walmart expanded to a well-recognized retailer with thousands of stores and billions of
sales from a single store who retired in 1988 as a CEO. President David Glass became the new
CEO who also continued to grow the business under whose leadership Walmart acquired Cul-
lum and owned Sam’s Wholesale Club entirely after one year becoming the CEO. Another
company named McLane, a wholesale distributor was acquired in 1990. After the departure of
Sam Walton in 1992, it continued to grow in the USA and international markets. In 1992, it
introduced its Sam’s Club in Mexico as a joint venture with Cifra, Mexico’s largest retailer in
1994. It entered into the Canadian market by acquiring 122 Woolco stores; in 1996, it started
business in China, 1997 in Germany, 1998 in Brazil, and 1999 in the UK. In 2000, David
Glass retired from CEO. However, he stayed in the company as the Yang chairman of the ex-
ecutive committee, and COO Lee Scott joined as the new CEO. In 2002, it started business in
Japan, acquiring a 6% stake in SEIYU, one of the top Japanese retailers. It opened 107 inter-
national units in the same year, with 2 in Brazil, 22 in Canada, 8 in China, 2 in Germany, 3 in
South Korea, 59 in Mexico, 2 in Puerto Rico, and 9 in the UK. Its international success ena-
bled its massive domestic expansion with opening 178 supercenters, 33 discount stores, and
25 Sum’s Club stores. It gained significant market share and influenced the retail industry,
which acclaimed it as the largest retailer in the USA by Fortune magazine in 2002; that is why
this year is the most successful. It seeks development in various industries; in 2004, it started
an online music store that competed with Apple and Napster as the significant competitors al-
lowing low-priced music downloads. In 2005, it introduced an urban women’s apparel line
called Metro 7 in 500 stores in the USA. At the time of progressing its market share, in 2006, a
problem occurred in the management team. The Vice-Chairman was guilted as fraud and tax
charges by being accused of misusing more than the US $500,000. He was sentenced to 27
months house arrest and ordered to pay US $400,000. Soon after the lawsuit, it restarted its
actual operation promptly. In 2007, it entered into a contract with Hollywood Studios to sell
movies and TV programs online through its website. In 2009, the CEO Lee Scott retired, and
another new CEO became Mike Duke. On 2014 February 1st, Doug McMillon became the 5th
President and Chief Executive Officer. Under whose strong management and supervision, it
strives for innovation to reach the customers with the products they serve from the origin
through stores and e-commerce sites in real-time and space.
~ 20 ~
3.2 Corporate Profile

Walmart Stores, Inc. engaged in 3 segments, namely Walmart US, Walmart International,
and Sam’s Club, illustrated as follows:
Figure 3: Different segments of Walmart
Walmart US, the largest segment, covers all 50 states of the USA that began supercenters
in 1988, offering a one-stop shopping experience by accumulating a grocery store with fresh
products, bakery, dairy foods, apparel, toys, electronics, and home furnishings. In 1962, it
started a discount store offering clothing, toys, electronics, home furnishings, health and
beauty aids, hardware, and more. Moreover, in 1998 it launched a neighborhood market offer-
ing fresh meat and dairy products, bakery and deli items, health and beauty aids, household
supplies, and a pharmacy that generated 60% net sales in 2015. Established In 1991,
Walmart International includes 27 countries outside the USA with 6,200 international stores
leveraging global resources to meet local needs. The 3rd segment opened the first Sam’s club in
1983 to facilitate small business owners in big purchasing in the USA with 650 clubs, 100
outside of USA, Samsclub.Com, and mobile applications.
3.3 Business Dynamics and Financial Trends

Every week, on average, it experiences 260 million customers in more than 11,500 stores
and websites in 28 countries with 2.2 million associates (1.4 million in the US only) worldwide
(57% women). According to Walmart's 2015 annual report, in 2015, its net sales were US $486
billion (1.9% increase), where global e-commerce sales were 12.2 billion (a 22% growth rate).
Again, net profit US $27,147 million (1% growth) with revenue growth of more than US $9 bil-
lion, EPS US $4.99 (about 3% increase than an earlier year), and 16% shareholder return. Ac-
cording to Forbes (2015), it is number 20 world’s most valuable brands, 16 world’s biggest
public companies among 2000 companies, where number 1 is by sale, 18 by profits; 135 in
assets; 12 in market value. Costco Wholesale is the stronger competitor for Walmart.
~ 21 ~
CHAPTER-Four: WALMART MARKET ANALYSIS
4.1 Performance Metrics
W
almart focuses on three priorities involving growth, leverage, and returns.
Among these priorities, they mainly emphasize the development for growing
investment in e-commerce and overall sales, which are expected to contribute
to the acquisition of leverage and returns. In 2015, the growth for Walmart was shown in the
table below:
Table 9: Walmart different segments’ sales revenue

Particulars Sales Revenue US$ in % of Share % Changed
Million
Walmart US 288,049 59.8 3.1
Walmart International 136,160 28.2 (0.3)
Sum’s Club 58,020 12.0 1.5
Total 482,229 100 1.9
In the case of leverage priority (net income), Walmart 2015 financial data show the follow-
ing growth:
Table 10: Walmart’s net income proposition

Particulars Net Income US$ in % of Share % Changed
Million
Walmart US 21,336 78.6 (2.1)
Walmart International 6,171 22.7 19.8
Sum’s Club 1,976 7.3 7.2
Corporate and Support (2,336) (8.6) (22.2)
Total 27,147 100 1
The returns of Walmart estimated value are shown in the table as follows:
Table 11: Comparison with fundamental ratios for two years
Particulars Fiscal year Jan Fiscal year Jan
2015 2014
ROI 16.9% 17.0%
ROA 8.2% 8.1%
Change in Revenue 2.0% 1.6%
Change in Net Sales 1.9% 1.6%
Change in Gross Profit Margin 24.3% 24.3%
Change in Gross Operating income 5.6% 5.7%
Other financial data of Walmart Stores Inc. include:

Growth Rate in the next 10 years: 8%
Business Predictability: 10%
Terminal Growth Rate for 10 years: 4%
Discount Rate: 12%
~ 22 ~
Table 12: Annual rates of change (per share)
Est’d ’12-’14 to
Particulars Past 10 Years Past 5 Years ’18-’20
Sales 9.00% 7.50% 5.00%
Cash Flow 10.00% 8.50% 2.50%
Earnings 9.50% 8.00% 1.50%
Dividends 16.50% 13.00% 4.00%
Book Value 9.00% 7.00% 6.50%
Source: Reuters.com (March, 2016)
Table 13: Earnings per share and dividend paid
Fiscal Year EPS Dividends

2012 5.02 1.96
2013 5.11 1.88
2014 5.07 1.92
2015 4.60 1.96
2016 4.10
Source: Reuters.com (March 2016)
Again, the following table shows other related financial information for Walmart:
Table 14: Walmart financial performance
Annual Rates (per share) 10 Years 5 Years 12 Months

Revenue Growth (%) 8.50 7.50 0.60
EBITDA Growth (%) 8.60 6.70 -2.10
EBIT Growth (%) 8.00 6.10 -3.70
EPS without NRI Growth (%) 8.00 5.90 -2.50
Free Cash Flow Growth (%) 22.00 5.70 18.50
Book Value Growth (%) 7.80 6.50 1.10
Source: Reuters.com (March 2016)
Table 15: Walmart financial performance and industry and sector-wise comparison
Valuation Ratios Company Industry Sector

P/E Ratio (TTM) 14.67 24.59 22.37
P/E High - Last 5 Yrs. 17.14 26.84 25.94
P/E Low - Last 5 Yrs. 13.56 14.77 14.74
Beta 0.22 0.89 1.18
Price To Sales (TTM) 0.44 2.28 4,065.00
Price To Book (MRQ) 2.67 2.71 2.62
Price To Tangible Book (MRQ) 3.36 3.66 3.07
Price To Cash Flow (TTM) 8.74 21.78 39,034.55
% Owned Institutions 29.94 2.36 0.17
Dividends
Dividend Yield 2.99 1.16 2.64
Dividend Yield - 5 Year Avg 2.47 1.25 0.48
~ 23 ~
Valuation Ratios Company Industry Sector

Dividend 5 Year Growth Rate 10.13 13.58 6.89
Payout Ratio(TTM) 32.23 8.51 8.23
Growth Rates
Sales (MRQ) Vs QTR. 1 Yr. Ago -1.44 30.50 -6.16
Sales (TTM) Vs TTM 1 Yr. Ago -0.73 20.16 -3.43
Sales - 5 Yr. Growth Rate 2.71 10.71 8.39
EPS (MRQ) Vs QTR. 1 Yr. Ago -6.51 -13.16 -37.97
EPS (TTM) Vs TTM 1 Yr. Ago -7.99 -- --
EPS - 5 Yr. Growth Rate 1.77 10.37 6.70
Capital Spending - 5 Yr. Growth Rate -2.00 11.31 9.60
Financial Strength
Quick Ratio (MRQ) 0.24 0.80 1.34
Current Ratio (MRQ) 0.93 1.28 1.76
LT Debt To Equity (MRQ) 54.66 61.12 37.86
Total Debt To Equity (MRQ) 62.12 77.83 68.48
Interest Coverage (TTM) 11.56 12.44 14.69
Profitability Ratios
Gross Margin (TTM) 25.13 42.96 24.57
Gross Margin - 5 Yr. Avg. 24.92 38.80 23.33
EBITD Margin (TTM) 6.96 -- --
EBITD - 5 Yr. Avg 7.48 17.54 14.26
Operating Margin (TTM) 5.00 14.10 8.27
Operating Margin - 5 Yr. Avg. 5.61 14.14 10.07
Pre-Tax Margin (TTM) 4.49 12.50 12.97
Pre-Tax Margin - 5 Yr. Avg. 5.13 12.82 13.25
Net Profit Margin (TTM) 3.13 9.91 10.37
Net Profit Margin - 5 Yr. Avg. 3.50 10.27 10.47
Effective Tax Rate (TTM) 30.31 23.12 24.47
Effective Tax Rate - 5 Yr. Avg. 31.82 21.07 22.09
Efficiency
Revenue/Employee (TTM) -- 15,113,344 865,922,168
Net Income/Employee (TTM) -- 721,562 75,826,965
Receivable Turnover (TTM) 77.75 19.71 11.87
Inventory Turnover (TTM) 8.06 3.26 10.74
Asset Turnover (TTM) 2.39 0.72 0.74
Management Effectiveness
Return On Assets (TTM) 7.48 4.92 5.93
Return On Assets - 5 Yr. Avg. 8.30 5.97 9.31
Return On Investment (TTM) 11.36 7.45 9.63
Return On Investment - 5 Yr. Avg. 12.91 8.96 15.36
Return On Equity (TTM) 18.15 9.58 12.82
Return On Equity - 5 Yr. Avg. 20.88 10.92 19.76
Source: Reuters.com (2016, March)
I.E., MRQ = Most Recent Quarter
~ 24 ~
Table 16: Walmart Profitability
Particulars Q4 FY15 Q4 FY14

Gross Profit Margin 27.07% 26.41%
EBITDA Margin 6.99% 8.00%
Operating Margin 5.12% 6.26%
Sales Turnover 2.42 2.38
Return on Assets 7.36% 8.03%
Return on Equity 18.24% 19.88%
Source: The Street Ratings (2016, March 13)
Table 17: Current valuation
Particulars WMT Industry Avg S&P 500 WMT 5Y Avg

Price/Earnings 15.2 17.5 19.1 14.6
Price/Book 2.7 3.4 2.7 3.1
Price/Sales 0.5 0.5 1.8 0.5
Price/Cash Flow 8.2 9.7 11.8 9.8
Dividend Yield % 2.8 2.3 2.4 2.5
Source: Morningstar.com (2016, April 27)
I.E., Price/Cash Flow uses three years' average
4.2 Competitive Circumstances

To sense a business as good, it must come from good comments and sustainable growth.
To achieve the company's success, it must focus on the environment where it runs its opera-
tions and find the competitors to gain a competitive advantage to offer customers superior
goods and business services. They get encouragement to purchase, sustain purchasing, and
invite others to be customers for those business products. In Walmart, there are micro and
macro environments in which it operates a business for which it pursues a strategy to out-
compete rivals. There found little or no competitors in the inaugural and forward periods.
Nowadays, several emerging companies pose as solid competitors for Walmart.
Primarily Walmart’s competitors (Estopinan, 2014; Marcilla, 2014) in North America in-
clude department stores like Costco Wholesale, ALCO stores Inc., Big Lots, Family Dollar
Stores, Inc., Dollar General Corp., The Bon-Ton Stores, Inc., Tuesday Morning Corp., Meijer
and in Canada Zellers, The Real Canadian Superstore Kmart, Target Shopko, Mexico’s Com-
mercial Mexicana etc. In Walmart’s Sam’s Club, competitors are BJ’s Wholesale Club, Costco
etc. The grocery business segment competes with many retailers, including Dollar General
Corporation, Family Dollar Stores, etc. In food and staples retailing, it is the 2nd most signifi-
cant segment of the consumer staples industry. It includes grocery retailing, wholesale food
distribution, specialty food stores, and drug stores. Major players after Walmart are CVS
Caremark, Walgreen Co., Sysco, Kroger, Super Value, Safeway, and Whole Foods Market, pos-
sessing unique operational models. This industry is defensive and characterized by stable
growth (The Street Ratings, 2016, March 13). After shifting to the grocery business in the
1990s, it set supermarket chains in Canada and the USA. Among not the least, Costco Whole-
sale can be assumed as the strong competitor for Walmart, which can capture the market if
not strategically defend in the market arena. Sam’s Club segment successfully competes
~ 25 ~
against home consumer sales competitors like Costco. Target and Costco are performing well
and thus competing against Walmart as about 70% of Walmart’s sale comes from the USA.
Most of the USA's competitors affect its performance, like Kroger, Target, Costco, Home Depot,
Walgreen, CVS Caremark are the most significant direct competitors. Among these establish-
ments, Kroger and Target operate only in the USA. However, the others also use globally,
which means Walmart needs to achieve competency abroad. Some of the comparisons are
shown in the table below in brief:
Table 18: Comparison of the top 4 retailers in the world in 2015
Particulars Walmart Carrefour Costco Tesco

Revenue (in USD billions) 485.651 ~100 110.212 ~110
Locations 11,453 10,105 671 7,305
Countries served 27 34 9 12
Employees 2.2 million 364,969 195,000 505,544
Retail space (square feet) 1.1 billion - 95 million 41 million
Source: The respective companies’ financial reports (Carrefour and Tesco revenues are rounded up
due to revenue translation. Data for Carrefour is from 2013)
Table 19: Competitive rivalry within the industry
Company 2012 USA Sales growth Worldwide USA % of 2012

Retail Sales ('11 v '12) Retail Sales Worldwide Stores
(USD in Mil) (USD in Mil) Sales
Walmart 328,704 4.00% 467,896 70.30% 4,570
Kroger 92,165 6.60% 92,165 100.00% 3,538
Target 71,960 5.10% 71,960 100.00% 1,778
Costco 71,042 10.60% 97,062 73.20% 435
The Home Depot 66,022 6.40% 74,754 88.30% 1,965
Walgreen 65,014 -1.20% 66,977 97.10% 7,821
CVS Caremark 63,688 6.70% 63,863 99.70% 7,472
Table: Kantar Retail ‘Top 100 Retailers in 2013’
Source: Marcilla (2014)
Table 20: Walmart competitors
Particulars Market Capital Revenue (TMT EBITDA (TMT Net Income (TMT
(USD in Billion) USD in Billion) in USD Billion) USD in Million)
Walmart 251.51 469.16 36.30 17,000
Direct Competitors
Costco 46.17 103.13 3.87 1,960
Target 44.16 73.3 7.51 3,000
Indirect Competitors
Dollar Tree 10.55 7.39 1.10 619
Dollar General 16.49 16.02 1.96 953
Family Dollar 6.88 9.60 0.92 422
Source: Goug (2013, April 9)
~ 26 ~
Comparable Companies assuming the same terminal growth rates and discount rate are
shown in the following table:
Table 21: Walmart growth and comparison with significant competitors
Particulars NYSE: WMT NAS: COST NYSE: TGT MEX: WALMEX

P/E 14.65 29.28 15.46 25.80
P/S 0.45 0.58 0.71 1.54
P/B 2.64 6.10 3.89 5.14
Price (USD) 66.95 153.15 82.71 41.80
Fair Value (USD) 59.23 75.52 59.18 14.13
Source: gurufocus.com (2016, March)
This giant corporation does more business than its direct competitors Target, Home De-
pot, Sears, Kmart, Safeway, and Kroger combined.
4.3 Major Competitors Profile

On July 12, 1976, James Sinegal and Jeffrey Brotman founded Costco Wholesale, the 3rd
largest public retail company in the USA, traded as NASDAQ: COST operating a business in
about 698 locations worldwide. The present chairman of Costco is Jeffrey Brotman, president,
and CEO W. Craig Jelinek, under whose active leadership now running profitably with the US
$3.62 billion as well total revenue was US$116.2 billion, operating income US $2.37 billion net
income in 2015 with total assets of US $33.44 billion, and total equity US$10.61 billion. It has
117,000 employees ("Costco", 2016, April 24).
Bernard Kroger established The Kroger Company in Cincinnati, Ohio, the USA, in 1883
that is the country’s largest supermarket chain by revenue, second largest general retailer, and
the 23rd largest company. It is traded as NYSE: KR in about 2,774 locations as convenience
stores, supercenters, and supermarkets in the USA. The present CEO and chairman are Rod-
ney McMullen. Its revenue was US $108.46 billion, operating income US $3.14 billion, net in-
come US $1.73 billion in 2014, and total assets were US $30.49 billion. Total equity was US
$5.41 billion in 2015. The present employees of Kroger are about 431,000 ("Kroger," 2016,
April 26).
Trading as NYSE: TGT, with the slogan, Expect More. Pay Less, Target Corporation, also
formerly known as Goodfellow Dry Goods, Dayton's Dry Goods Company, Dayton Company,
Dayton Corporation, Dayton-Hudson Corporation is the second-largest discount retailer in the
United States, behind Walmart. The component of the S&P 500 Index was founded by George
Dayton on June 24, 1902, in Minneapolis, Minnesota, USA. It operates in 1,793 locations in
the USA by the products of Beauty and health products; bedding; clothing and accessories;
electronics; food; furniture; housewares; jewelry; gardening supplies; pet supplies; shoes;
sports equipment. Its current Chairman and CEO are Brian C. Cornell. Its revenue was US
$73.785 billion, operating income US $5.53 billion, net income US $3.363 billion, total assets
US $40.262 billion, total equity US $12.957 billion, and total employees 341,000 in 2015
("Target Corporation," 2016, April 29).
Traded as NASDAQ: AMZN, NASDAQ-100 Component, S&P 500 Component, Amzon.com,

or simply Amazon is a public-oriented largest internet-based e-commerce and cloud computing
worldwide retail company founded on July 5, 1994, in Seattle, Washington, USA, by Jeff Be-
~ 27 ~
zos. He is the present chairman, president, and CEO. Its major products are Appstore, AWS,
The Book Depository, comiXology, Game Studios, Video, Instant Video UK, Instant Video Ger-
man, Audible, Kindle, Fire, Lab126, Studios, Twitch, Woot, Echo, MyHabit.com, Shopbop, As-
kville, and services are Online shopping, web hosting, and content distribution. In 2015, its
revenue was US $107 billion, operating income US $2.233 billion, net income US $596 million,
total assets US $65.444 billion, total equity US $13.384 billion and total employees 230,800
("Amazon.com", 2016, April 26).
4.3.1 Competitive Advantage

The most threat comes from direct competitors like Costco and Target. The most competi-
tive advantage is Walmart’s scale and supply chain built over history. The largest size of opera-
tions, consistent operating results that lower the risk in sudden difficulty and increase inves-
tors’ confidence are the prime cause of success that allows achieving economies of scale thus
has the advantage over all competitors (Gough, 2013, April 9; Sure Dividend, 2016, January
29; WikiWealth, 2016)
4.4 SWOT Analysis of Walmart

SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis is the technique used
for structured planning to oversee and search for the company’s internal strengths and weak-
nesses and external opportunities and threats from the environment outside the business.
Based on the knowledge of the industry, the environment in which Walmart operates, assump-
tions believed to be reasonable, the SWOT analysis of Walmart is summarized in the table be-
low:
Table 22: Walmart SWOT analysis
Strengths Weaknesses
o The largest retail company in the world with o Disruption in the e-commerce websites and
a grander scale of operations internationally mobile applications
o Consumer confidence and acceptance of o Trouble in the supply chain for unavailability
stores, clubs, and e-commerce sites (loyal of goods and transports to carry out to the
clientele) stores and other facilities
o Digital (Strong Information Systems in e- o Costs for relocation of stores, clubs, and facili-
commerce) and physical retail initiatives, ties
merchandise offerings, especially globally o Real estate laws, ordinances, and restrictions
fresh food offerings to building and expand Walmart business
o Historical solid financial performance and o Labor lawsuits
position o Lack of differentiation
o Lower prices (Cost leadership) of goods and o High employee turnover
services o Adverse publicity and negative public percep-
o Consistent, high-quality goods supply avail- tion
able on demand (Range of products and re- o Decreasing margins
liant, large and robust supply chain) o Matured markets and limited product expan-
o Availability of competent personnel to oper- sion
ate and manage the business and knowl- o Slow to innovate
edgeable and capable existing employees
o Economies of Scale
Opportunities Threats
o Availability of attractive investment oppor- o Globally changing market condition
tunities in the retail market and digital re- o Inflation and deflation
tail acquisition for online shopping o Fluctuated currency exchange rate and mar-
o Business expansion in new markets ket interest rate (Currency volatility)
o Availability of utilities for new and expanded o Market labor costs
units o Changes in laws-regulations and tax rates, as
o Availability of skilled labor, material in well as the imposition of new taxes & sur-
which new units to be constructed charges
~ 28 ~
o Healthy eating trends o Cyber-attacks on information used to operate

o Emerging markets the e-commerce sites
Opportunities Threats
o Alternative store formats o Costs for information security to prevent
o Data mining cyber-attacks
o Fast-paced internet sales o Unanticipated changes in business goals and
operating philosophy
o Conflict of interests
o Intense competition and increasing competi-
tor’s powers
o International barriers
o Local communities’ resistance
o Market saturation
o Online gaming
Source: Walmart 2015 Annual Report; Marcilla (2014); WikiWealth (2016)
For the worldwide operation of Walmart, it is needed to analyze micro and macro analysis
in case of financial situation. It is challenging to study for its massive size y as a whole; only a
quick view is done.
4.5 Micro-Level Analysis (Porter´s Five Forces Model)

Walmart faces tremendous competition from different countries and competitors like
Kmart, Target, ShopKo, department stores, Costco Wholesale, Meijer, and BJ’s wholesale as
primary competitors and many other smaller retailers focusing on a small market niche that
can also compete against Walmart using specialization strategies.
4.5.1 Threat of substitute products and services

Some other retailers compete aggressively against Walmart by specializing in certain
products or selling their products online worldwide. There are some non-specialized but deal
with a wide range, which can be found in another store offered by Walmart. The retailers that
offer unique products having a distinct advantage over competitors. The primary five competi-
tors generate about half a trillion USD per year. In contrast, two e-commerce giants are gain-
ing a more significant market share, Amazon and Dell Direct, combined to generate about the
US $38.8 billion where Amazon is increasing its sales year after year account for less than
15% of total retail sales.
4.5.2 Threat of new entrants

New competitors in the field of E-commerce and M-commerce are significant threats for
Walmart. However, Amazon is leading in this online business. There is a decreasing number of
independent retailers; most retail stores are mall and chain stores. As there is no barrier to
starting up a USA store, Walmart has the threat coming from new entrants.
4.5.3 Competitive rivalry within the industry

For being internationally expanded, Walmart has been facing competition in different
countries where direct competition comes from big retailer chains. As about 70% of sales reve-
nue comes from the USA, the primary competitors affect its performance. They are those oper-
ating in the origin country, including Kroger, Target, Costco, The Home Depot, Walgreen, and
CVS Caremark, which are the most significant direct competitors offering a variety of similar
products to the customers. Despite Kroger and Target, others also have international opera-
tions which create completion in foreign countries too. After Walmart, Target is the largest re-
~ 29 ~
tailer that delivers discount goods with high quality and broader product variety, attracting
high-income customers (average annual income US $50,000 compared to Walmart’s US
$35,000) and generating higher revenues. The indirect competition occurs when a new distri-
bution company opens stores to serve a sizeable affluent customer base, such as convenience
stores having more than 120,000 stores account for the US $350 billion revenue per year.
They sell a limited variety of products like food, cigarettes, groceries, candy, magazines, and
fuel located in high-traffic locations in general. Other competitors for Walmart are vending ma-
chines that are becoming popular that sell drinks, snacks, coffee, sandwiches owned by fran-
chises that rent office space or commercial buildings in high traffic areas.
4.5.4 Bargaining power of customers

The buyers can put Walmart under pressure in the territory where it operates. Customers
as a whole if high-quality demand products at low prices make Walmart adapt to their expec-
tations. It considers its customers' great power as they have many alternatives from where
they can buy and have sufficient information. When they buy, they can check prices from dif-
ferent stores.
4.5.5 Bargaining power of suppliers

As Walmart is big in size, suppliers have little power against this company to fear losing
great sales; thus, it can leave small suppliers. This facilitates Walmart to push the supplier to
be more efficient, lower prices, and more beneficial. Sometimes it treats its supplier that is
considered unfair because it does not lead them to raise their profits. A company that sells
30% of its products to Walmart finds it hard to reject a retail offer even if it does not get desir-
able treatment. Considering all, it can be said that there is very little bargaining power of sup-
pliers in Walmart.
4.6 Market Risk

There are some market risks for Walmart. Changes in interest rates and fluctuations in
currency exchange rates can create trouble in its market. Walmart Stores, Inc. (2015) stated
that it faces changes in interest rates due to short-term borrowings and long-term debt issu-
ances. In 2015, Walmart’s interest rate fair value decreased approximately by US $158 million
because of fluctuation in market interest rates and termination of forwarding starting to re-
ceive variable rate. As of January 31, 2015, its short-term and long-term interest rate is 7%
causing the annual interest costs by about US $23 million.
4.6.1 Currency Risk

Walmart’s functional and financial currency is USD ($). Currency risk negatively affects a
firm’s operations and earnings feedback like:
Currency Risk
Transaction
Exchange Risk
Risk
Figure 4: Type of currency risk
~ 30 ~
For operating outside the origin country, Walmart was exposed to fluctuations in the for-
eign currency exchange rates. In the fiscal year 2015, the movement of currency exchange
rates of the company’s subsidiaries from Canada, UK, Japan, Mexico, and Chile, Walmart ex-
perienced US $3.6 billion losses. The total fair value of the swaps was US $110 million in lia-
bility and US $550 million in asset position on January 31, 2014. Due to the change in the fair
value caused by the fluctuations in the currency exchange rates, hypothetically, a +/-10%
change in currency rates on January 31, 2015, resulted in loss/gain in the swap value of US
$435 million and a 10% change in an interest rate at January 31, 2015, resulted in loss/gain
of swaps value of US $20 million.
4.6.2 Strategy and Competitive Forces

Walmart’s business strategy is combined with cost leadership and differentiation. Its cor-
porate strategy centers on everyday low prices (EDLP) philosophy. It can provide customers
with goods at steep discounts by aggressive cost-cutting efforts and improvements in operating
excellence. Especially in international markets (global business strategy-"Different Stores for
Different Folks") and supply chain management and currently concentrating on e-commerce,
which focus is going forward. Focus on a single business strategy works as the primary suc-
cess as about 95% of revenues are earned from the grocery business (Gough, 2013, April 9;
Wei, Wang, Zhang, & Ao, 2014). There are some strategic challenges for Walmart, including
maintaining supplier relationship management and culture created for globalization, market-
based management of innovation, changes and management in/of human resources, online
technology that making product information available any time (Wei, Wang, Zhang, & Ao,
2014). Based on the SWOT analysis, Walmart can pursue a strategy for proper business opera-
tions. In this case, the following table gives an overview of how companies use their internal
strength to defend against external threats and how the company’s external opportunities can
be used to reduce internal weaknesses. Thus the attempt which Walmart can consider for its
strategic direction is as follows:
Table 23: Walmart strategic direction
Particulars Opportunities Threats

(external, positive) (external, negative)
Strengths Strength-Opportunities Strategies Strength-Threats Strategies

(internal, posi- Which Walmart’s strengths can be How can Walmart’s strengths be used to
tive) used to maximize the opportunities? minimize the threats?
Weaknesses Weaknesses-Opportunities Strategies Weaknesses-Threats Strategies

(internal, nega- What actions can be taken to mini- How can Walmart’s weaknesses be min-
tive) mize Walmart’s weaknesses using imized to avoid the threats identified?
opportunities identified?
With worldwide recognition as the world’s largest retail and wholesale company, Walmart
has enough strength to capture a broader market opportunity across the globe. Again, its
competent workforce and innovative initiative to run business in e-business platform can
spread its boundary in Europe and even in developing nations. In this case, the threats and
weaknesses can be lessened by concentrating on making e-commerce sites strong by ensuring
security measures and reliable IT business infrastructure.
~ 31 ~
CHAPTER-Five: HISTORICAL FINANCIAL DATA AND FREE CASH FLOW FORECASTS
5.1 Financials
Particulars 2006-01 2007-01 2008-01 2009-01 2010-01 2011-01 2012-01 2013-01 2014-01 2015-01 2016-01 TTM
Revenue USD 315,654 348,650 378,799 405,607 408,214 421,849 446,950 469,162 476,294 485,651 482,130 482,130
Mil
Gross Margin % 23.8 24.2 24.4 24.5 25.4 25.3 25.0 24.9 24.8 24.8 25.1 25.1
Operating Inco- 18,530 20,497 21,996 22,798 23,950 25,542 26,558 27,801 26,872 27,147 24,105 24,105
me USD Mil
Operating Mar- 5.9 5.9 5.8 5.6 5.9 6.1 5.9 5.9 5.6 5.6 5.0 5.0
gin %
Net Income USD 11,231 11,284 12,731 13,400 14,335 16,389 15,699 16,999 16,022 16,363 14,694 14,694
Mil
Earnings Per 2.68 2.71 3.13 3.39 3.70 4.47 4.52 5.02 4.88 5.05 4.57 4.57
Share USD
Dividends USD 0.60 0.67 0.88 0.95 1.09 1.21 1.46 1.59 1.88 1.92 1.96 1.96
Payout Ratio % — 23.0 27.9 27.2 30.5 29.0 32.2 32.0 34.8 40.2 41.8 42.9
Shares Mil 4,188 4,168 4,072 3,951 3,877 3,670 3,474 3,389 3,283 3,243 3,217 3,217
Book Value Per — 14.91 16.26 16.71 17.88 19.49 20.86 22.30 22.70 24.51 25.16 25.62
Share USD
Operating Cash 17,633 20,164 20,354 23,147 26,249 23,643 24,255 25,591 23,257 28,564 27,389 27,389
Flow USD Mil
Cap Spen- -14,563 -15,666 -14,937 -11,499 -12,184 -12,699 -13,510 -12,898 -13,115 -12,174 -11,477 -11,477
ding USD Mil
Free Cash 3,070 4,498 5,417 11,648 14,065 10,944 10,745 12,693 10,142 16,390 15,912 15,912
Flow USD Mil
Free Cash Flow — 1.08 1.33 2.19 3.32 2.98 3.09 4.21 2.88 4.18 4.93 —
Per Share USD
Working Capi- -5,002 -5,166 -10,869 -6,441 -7,230 -6,591 -7,325 -11,878 -8,160 -1,994 -4,380 —
tal USD Mil
~ 32 ~
5.1.1 Key Ratios
Cash Flow Ratios 2006- 2007-01 2008-01 2009-01 2010-01 2011-01 2012-01 2013-01 2014-01 2015-01 2016-01 TTM
01
EBT Margin 5.44 5.33 5.15 5.41 5.58 5.46 5.49 5.18 5.11 4.49 4.49
Operating Cash Flow — — 94.00 — — -993.00 259.00 551.00 -912.00 — -411.00 —
Growth %
Tax Rate % 33.56 34.20 34.19 32.35 32.20 32.56 31.01 32.87 32.20 30.31 30.31
Asset Turnover (Average) 2.41 2.41 2.48 2.44 2.40 2.39 2.37 2.34 2.38 2.39 2.39
Return on Assets % 7.80 8.09 8.20 8.58 9.33 8.39 8.57 7.86 8.01 7.29 7.29
Financial Leverage (Avera- 2.46 2.53 2.50 2.41 2.64 2.71 2.66 2.69 2.50 2.48 2.48
ge)
Return on Equity % 19.67 20.18 20.63 21.08 23.53 22.45 23.02 21.00 20.76 18.15 18.15
Return on Invested Capi- 12.77 13.26 13.52 14.22 15.40 14.11 14.44 13.30 13.57 12.51 12.51
tal %
Free Cash Flow Growth % — — — — — — -182.00 — — — -292.00 —
Cap Ex as a % of Sales 4.61 4.49 3.94 2.84 2.98 3.01 3.02 2.75 2.75 2.51 2.38 2.38
Free Cash Flow/Sales % 0.97 1.29 1.43 2.87 3.45 2.59 2.40 2.71 2.13 3.37 3.30 3.30
Free Cash Flow/Net In- 0.27 0.40 0.43 0.87 0.98 0.67 0.68 0.75 0.63 1.00 1.08 1.08
come
Current Ratio 0.90 0.81 0.88 0.87 0.89 0.88 0.83 0.88 0.97 0.93 0.93
Quick Ratio 0.20 0.16 0.20 0.22 0.21 0.20 0.20 0.20 0.24 0.22 0.22
Financial Leverage 2.46 2.53 2.50 2.41 2.64 2.71 2.66 2.69 2.50 2.48 2.48
Debt/Equity 0.50 0.52 0.53 0.51 0.64 0.66 0.54 0.58 0.54 0.55 0.55
Receivables Turnover 126.74 116.66 107.32 101.43 91.38 81.07 73.85 70.85 72.19 77.75 77.75
Inventory Turnover 8.02 8.32 8.79 9.00 9.08 8.70 8.34 8.08 8.11 8.06 8.06
Source: Morningstar.com (2016)
I.E., TTM: Trailing twelve months
~ 33 ~
5.1.2 Free Cash Flow Forecasts
FCF can be found using the calculation as stated below:
Equation 2: Calculation of free cash flow

FCF = 𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤 𝑓𝑟𝑜𝑚 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑠 − 𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤 𝑓𝑟𝑜𝑚 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
(+) Earnings before Taxes ***

(±) Non-Monetary Earnings Components ***
(=) Cash Flow from Operations ***

(+) Inflows from Investments ***
(-) Outflows from Investments ***
(=) Free Cash Flows ***
FCF Forecasts can be found by using the formulae as follows:
FCFt+1 = FCFt (1 + CAGR)
Or,
FCF = EBIT × (1-t)
A good proxy for free cash flow is:

(+) EBIT xxx
(+) Taxes Paid xxx
(±) Changes in Working Capital xxx
(±) Non-monetary Items (Depreciation, Amortization, etc.) xxx
(=) Cash Flow from Operations xxx
(-) Cash Flow of Investment xxx
FCF is the same as the amount of amortization xxx
Table 24: Historical FCF from 2006 to 2016

Year Amount USD in Million % Change
2007 4,498 31.75
2008 5,417 16.97
2009 11,648 53.49
2010 14,065 17.18
2011 10,944 -28.52
2012 10,745 -1.85
2013 12,693 15.35
2014 10,142 -25.15
2015 16,390 38.12
2016 15,912 -3.00
Source: Morningstar.com (2016)
~ 34 ~
1
𝐹𝐶𝐹2016 8
CAGR2009, 2016 = [( ) − 1]
𝐹𝐶𝐹2009
8 𝐹𝐶𝐹
= √ 2016 – 1
𝐹𝐶𝐹 2009
8 15,912
= √ -1
11,648
8
= √1.36607 – 1
= 1.0398– 1
= 0.0398
≈ 3.98%
Table 25: Forecasted FCF from 2017 to 2026
Year Calculation Using Formula Amount USD in Million

2017 FCF1 = 15,912 (1 + 0.0398) 16,545
2018 FCF2 = 16,545 (1 + 0.0398) 17,204
2019 FCF3 = 17,204 (1 + 0.0398) 17,889
2020 FCF4 = 17,889 (1 + 0.0398) 18,600
2021 FCF5 = 18,600 (1 + 0.0398) 19,341
2022 FCF6 = 19,341 (1 + 0.0398) 20,111
2023 FCF7 = 20,111 (1 + 0.0398) 20,911
2024 FCF8 = 20,911 (1 + 0.0398) 21,743
2025 FCF9 = 21,743 (1 + 0.0398) 22,609
2026 FCF10 = 22,609 (1 + 0.0398) 23,508
The above-mentioned tables are showing the previous ten years of FCF and the following
ten years of forecasted FCF. It indicates the changes in the FCF in different years where the
historical mean (average) FCF is the US $10,502 million, median US $10,944 total of US
$115,524 million for ten years period from 2007 to 2016. It has significant changes with outli-
er between the US $3,070 and the US $16,390. Walmart enjoyed the maximum percentage
change in the FCF in 2009 (53.49%), and the lowest FCF occurred in 2011 (-28.52%). Instead
of having fluctuations in FCF, it has consistent growth in different years, attracting investors
and debenture holders. The expected FCF for 2017 is forecasted at US $16,545 million, which
may reach US $23,508 million in 2026. The increasing percentage change of about 3.83% was
estimated in FCF over ten years from 2017 to 2026. The forecasts were made based on using
the formula [FCFt+1 = FCFt (1 + CAGR)], where CAGR was calculated for eight years (2009-
2016), omitting earlier two years FCF. Because, in these two years, Walmart had lower FCF
compared to the years of 2009 that may affect obtaining accurate CAGR; hence, the researcher
uses eight years’ CAGR to find forecasted FCF. The compound annual growth rate assumed
from the eight years FCF data from 2019 to 2016 as there is some consistency in the case of
FCF and found to be 3.98%.
~ 35 ~
5.1.3 Persistence and Sustainability of Historical Financial Data

Revenue
600,000
500,000
400,000
300,000
200,000
100,000
0
Revenue USD Mil
Figure 5: Walmart revenue flow for different years
The above figure indicates the increasing sales revenue for Walmart over time which was
US $315,654 million in 2006, reaches the highest US $485,651 million in 2015. It can be
called a sustainable growth rate of 35% within ten years period that reduced to some extent in
2016 but still the US $482,130 million.
Operating and Net Income

30,000
25,000
20,000
15,000
10,000
5,000
0
Operating Income USD Mil Net Income USD Mil
Figure 6: Walmart operating and net income for different years
Operating income before tax was gradually rising; although we can see in 2014, it de-
creased by the US $929 million. It reached the US $24,105 million in 2016. Again, the net
profit is growing (2006 US $11,231 and 2015 US $16,363 million but in 2016 is reduced to the
US $14,694) except in 2012. There is a decrease of US $690 million. In 2014 it decreased by
US $977 million, and in 2016 by US $1,669 million.
~ 36 ~
Gross and Operating Margin

23.8 24.2 24.4 24.5 25.4 25.3 25 24.9 24.8 24.8 25.1
5.9 5.9 5.8 5.6 5.9 6.1 5.9 5.9 5.6 5.6 5.0
Gross Margin % Operating Margin %
Figure 7: Walmart gross margin and operating margin of different years
The gross margin for Walmart is slightly changing through 1.6% (23.8% lowest in 2006
and 25.4% highest in 2010) volatility. Operating margin at the same time, we see from the fig-
ure that there is not much variation except only 0.5% between 6.1% in 2011 and 5.6% in 2014
and 2015.
Earnings and Dividends/Share

6
5.02 4.88 5.05
5 4.47 4.52 4.57
3.7
4 3.39
3.13
2.68 2.71
3
1.88 1.92 1.96
1.59
2
1.09 1.21 1.46
0.95
0.6 0.67 0.88
1
0
0 2 4 6 8 10 12
Earnings Per Share USD Dividends USD
Figure 8: Walmart historical earnings per share and dividend per share
Walmart has been enjoying growing EPS (lowest US $2.68 in 2006 and highest US $5.05
in 2010) over time without some interruption in this regard. In 2014 and again in 2016 of US
$4.57, dividends per share always saw a rising nature from 2006 (US $0.60) to 2016 (US
$1.96). This is a good indication for the investment holders.
~ 37 ~
18,000 16,39015,912
16,000 14,065
12,693
14,000 11,648 10,944
10,745 10,142
12,000
10,000
8,000 5,417
4,498
6,000 3,070
4,000
2,000
0
Free Cash Flow USD Mil
Figure 9: Walmart historical free cash flow
Free cash flow is the excess amount of a company that can be distributed among equity
holders, debt holders without causing any interruption to the normal operations of the compa-
ny functionalities. It is calculated by subtracting capital expenditure from operating cash flow.
Free Cash Flow/Share, Net Income and

Sales
6
0
0 2 4 6 8 10 12
Free Cash Flow Per Share USD

Free Cash Flow/Sales %
Free Cash Flow/Net Income
Figure 10: Walmart FCF per share, FCF percentage of sales, and net income
Walmart FCF in the year 2006 was US $3,070 million, which rose to US $14,065 million
in 2010. After this period, it reduced by a maximum of US $3,923 million until 2014. In 2015
it suddenly rose to US $16,390 million, a 61.6% positive growth rate consistent in 2016, with a
slight reduction by the US $ 478 million.
~ 38 ~
25,000
20,000
15,000
10,000
5,000
0
FCF (USD in Million)
Figure 11: Walmart forecasted free cash flow from 2017 to 2026
FCF per share is seen to be growing in nature ranging from US $1.08 (2007) to US $4.93
(2016). In 2014, FCF per share reduced by 41%, and on the contrary, in 2016, it increased by
15% from the previous year. FCF by sales is seen from the above figure that from 2008 (1.43%)
to 2010 (3.45%), there is a 141% increase within two years. It reached 2.13% in 2014, which
again went to a 3.29% decrease in the next fiscal year, a 37% positive growth found in 2015
(3.37) and a 2.12% negative increase in 2016 (US $3.3). The FCF by net income has a slight
fluctuation over time. It ranges from the US $0.27 (2006) to the US $1.08 (2016) indicates
consistency.
Walmart's forecasted free cash flow from 2017 (US $16,545 million) to 2026 (US $23,508
million) shows an increasing growth over ten years by a 3.83% growth rate per year.
~ 39 ~
CHAPTER-Six: WALMART VALUATION AND COMPARISON
6.1 Conceptual Approach to Valuation
T
here are three methods to calculate the fundamental value of a firm mentioning:
A. Discounted Cash Flow

B. Comparatives (Multiple Valuation)
C. Real Option Valuation (Black-Schools Model)
In this study, Harvard professor Williams (John Burr Williams; 1900 - 1989) Valuation
Model (1938) for discounted cash flow, a globally accepted method is used to find out the fun-
damental value of Walmart, which is based on the formula stated below:
Equation 3: Value calculation
𝑇
𝐸 (𝑥)
𝑉=∑
(1 + 𝐾)𝑖
𝑖=1
Practical Approach,
𝑇
𝐸 (𝑥) 𝐸 (𝑥𝑇 )(1 + 𝑔)
𝑉0 = ∑ +
(1 + 𝐾)𝑖 (𝐾 − 𝑔)
𝑖=1
Or,
10
𝐹𝐶𝐹𝑖 𝐹𝐶𝐹5 (1 + 𝑔) 1
𝑉=∑ 𝑖
+( × )
(1 + 𝑊𝐴𝐶𝐶) 𝑘−𝑔 (1 + 𝑊𝐴𝐶𝐶)6
𝑖=1
“K” is the risk factor that indicates that the more the value of K is, the less the fundamen-
tal importance of the firm is. “T” is the finite horizon between 5 years. “E(x)” is the free cash
flow.
6.2 Perpetual Growth Rate

The digital sales of Walmart have experienced a rapid growth rate (a 17% per year) that
generates about US $12 billion. The company expects revenue growth between the US $44-$60
billion over the next three years, a (3-4)% growth in a per (Sure Dividend, 2016, January 29).
To see the growth rate for a company, it is helpful to get the compound growth rate for years
as the value of different years varies considerably. When the value for investment changes
~ 40 ~
from one year to another year, then compound annual growth rate (CAGR) is helpful to deter-
mine the annual growth rate that is calculated under the formula as shown below:
Equation 4: Compound annual growth rate calculation
1 1
𝐹𝐶𝐹 t+n 𝑛 𝐹𝐶𝐹2016 5
CAGRt, t+n = [( ) − 1] CAGR2012, 2016 = [( ) − 1]
𝐹𝐶𝐹𝑡 𝐹𝐶𝐹2012
1
𝐹𝐶𝐹 5 15,912
CAGR2007, 2016 = [( 2016 )
10
− 1] = √ -1
𝐹𝐶𝐹2007 10,745
5
10 𝐹𝐶𝐹 = √1.48087 – 1
= √ 2016 – 1
𝐹𝐶𝐹 2007
= 1.0817 – 1
10 15,912
= √ -1 = 0.0817
4,498
10
= √3.53757 – 1 ≈ 8.17%
1
= 1.1347 – 1 CAGR2017, 2026 =
𝐹𝐶𝐹
[( 2026 )
10
− 1]
𝐹𝐶𝐹2017
= 0.1347
10 23,508
= √ -1
≈ 13.47% 16,545
10
= √1.42085 – 1
= 1.0357– 1
= 0.0357
≈ 3.57%
CAGR per year found for Walmart is 13.47% for ten years and 8.17% for five years in FCF.
It means that Walmart’s overall growth was 13.47% over the last ten years of operations. For
the previous five years, it reduced to 8.17%, even if we consider eight years period from 2009
to 2016. The compound annual growth rate diminishes to only 3.98%, which indicates the
market competition and the internal weaknesses and external threats hampered its consistent
growth rate. Even if it expanded its markets and continually improved the business, according
to Stock Analysis on Net (2016), it is 14.53% in five years. According to Walmart report 2014,
total shareholder returns (CAGR) are 12% and 16% based on Walmart annual report 2015. In
terms of total liabilities and equity investment, Walmart’s acquisition grew from US $138,187
million (2006) to US $203,706 million (2015) over ten years, and its CAGR is 3.96%. It indi-
cates the clear picture of growth on the investment over time with a stable return throughout
its operations, even though the asset is volatile and fluctuating one year to another. Moreover,
for the period of 5 years (2011-2015) with balances of US $180,663 in 2011, its return is
2.43%. The forecasted period’s (2016-2020) CAGR was found 3.57%. According to Cohagen,
Khalil, and Zhang (2016), the subsequent growth prospects are estimated:
~ 41 ~
Table 26: Walmart Month Covered Call Option Return Model

Particulars 2016 2017 2018
Gross Profit (USD million) 67.00 18.19 75.74
Net Profit (USD million) 85.26 39.01 99.49
Net Profit % 1.10% 0.40% 1.00%
Annualized Net Profit % 13.80% 5.00% 11.60%
Total Return 13.76% 19.44% 33.25%
Source: Cohagen, Khalil, and Zhang (2016)
Table 27: Pro Forma Financial Performance
Particulars 2016 2017 2018 2019 2020

Growth rate 2.79% 2.93% 2.84% 2.69% 2.67%
Gross margin 24.83% 24.83% 24.83% 24.83% 24.83%
Operating margin 5.59% 5.60% 5.60% 5.60% 5.60%
EBITDA margin 7.43% 7.41% 7.38% 7.31% 7.28%
Net margin 3.34% 3.35% 3.35% 3.35% 3.35%
ROA 7.35% 7.33% 7.29% 7.24% 7.20%
6.3 Weighted Average Cost of Capital (WACC)

Usually, the company’s assets are financed by two terms: shareholders’ equity and total
short-term and long-term debt. Stockholders’ equity is the market cap for the business. WACC
is the average cost incurred for this equity and debt, weighted against every dollar the compa-
ny finances (Gurufocus.com, 2016). In this case, to calculate WACC, we need to calculate the
cost of equity (Ke) and cost of debt first (Kd) as there are two financing options like:
Equity Cost of Equity

Investments
Cost of Debt
Debt
Figure 12: Input source of cost of equity and cost of debt
6.3.1 Calculating Cost of Equity, Ke

According to Investopedia (2003), the cost of equity for a company represents the compen-
sation that the market demands in exchange for its ownership of assets and bearing the risk of
such a right. The higher cost of equity indicates the future nature of the company as risky. The
risk-free rate, market return, and equity risk premium are associated with calculating the cost
of equity. The risk-free rate is when the investors have no risk of acquiring that interest for
their investment in a specific market. The market return is the rate of return the investors can
expect from the particular market they invest.
~ 42 ~
On the other hand, the equity risk premium is the excess return over the market-free rate.
Beta or beta coefficient is the systematic or volatility risk of a company compared to a market
portfolio. It is calculated as:
Equation 5: Beta calculation
𝐶𝑂𝑉 (𝑅𝐴𝑀, 𝑅𝐴𝐹 )

β=
𝜎𝐴𝐸
or,
𝐶𝑂𝑉 (𝑅𝑖, 𝑅𝑀 )
β=
𝑉𝐴𝑅(𝑅𝑖 )
Where, if β > 1, company investment is more volatile than the market (high risk) and β< 1,
indicates company investment is less volatile than the market or conservative stock (low risk).
If,
β = 0, Ke = RF + 0 (RM - RF) = RF
β = 1, Ke = RF + 1 (RM - RF) = RM
β< 1, RF < Ke < RM
β > 1, Ke > RM
As of data observed until 31 Jan, 2016, it is found that,
USA RF = 1.94 (Source: Fenebris.com, 2016, January)
USA ERP = 4.93 (Source: Fenebris.com, 2016, January)
USA RM = 6.87 (Source: Fenebris.com, 2016, January)
Walmart β = 0.65 (Source: Value Line, Inc., 2016, January 29)
Equation 6: Cost of equity calculation
Ke = RF + β (ERP)
Now, Ke = RF + β (ERP)
= 1.94 + 0.65 × 4.93
=1.94 + 3.2045
= 5.1445
≈ 5.14 (RF < Ke < RM = 1.94 < 5.14 < 6.87)
6.3.2 Calculating Cost of Debt, Kd

Cost of debt is the percentage of cost the company pays for its loans and bonds per year.
It is higher than the cost of equity in general. The financial cost is the total cost incurred for
the interest and other charges paid for the borrowings. The cost of debt for Walmart is as fol-
lows:
~ 43 ~
From the Walmart 2015 Annual Report found,
D = US $50,381 in Million as of 31-01-2016

COF = US $2,348 in Million as of 31-01-2016
Equation 7: Cost of debt calculation
𝐶𝑂𝐹
Kd = × 100
D
𝐶𝑂𝐹
Now, Kd = × 100
D
2,348
= × 100
50,381
= 0.04660487×100
= 4.660487
≈ 4.66
6.3.3 Calculating Weighted Average Cost of Capital (WACC)

By the term weighted average cost of capital (WACC), we mean the rate at which the com-
pany is expected to pay to the security holders on an average for financing in the company’s
assets. It is the cost incurred on the capital invested in the firm. The effective tax rate is the
rate at which the company’s net profit before tax is taxed. The WACC for Walmart is calculated
using two formulae shown below:
Given,
Ke = 5.14
Kd = 4.66
E = US $81,394 in Million as of 31-01-2015 (Source: Walmart 2015 Annual Report)
D = US $50,381 in Million as of 31-01-2015 (Source: Walmart 2015 Annual Report)
t = 0.32 (Average of 5 years’ tax rate), “t” is called “Effective Tax Rate (ETR)”
Equation 8: Calculation of effective tax rate

Income Taxes
ETR =
Earnings Before Taxes (EBT)
Table 28: Walmart tax rate for five consecutive years
31-01-2016 31-01-2015 31-01-2014 31-01-2013 31-01-2012

(Amount in USD (Amount in USD (Amount in US$ (Amount in USD (Amount in USD
Million) Million) Million) Million) Million)
6,558 7,985 8,105 7,958 7,944
= = = = =
21,638 24,799 24,656 25,737 24,398
= 0.30 = 0.32 = 0.33 = 0.31 = 0.33
Source: Walmart annual reports, internet
E D (1−t)
Now, WACC = Ke × + Kd ×
𝐷+𝐸 𝐷+𝐸
81,394 50,381 (1−0.32)
= 5.14 × + 4.66 ×
50,381+81,394 50,381+81,394
81,394 50,381×0.68
= 5.14 × + 4.66 ×
131,775 131,775
~ 44 ~
81,394 34,259
= 5.14 × + 4.66 ×
131,775 131,775
= 5.14 × 0.61767 + 4.66 × 0.25998

= 3.17482 + 1.21150
= 4.38632 ≈ 4.39
Or,
Ke Kd (1−t)
WACC = ×𝐸 + ×𝐷
𝐷+𝐸 𝐷+𝐸
5.14 4.66 (1−0.32)
= × 81,394 + × 50,381
50,381+81,394 50,381+81,394
5.14 3.1688
= × 81,394 + × 50,381
131,775 131,775
418,365 159,647
= +
131,775 131,775
= 3.17484 + 1.21152
= 4.38636
≈ 4.39
Where,
Ke = Cost of Equity
RF = Risk-free Rate
RM = Market Return / Implied Market Return (ICOC)
ERP = Equity Risk Premium (RM-RF) / Implied Market Risk Premium (IMRP)
E = Equity
D = Debt
t = Effective Tax Rate (ETR)
β = Specific Firm Risk Factor
COF = Cost of Finance/Financial Cost
The historical WACCA found is shown in the following table:
Table 29: Walmart historical WACC
Year Jan Jan Jan Jan Jan Jan Jan Jan Jan
2007 2008 2009 2010 2011 2012 2013 2014 2015
WACC 5.56 2.46 5.11 5.17 5.79 4.03 4.41 4.81 3.64
Source: Gurufocus.com (2016)
6.4 Terminal Value

The terminal value is 296 billion according to Stock Analysis on Net (2016), assuming pre-
sent value at 5.97%. The following estimation prepared by Cohagen, Khalil, and Zhang (2016)
shows the relevant value for ten years periods from 2016 to 2025:
Table 30: Walmart terminal value and necessary value calculation
Weighted Average Cost of Debt 43,692

Capital Tax rate 32.20%
Variable Value Cost of equity 5.09%
Risk Free rate 2.34% WACC 4.69%
Market Premium 5.92%
Beta 0.4646
Cost of Debt 4.40% Perpetuity method
Market Cap 188,450 FCF terminal growth rate 2.34%
Terminal value 327,250
~ 45 ~
PV of the terminal value 115,630 # of shares 468.76

PV of free cash flow 102,336 Price per share 447.35
Enterprise value 217,966 Current price 659.37
Net Debt 8,265 Potential downside 32.15%
Equity value 209,701

I.E., data are in USD million
In this calculation, it is found,

FCF10 = US $23,508 Million
WACC or K = 4.39% or 0.0439
g = 1.22% or 0.0122 (Source: USA GDP Growth Rate Based on IMF data from 2008-2015)
I.E., g = Perpetual Annual FCF Growth/Perpetuity Earnings Growth Rate ≈GDP growth
The condition must be fulfilled in this perspective that K>g and k = WACC.
Equation 9: Terminal value calculation for Walmart

𝐹𝐶𝐹10 (1 + 𝑔) 1
Terminal Value = ×
𝑘−𝑔 (1 + 𝑊𝐴𝐶𝐶)6
𝐹𝐶𝐹10 (1+𝑔) 1
Now, Terminal Value = ×
𝑘−𝑔 (1+𝑊𝐴𝐶𝐶)6
23,508 (1+0.0122) 1
= ×
0.0439−0.0122 (1+0.0439)6
23,508 (1.0122) 1
= ×
0.0317 (1.0439)6
23,795 1
= ×
0.0317 1.2941
= 750,625 × 0.7727
= 580,008 Million
≈ 580 Billion
The terminal value of Walmart for ten years would be 580 billion.
6.5 Fundamental Value

In this study, for the calculation of fundamental value based on FCF in discounted meth-
od, the hypothesis on perpetuity growth is as follows:
Table 31: Walmart terminal value calculation

Year Forecasted FCF 𝑭𝑪𝑭𝒊 𝟏𝟎
𝑭𝑪𝑭𝒊
∑
(𝟏 + 𝑾𝑨𝑪𝑪)𝒊 𝒊=𝟏 (𝟏+𝑾𝑨𝑪𝑪)
𝒊
2017 16,545 15,850 15,850

2018 17,204 15,787 31,637
2019 17,889 15,725 47,362
2020 18,600 15,663 63,025
2021 19,341 15,602 78,627
2022 20,111 15,541 94,168
2023 20,911 15,480 109,648
2024 21,743 15,419 125,067
2025 22,609 15,358 140,425
2026 23,508 15,298 155,723
~ 46 ~
Walmart Fundamental Value for 2026
Equation 10: Fundamental value calculation for Walmart
10
𝐹𝐶𝐹𝑖 𝐹𝐶𝐹10 (1 + 𝑔) 1
𝑉2026 = ∑ +( × )
(1 + 𝑊𝐴𝐶𝐶)𝑖 𝑘−𝑔 (1 + 𝑊𝐴𝐶𝐶)6
𝑖=1
10
𝐹𝐶𝐹𝑖 𝐹𝐶𝐹10 (1+𝑔) 1
Now, 𝑉2026 = ∑ 𝑖 +( × )
𝑖=1 (1+𝑊𝐴𝐶𝐶) 𝑘−𝑔 (1+𝑊𝐴𝐶𝐶)6
= 155,723 + 580,008
= 735,731 Million
≈ 736 Billion
Table 32: Walmart terminal value and fundamental value for different estimated years
Forecasted Fiscal Year Terminal Value (USD in Billion) Fundamental value (USD in Billion)
2017 408 424
2018 425 456
2019 441 489
2020 459 522
2021 477 556
2022 496 590
2023 516 626
2024 537 662
2025 558 698
2026 580 736
Source: Author
6.6 Market Value (MV)

Market value can be assessed as the measure of market capitalization and enterprise val-
ue. These calculations are not identical and interchangeable, but they offer the appropriate
way to compare similar companies.
6.6.1 Market Capitalization

Market capitalization measures evaluating a company’s size, growth, and risk for the ex-
pectation of a particular stock and is used to identify the competitors in the same sector. Gen-
erally, companies are categorized as large, mid, or small according to the market capitaliza-
tion. In general, the large companies pose far less risk than small capital stocks but slower
growth that may experience quick change at the cost of high risk. Share price alone is not the
only determinant of a company’s overall value. The higher share price of a company does not
mean the more worthy of that company (Investopedia, 2014).
WALMART
As of Jan 31, 2015,

Walmart Share Price = US $80.71 (Source: Stock-analysis-on.net)
Walmart Number of Shares outstanding = 3,226,062,652 (Source: Stock-analysis-on.net)
~ 47 ~
Equation 11: Market value calculation

MV = (Share Price) × (Number of Shares Outstanding)
Now, MV = (Share Price) × (Number of Shares Outstanding)
= 80.71 × 3,226,062,652
= 260,375,516,643
= 260.38 Billion
Main Competitors’ Market Value
COSTCO Wholesale
As of Jan 31, 2015;
Costco Share Price = US $142.99 (Source: Phx.corporate-ir.net)
Costco Number of Shares outstanding = 440,180,000 (Source: Ycharts.com)
= 142.99 × 440,180,000
= 62,941,338,200
= 62.94 Billion
TARGET Corporation
As of Jan 31, 2015;
Target Share Price = US $73.61 (Source: Yahoo Finance)
Target Number of Shares Outstanding = 632,100,000 (Source: Gurufucus.com)
= 73.61 × 632,100,000
= 47,117,761,000
= 47.12 Billion
The KROGER Co
As of Jan 31, 2015;
Kroger Share Price = US $34.04 (Source: Yahoo Finance)

Kroger Number of Shares Outstanding = 993,000,000 (Source: Gurufocus.com)
= 34.04 × 993,000,000
= 33,801,720,000
= 33.81 Billion
~ 48 ~
AMAZON
As of Jan 31, 2015;
Amazon Share Price = US $354.53 (Source: Yahoo.com)
Amazon Number of Shares outstanding = 462,000,000 (Source: Ycharts.com)

= 354.53 × 462,000,000
= 163,792,860,000
= 163.79 Billion
THE HOME DEPOT
As of Jan 31, 2015;
The Home Depot Share Price = US $101.80 (Source: Yahoo Finance)
The Home Depot Number of Shares Outstanding = 1,346,000,000 (Source: Ycharts.com)
= 101.80 × 1,346,000,000
= 137,022,800,000
= 137.02 Billion
CVS
As of Jan 31, 2015;
CVS Share Price = US $96.35 (Source: Phx.corporate-ir.net)
CVS Number of Shares outstanding = 1,169,000,000 (Source: Ycharts.com)
= 96.35 × 1,169,000,000
= 112,633,150,000
= 112.63 Billion
WALGREEN
As of Jan 31, 2015;
Walgreen Share Price = US $72.21 (Source: Phx.corporate-ir.net)

Walgreen Number of Shares Outstanding = 1,054,700,000 (Source: Ycharts.com)
= 72.21 × 1,054,700,000
= 76,159,887,000
= 76.16 Billion
~ 49 ~
6.6.2 Enterprise Value (EV)

A more accurate valuation than market capitalization that omits some essential factors of
the company in the overall valuation is enterprise value. The calculation is made considering
both market capitalization and all debt obligations and subtracting cash and cash equivalents.
It is used to identify undervalued and overvalued companies. A company with good earnings,
dividend policy, and large market capitalization may have serious debt obligations found from
enterprise value. In these cases, compared with similar companies, the company having rela-
tively more significant enterprise value should be a better decision for purchasing (In-
vestopedia, 2014).
6.7 Comparison
Walmart’s historical enterprise value (EV) and comparison with Costco Wholesale enter-
prise value for six years are shown in the following table:
Table 33: Comparison of Historical Enterprise Value
Company Financial 31-Jan- 31-Jan- 31-Jan- 31-Jan- 31-Jan- 31-Jan-

Name Year 15 14 13 12 11 10
WALMART Enterprise 306.17 300.18 297.93 259.31 227.97 245.76
value (EV)
USD in bil-
lion
Growth 1.96 0.75 12.96 12.09 -7.8
Rate (%
Change)
COST Financial 31-Jan- 31-Jan- 31-Jan- 31-Jan- 31-Aug- 31-Aug-
Year 15 14 13 12 11 10
Enterprise 60.61 48.31 40.63 32.67 31.22 22.01
value (EV)
USD in bil-
lion
Growth 16.81 6.04 18.41 20.13 29.49
Rate (%
Change)
TARGET Financial 31-Jan- 31-Jan- 31-Jan- 31-Jan- 31-Jan- 31-Aug-
Year 15 14 13 12 11 10
Enterprise 61.40 50.67 60.81 55.96 49.73
value (EV)
USD in bil-
lion
Growth 17.47 -20.01 7.97 11.14
Rate (%
Change)
KROGER Financial 31-Jan- 31-Jan- 31-Jan- 31-Jan- 31-Jan- 31-Jan-
Year 15 14 13 12 11 10
Enterprise 43.12 26.64 19.83 19.19 19.08 20.24
value (EV)
USD in bil-
lion
Growth 38.21 25.56 3.25 0.56 -6.05 -6.30
Rate (%
Change)
Source: Data from Gurufocus.com (2016); Ycharts.com (2016); Stock-analysis-on.net (2016)
~ 50 ~
Table 34: Walmart peer group in food & staples retailing
Ticker Company Name Recent Market Price/ Net Sales Net In-
Price Cap. Earnings (TMT in come
(USD) (USD in USD Mil) (TMT in
Mil) USD Mil)
WMT Walmart Stores Inc 67.41 215,840 14.75 482,130 14,694
ANDE Andersons Inc 29.41 847 NM 4,199 -13
RAD Rite Aid Corp 7.99 8,361 4.23 29,314 1,935
CNCO Cencosud Sa 7.32 6,902 38.53 16,392 185
COST Costco Wholesale Corp 152.87 67,115 29.23 117,269 2,309
IMKTA Ingles Markets Inc 32.88 458 11.62 3,765 57
CASY Caseys General Stores Inc 105.62 4,125 18.89 7,193 220
KR Kroger Co 37.73 36,485 18.27 109,830 2,039
PSMT Pricesmart Inc 81.56 2,477 26.74 2,858 92
CBD Cia Brasileira De Distrib 13 2,158 15.29 18,428 220
CVS Cvs Health Corp 99.34 109,124 21.46 153,290 5,237
~ 51 ~
CHAPTER-Seven: ANALYSIS, RECOMMENDATION, AND

CONCLUSION
7.1 Fundamental Analysis and Recommendation
T
he success of a retail business is neither straightforward nor even; it is a journey
with enormous obstacles arising from several factors and elements. Most of the
retailers fail to stay at the correct course in facing challenges and heightening com-
petitive pressures. But some retailers successfully take advantage of the changes in customers’
shopping behavior and the industry’s changing circumstances (Prepletaný, 2013). Walmart op-
erates in a highly competitive environment in all the countries where they serve. Here intense
sales competition is rigorous against another national and international department, discount,
drug, dollar, variety and specialty stores, supermarkets and warehouse clubs, e-commerce re-
tailers, and catalog businesses for prime retail site locations, attracting and retaining quality
employees. Walmart is influenced by several factors, including economic conditions, consumer
disposable income, credit availability, debt levels and buying patterns, cost of goods, rate of in-
terest and tax, customer preferences, labor costs, unemployment, inflation and deflation, fluc-
tuations in the currency exchange rate, prices of fuel and energy, climate change, the pattern
of weather, costs of insurance, catastrophic events, pressures from competitors and more. In
these circumstances surviving for established retailers like Walmart is somewhat tricky but
not impossible. Reassessing ways of creating value, adjusting their asset mix to focus on the
role they want to play can reveal from the vast competition. When the future becomes uncer-
tain and transformation is complex with internal resistance, uncertainty can become possible
to choose a direction and shape the opportunity. Driving change business’s edges, retailers
can prototype and test new business models, gather meaningful feedback, learn and reflect
with less internal tension and resistance. Small moves smartly made can set big things in mo-
tion (Hagel III, Brown, Samoylova, Lobaugh, & Goel, 2015; SEC, 2013, January 31). During
the great world recession of 2007 to 2009, Walmart’s EPS was US $3.16 (2007), US $3.42
(2008), US $ 3.66 (2009), and S&P 500’s EPS was US $75.2 (2007), US $16.89 (2008), US
$56.33 (2009). It explains that the average business in the S&P 500 suffered in earnings where
Walmart did not. In 2008, S&P 500 stock fell 37%, but Walmart gained 21.6% for the higher
yields; thus, its business model makes it the ideal recession stock for investors (Sure Dividend,
2016, January 29). The recent declining EPS for two years and operating income decline of
8.8% causes cheaper share value because of the raising salaries to reduce employee turnover.
Again, it is investing much in digital sales that are not yet profitable, causing a drag on earn-
ings. When it scales, these will be profitable and supplement profits from physical stores, but
Walmart’s stock price declined by 24% in the last TMT. However, its stock is 12% up while
S&P 500 is down 8% in the 3rd quarter of 2015, and its earnings were generally positive. Con-
stant currency revenue grew by 2.8%, where comparable stores’ sales grew by 1.5%. Wages
will not be rising continually, and its margin will be stabilized and recovered as well improve-
ments will cause revenue to increase (Sure Dividend, 2016, January 29).
An investment should be made after consulting with a financial advisor and understand-
ing several issues like market risk, currency risk, political and credit risks, the risk of econom-
ic recession, and the risk that issuers of securities or general stock market conditions may
~ 52 ~
worsen over time. Foreign investing involves certain risks, including currency fluctuations and
controls, restrictions on foreign investments, less governmental supervision and regulation,
less liquidity, and the potential for market volatility and political instability. As with any in-
vestment, investment returns and principal value will fluctuate so that when redeemed, an in-
vestor’s shares may be worth more or less than their original cost (The McGraw-Hill Compa-
nies, 2011 April 2). Walmart has an excellent financial structure. Suppose one wants to invest
in this company. In that case, it is highly recommended to invest in the company as the trends
are demonstrating that Walmart will be making exceptional progress ahead (Estopinan, 2014).
Walmart’s WACC is based on discounted cash flow valuation. The risk-free rate of 2.34% and
market risk premium of 5.92% is estimated at 4.69%. The valuation is done using the perpetu-
ity growth method. The value found at US $287 billion and the recommended as the best
choice for ten years’ investment. It has a consistent financial history, forward-looking executive
team, consistent divined yield, historically accurate guidance on its expectation giving the con-
fidence for forecasting for the next ten years. Although currently, Walmart is undervalued re-
garding its recent performance and future projections (Cohagen, Khalil, & Zhang, 2016).
Walmart’s growth is 3.5, total return 3.0, Efficiency 4.5, price volatility 4.0, solvency 5.0, in-
come 4.0 out of score 5.0 where 1 is weak. Five is strong and estimated EPS .88 (2016), 4.14
(2017), 4.30 (2018) (The Street Ratings, 2016, March 13). The rating and target suggest to
Strongly Buy (+138%) (X-FIN.com, 2016). There is stable performance and dividend yield and
low earnings volatility and growth compared to S&P 500 companies, making it the best choice
for a 10-year position (Gough, 2013, April 9). The following table shows the recent rating
changes:
Table 35: Most recent ratings changes of Walmart
Date Price Action From To
2/23/2016 $66.48 Upgrade Hold Buy
9/17/2015 $64.47 Downgrade Buy Hold
3/10/2014 $74.43 No Change Buy Buy

The following table, another estimation made by Cohagen, Khalil and Zhang (2016) shows
the multiple valuation models for Walmart Stores, Inc. different valuation for 10 years from
2016 to 2025:
Table 36: Walmart Multiple Valuation Model
Particu- 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
lars
Net In- 14,820 18,064 19,238 19,363 19,956 20,568 21,198 21,848 22,517 23,207
come .53 .79 .53 .14 .54 .13 .45 .10 .65 .72
EPS 4.77 6.02 6.62 6.89 7.33 7.81 8.32 8.86 9.44 10.05
Share 74.33 93.82 103.24 107.37 114.35 121.78 129.7 138.12 147.1 156.66
Price
EBIT 1709.2 1975.6 2251.6 2434.2 2668.2 2874.1 6716.4 11170. 16329. 22265.
8 9 7 7 3 7 9 26 47 35
EBIT*(1- 1042.6 1205.1 1373.5 1484.9 1627.6 1753.2 4097.0 6813.8 9960.9 13581.
Tax) 6 7 2 1 2 4 6 6 8 86
Depre- 3447.7 3643.0 3488.4 3526.4 3552.6 3522.4 3533.8 3536.3 3530.8 3533.6
ciation 5 1 4 2 8 3 1 8 7
CAPEX 4782.4 5124.5 4875.4 4927.5 4975.8 4926.2 4943.2 4948.4 4939.3 4943.6
~ 53 ~
Particu- 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
lars
4 9 6 5 7 4 5
Change - - - - - - - - - -
in wor- 5311.9 5906.7 5319.3 5512.6 5579.5 5470.5 5520.9 5523.6 5505.0 5516.5
king 8 2 1 7 7 2 2 7 3 4
capital
Free 14584. 15879. 15056. 15451. 15735. 15672. 18095. 20822. 23936. 27575.
cash flow 84 5 72 47 65 51 02 28 19 72
to firm
I.E., See Appendix 2 for further Walmart valuation
The table shows estimation for related companies as follows:
Table 37: Related retail business recommendation
RELATED COMPANIES Price Int.Val. Rating
COST Costco Wholesa 151.77 137.62 Hold
TGT Target 83.29 164.29 Strong buy
WFM Whole Foods Ma 29.43 27.41 Hold
PSMT PriceSmart 86.66 55.35 Sell
DG Dollar General 82.69 83.92 Hold
SVU Supervalu 5.50 3.46 Sell
BIG Big Lots 47.10 86.14 Strong buy
Source: X-FIN.com (2016)
Walmart’s current P/E ratio of 13.7, which is 15.0, averaged for the last decade. It has
been trading almost all the time high (ranks in the top 10) dividend yield with the fair-share
value of around US $80. It has an above-average 3% dividend yield, 40% payout ratio, market-
beating total returns of (8-11)%, low ten years stock price standard deviation of 19.5%, the low
beta for ten years of 0.5. Compared to the same period, Walmart’s net profit margin for the 4 th
quarter of 2015 was unchanged, and its sales and net income dropped. However, the growth
outpaced the average competitor within the industry. It has weak liquidity with a current ratio
of 0.22, showing an inability to meet short-term cash needs decreasing from the same period a
year ago. It indicates the deteriorating cash flow and means the company’s financial difficulties
can develop shortly. At the same period, its net worth remained almost unchanged by decreas-
ing 1.04%. During the economic recession, the industry’s low beta and dependable revenue are
commendable. Two factors of increasing raw material costs and high valuation can curtail
long-run performance. The declining stock price makes the excellent time for buying this in-
dustry-leading organization (Sure Dividend, 2016, January 29; The Street Ratings, 2016,
March 13).
~ 54 ~
Figure 13: Walmart historical dividend yield
Source: Sure Dividend (2016, January 29)
Finally, the table below in this study makes the comparisons with significant competitors
of Walmart in retailing:
Table 38: Investment decision for Walmart and its major competitors
USD in Billion
Particulars Walmart Costco Target Kroger
(+) Fundamental Value or
Intrinsic Value (Value Driv- 306 61 61 43
ers)
(-) Market Value 260 63 47 34
(=) Undervalued/Overvalued
46 -2 14 9
Firm
Decision for Investors Overvalued Undervalued Overvalued
(Buy/Sell) (Strong Buy) (Sell) Overvalued (Buy) (Buy)
Here, Fundamental Value (Market Value of Assets or Enterprise Value) = Market Value of
Equity + Market Value of Debt and, Market Value = Market Capitalization
Walmart Stores, Inc., a fundamentally prosperous retail business organization, has some
limitations. It has a lower liquidity position with the current trend indicating current cash
cannot meet current obligations. Quick assets are not enough to meet the company’s current
commitment, which may be acute in the future. Instead, focusing on the capacity building
should consider adding more current assets (Estopinan, 2014). The lacking of Walmart, such
as inventories shortage, poor liquidity position, should be removed.
Having an excellent financial structure with a stable debt-to-equity ratio, more than suffi-
cient and sustainable total worth, the cost of debt is 4.66%. The cost of equity is 5.14%,
Walmart is the excellent choice for investment. Downing (2016, January 29) stated that
~ 55 ~
Walmart’s current Financial Strength A++, Stock’s Price Stability 100, Price Growth Persis-
tence 45, Earnings Predictability 100. It made projections for 2018-2020 is towards high share
price 95 and low 80 high gain +50% and low +30% annual total return high 13% and down
9%. The research’s opinion is that if an investor wants to finance this company, it is recom-
mended to do so as there are progressing trends and prospects for growth. With the view of
maximizing long-term shareholder value, management is trying hard. It is well known that
long-term gains can lead to short-term declines that are happening right now. Walmart man-
agement should emphasize the long-term view and restructuring the business currently.
Walmart’s investments in employees, supply chain, and digital capabilities have been acceler-
ating. This will create higher demand for Walmart jobs which in turn save money for the long
run. Along with raising wages, investing in training its employees for ensuring more excellent
customer service is necessary. Infrastructural investment can speed up delivery to store and
reduce the expiry and perish.
7.2 Concluding Remarks

In 2020, the most successful retailers would demonstrate mastering in the dynamic mar-
ketplace and polarization by channel fragmentation, smaller footprints, non-store retail’s ac-
celerated growth, growth of the recession-trained and fixed-income shoppers, income fragmen-
tation adaptation. The retail realities would shape the winners’ success factors in a flexible,
scalable, and agile model. with a superior understanding of the customer considering income,
behavior, demographic fragmentation, ability to analyze shopper data to extract valuable in-
formation. These retailers would leverage technology shifts and turn business intelligence and
data into actionable insight. This is to grow and benefit the business, integrate these insights
into the demand chain, and enhance customer service models. They have an improved
knowledge of market fragments and growth patterns to operate and manage glocally, a concept
of working globally with attention to local needs. The leading retailers would address the chal-
lenges on store formats, return on investments, and employment models. The successful re-
tailers in 2020 would build an accurate Omnichannel operation allowing customer access on a
24/7 basis any time anywhere. Thus embodying all the factors, retailers and suppliers could
manage the complexity and diversity of retailing in the specified period (PwC, 2012). A broad
set of Information and technologies integrated with the economic and social trends that create
the future of the retail industry. Nevertheless, companies face challenges blending appropriate
business models to benefit from these technologies—anticipated that unknown technologies
can emerge to show their impact.
However, existing technologies have been combined to unlock consumer value and create
a competitive advantage. Examples of those technologies include but are not limited to loca-
tion-based applications, targeted and customized mobile promotions, mobile point-of-sale, per-
sonal shopping assistants, and radio frequency identification technology. These technologies
can create a more vital link between associates and customers. It may translate into sales
growth and satisfied customers, saving customers’ time with easier payment options using
credit cards and mobile applications. It presents facilities in increased profitability, competi-
tiveness, and business model innovation (Deloitte, 2014; Hagel III, Brown, Prepletaný, 2013;
Samoylova, Lobaugh, & Goel, 2015). Launching and defining a winning data strategy for key
business areas, mapping the right metrics to decision processes can assist retailers to achieve
product differentiation, drive conversion, personalize customer journey, and manage business
~ 56 ~
more efficiently. Gaining a more accurate and comprehensive body of data may lay the
groundwork for business success now and in the future (Howe, 2014).
Walmart Stores, Inc. is in a solvent position, and investors can buy the shares to get ex-
pected payback from their investment. It can be called a haven for them. Based on the analy-
sis, it is clear that Walmart is still dominating the retail industry in the USA and the world re-
tail sector. Although there are some inconsistencies and slowing down the company’s growth
rate and profitability for being considered at the maturity stage, it will lead the industry. Alt-
hough anticipated a slower expansion rate, Walmart has the attractiveness for offering a signif-
icant expected return and exciting opportunity over the estimated periods and forth.
~ 57 ~
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APPENDIX
Appendix 1: Retail business in the World vs. USA

Table: Retail Tax rate and important Valuation
Industry Name Aggregate Effec- After-tax Cost EV/EBITDA EV/EBIT EV/EBIT (1-t)
tive Tax Rate of Debt
World USA World USA World USA World USA World USA
Retail (Automo-
tive) 34.82% 36.68% 3.22% 2.11% 10.86 11.49 17.06 17.36 25.94 27.44
Retail (Building
Supply) 34.31% 36.60% 3.22% 2.41% 11.79 13.03 17.6 17.75 26.88 27.97
Retail (Distribu-
tors) 30.39% 34.80% 3.22% 2.41% 11.78 10.72 20 13.21 27.61 19.31
Retail (General) 32.15% 34.17% 3.22% 2.11% 8.79 7.92 16.59 13.24 24.51 20.2
Retail (Grocery
and Food) 44.29% 36.01% 3.22% 2.41% 8.38 8.78 20.2 20.34 28.68 31.44
Retail (Online) 31.62% 29.05% 3.57% 2.41% 33.14 35.07 73.08 82.85 104.13 115.16
Retail (Special
Lines) 30.63% 30.95% 3.22% 2.41% 9.67 8.81 17.66 17.19 25.79 26.05
Total Market in
Retail Industry 34.03% 34.04% 3.27% 2.32% 13.49 13.69 26.03 25.99 37.65 38.22
Total Market 27.40% 29.12% 3.22% 2.41% 12.96 14.74 21.95 24.3 29.96 34.04
Source: Aswath Damodaran (5-Jan-16)
Table: Retail Dividends, Net Income and Growth in the USA vs Global
Industry Dividends Net Income Growth in Growth in Net

Name Revenues- Income- Last
Last 5 years 5 years
World USA World USA World USA World USA
Retail (Auto- $6,070.73 $180.54 $7,410.67 $5,079.43 8.39% 8.71% 11.61 19.52
motive) % %
Retail (Buil- $4,549.12 $3,830.0 $12,076.77 $9,891.31 7.86% 6.64% 10.85 13.31
ding Supply) 0 % %
Retail (Distri- $11,685.61 $1,612.2 $24,117.32 $5,116.33 8.65% 13.29 10.31 9.47%
butors) 0 % %
Retail (Gene- $19,263.97 $9,634.2 $39,855.25 $20,367.18 5.23% 3.62% 10.44 4.90%
ral) 5 %
Retail (Gro- $8,978.55 $647.99 $5,957.88 $3,302.75 7.78% 4.17% 5.00% 9.68%
cery and
Food)
Retail (Onli- $333.71 $151.67 $4,786.79 $4,264.65 21.27 13.19 16.91 0.40%
ne) % % %
Retail (Spe- $14,066.05 $6,730.1 $43,221.63 $24,897.06 4.67% 4.65% 7.78% 8.82%
cial Lines) 6
Total Market $64,947.74 $22,786. $137,426.3 $72,918.71 9.12% 7.75% 10.41 9.44%
in Retail In- 81 1 %
dustry
~ 64 ~
Industry Dividends Net Income Growth in Growth in Net
Name Revenues- Income- Last
Last 5 years 5 years
World USA World USA World USA World USA
$1,564,895.2 $485,081 $2,990,591. $929,718.1 8.15% 10.13 9.86% 11.91

Total Market
8 .59 34 3 % %
Source: Damodaran (5-Jan-16)
Table: Retail Payout, ROE, and Fundamental Growth for the USA and Global
Payout ROE Fundamental Growth

Industry Name
World USA World USA World USA
Retail (Automoti- 81.92% 3.55% 17.45% 33.90% 3.15% 32.70%

ve)
Retail (Building 37.67% 38.72% 23.76% 45.64% 14.81% 27.97%

Supply)
Retail (Distribu- 48.45% 31.51% 6.60% 14.96% 3.40% 10.25%

tors)
Retail (General) 48.33% 47.30% 11.13% 15.15% 5.75% 7.98%
Retail (Grocery 150.70% 19.62% 3.06% 26.76% -1.55% 21.51%

and Food)
Retail (Online) 6.97% 3.56% 12.64% 15.96% 11.76% 15.40%
Retail (Special 32.54% 27.03% 15.65% 19.73% 10.56% 14.40%

Lines)
Total Market in 58.08% 24.47% 12.90% 24.59% 6.84% 18.60%

Retail Industry
Total Market 52.33% 52.18% 8.89% 10.77% 4.24% 5.15%
Table: Retail Beta valuation of the USA vs World
Std Dev in
Beta E/(D+E) Stock Tax Rate D/(D+E)
Industry
Name World USA World USA World USA World USA World USA
Retail (Au-
tomotive) 1.01 1.06 64.40% 65.29% 45.03% 46.34% 21.53% 21.18% 35.60% 34.71%
Retail (Buil-
ding Supply) 0.9 1.47 81.05% 84.22% 38.25% 50.34% 23.77% 23.18% 18.95% 15.78%
Retail (Dis-
tributors) 0.97 1.22 51.75% 62.37% 47.14% 52.36% 18.51% 16.42% 48.25% 37.63%
Retail (Gene-
ral) 1.14 1.16 66.90% 71.69% 41.44% 46.87% 23.61% 24.75% 33.10% 28.31%
Retail (Gro-
cery and
Food) 0.79 1.04 61.87% 68.08% 36.91% 51.57% 25.60% 23.56% 38.13% 31.92%
Retail (Onli-
ne) 1.43 1.58 91.60% 92.17% 61.79% 50.54% 14.62% 11.14% 8.40% 7.83%
Retail (Spe-
cial Lines) 1 1.07 74.89% 68.17% 44.06% 50.69% 22.43% 19.95% 25.11% 31.83%
~ 65 ~
Std Dev in
Beta E/(D+E) Stock Tax Rate D/(D+E)
Industry
Name World USA World USA World USA World USA World USA
Total in Re-
tail Market 1.03 1.23 70.35% 73.14% 44.95% 49.82% 21.44% 20.03% 29.65% 26.86%
Total Market 1.12 1.13 55.68% 58.31% 48.72% 51.65% 14.12% 10.95% 44.32% 41.69%
Table: Retail Cost of Equity, Debt and Capital for World vs the USA
Cost of Equity Cost of Debt Cost of Capital

Industry Name
World USA World USA World USA
Retail (Automotive) 9.80% 8.63% 4.60% 3.52% 7.46% 6.37%
Retail (Building Supply) 8.97% 11.10% 4.60% 4.02% 7.88% 9.73%
Retail (Distributors) 9.51% 9.60% 4.60% 4.02% 6.48% 6.89%
Retail (General) 10.76% 9.24% 4.60% 3.52% 8.27% 7.22%
Retail (Grocery and Food) 8.16% 8.50% 4.60% 4.02% 6.28% 6.56%
Retail (Online) 12.94% 11.72% 5.10% 4.02% 12.15% 10.99%
Retail (Special Lines) 9.71% 8.71% 4.60% 4.02% 8.08% 6.71%
Total in Retail Market 9.98% 9.64% 4.67% 3.88% 8.09% 7.78%
Total Market 10.64% 9.06% 4.60% 4.02% 7.35% 6.29%
~ 66 ~
Appendix 2: Forecasted FCF and Valuation of Walmart
Table: FCF Forecast and Valuation of Walmart from 2016-2046
Fiscal
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
year
Revenue
growth -0.73 2.00 2.30 2.57 2.81 3.03 3.23 3.41 3.57 3.71 3.84 3.95 4.06 4.15 4.24
rate, %
Revenue,
482 492 503 516 531 547 564 583 604 627 651 676 704 733 764
$B
Variable
operating
93 95 98 100 103 107 110 114 118 123 128 133 139 144
expenses,
$B
Fixed ope-
rating
382 389 397 405 413 421 430 438 447 456 465 474 484 494
expenses,
$B
Operating
Income, 24 17 19 21 25 30 36 43 52 61 72 83 96 111 126
$B
EBITDA,
34 26 27 30 34 40 46 53 62 72 83 95 108 123 139
$B
Deprecia-
tion,
amort., 9.5 8.4 8.6 8.8 9.0 9.3 9.6 9.9 10.3 10.7 11.1 11.5 12.0 12.5 13.0
depletion,
$B
Interest
expense
1.1 1.3 1.3 1.4 1.5 1.6 1.7 1.8 2.0 2.1 2.2 2.4 2.6 2.7
(income),
$B
Earnings
before tax, 21.6 16.1 17.5 20.1 23.9 28.7 34.7 41.7 49.9 59.2 69.6 81.2 94.0 108.0 123.4
$B
Tax ex-
6.6 4.8 5.2 6.0 7.2 8.6 10.4 12.5 15.0 17.7 20.9 24.4 28.2 32.4 37.0
pense, $B
Net inco-
14.7 11.2 12.2 14.1 16.7 20.1 24.3 29.2 35.0 41.4 48.7 56.8 65.8 75.6 86.4
me, $B
Funds
from ope- 29.5 19.6 20.8 22.9 25.7 29.4 33.9 39.1 45.2 52.1 59.8 68.4 77.8 88.1 99.4
rations,$B
~ 67 ~
Fiscal
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
year
Change in
working
2,117 -145 -170 -194 -218 -241 -265 -288 -312 -336 -361 -386 -412 -438 -466
capital,
$M
Cash from
opera- 27.4 19.7 21.0 23.1 26.0 29.7 34.1 39.4 45.5 52.4 60.2 68.7 78.2 88.6 99.9
tions, $B
Mainte-
nance
8.2 8.4 8.6 8.8 9.0 9.3 9.6 9.9 10.3 10.7 11.1 11.5 12.0 12.5
CAPEX,
$B
New CA-
11.5 2.4 2.7 3.1 3.5 3.9 4.3 4.7 5.0 5.4 5.8 6.2 6.6 7.1 7.5
PEX, $B
Free cash
15.9 9.1 9.9 11.4 13.7 16.7 20.6 25.2 30.5 36.7 43.7 51.4 60.0 69.5 79.8
flow, $B
Issu-
ance/(repa
4.9 2.7 3.0 3.4 3.8 4.1 4.5 4.9 5.3 5.6 6.0 6.4 6.9 7.3
yment) of
debt, $B
Total debt,
50.0 49.0 51.6 54.6 58.0 61.8 65.9 70.4 75.3 80.6 86.2 92.2 98.7 105.5 112.8
$B
Equity, $B 80.5 79.4 81.3 83.3 85.7 88.3 91.1 94.2 97.6 101.2 105.1 109.3 113.7 118.4 123.4
Cash
available
15.1 10.7 12.3 14.7 17.9 21.8 26.6 32.1 38.3 45.4 53.3 62.0 71.6 82.1
for distri-
bution, $B
Discount
4.3 4.5 4.7 5.0 5.2 5.5 5.8 6.1 6.4 6.7 7.0 7.4 7.7 8.1
rate, %
PV of cash
for distri- 14.5 9.8 10.7 12.1 13.9 15.9 17.9 20.0 22.0 23.8 25.3 26.5 27.2 27.6
bution, $B
~ 68 ~
Table: Cash Flow Forecast and Present Value Calculation
Fiscal year 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046
Revenue growth rate, % 4.31 4.38 4.44 4.50 4.55 4.59 4.64 4.67 4.70 4.73 4.76 4.78 4.81 4.83 4.84 4.86
Revenue, $B 797 832 869 908 950 993 1,039 1,088 1,139 1,193 1,250 1,309 1,372 1,439 1,508 1,582
Variable operating ex-
151 157 164 172 179 188 196 206 215 225 236 247 259 272 285 299
penses, $B
Fixed operating expen-
504 514 524 534 545 556 567 578 590 602 614 626 639 651 664 678
ses, $B
Operating Income, $B 143 161 181 202 225 250 276 304 334 366 400 436 474 515 559 605
EBITDA, $B 157 175 196 218 241 266 293 322 353 386 421 458 498 540 584 632
Depreciation, amort.,
14.6 14.2 14.8 15.5 16.2 16.9 17.7 18.5 19.4 20.3 21.3 22.3 23.4 24.5 25.7 27.0
depletion, $B
Interest expense (inco-
2.9 3.1 3.3 3.6 3.8 4.1 4.3 4.6 4.9 5.2 5.5 5.9 6.3 6.6 7.0 7.5
me), $B
Earnings before tax, $B 140 158 178 199 221 245 271 299 329 360 394 430 468 509 552 597
Tax expense, $B 42 47 53 60 66 74 81 90 99 108 118 129 140 153 166 179
Net income, $B 98 111 124 139 155 172 190 209 230 252 276 301 328 356 386 418
Funds from operations,
112 125 139 155 171 189 208 228 250 273 297 323 351 381 412 445
$m
Change in working capi- - -
-494 -524 -555 -587 -620 -654 -691 -728 -768 -809 -852 -897 -944 -993
tal, $m 1,045 1,099
Cash from operations,
112 125 140 155 172 189 208 229 250 273 298 324 352 382 413 446
$B
Maintenance CAPEX,
13.0 13.6 14.2 14.8 15.5 16.2 16.9 17.7 18.5 19.4 20.3 21.3 22.3 23.4 24.5 25.7
$B
New CAPEX, $B 8.0 8.5 8.9 9.5 10.0 10.6 11.1 11.7 12.4 13.0 13.7 14.5 15.2 16.0 16.9 17.7
Free cash flow, $B 91 103 117 131 146 163 180 199 219 241 264 288 314 342 372 403
Issuance/(repayment) of
7.7 8.2 8.7 9.2 9.7 10.2 10.8 11.4 12.0 12.6 13.3 14.0 14.7 15.5 16.3 17.2
debt, $B
Total debt, $B 121 129 137 147 156 166 177 189 201 213 227 241 255 271 287 304
Equity, $B 129 134 140 147 153 160 168 176 184 193 202 211 222 232 244 255
Cash available for dis-
94 106 119 134 149 166 184 203 223 245 268 293 319 347 377 408
tribution, $mB
Discount rate, % 8.5 8.9 9.4 9.9 10.3 10.9 11.4 12.0 12.6 13.2 13.9 14.6 15.3 16.1 16.9 17.7
PV of cash for distribu-
27.5 26.9 25.9 24.6 23.0 21.1 19.0 16.8 14.6 12.5 10.4 8.5 6.8 5.4 4.1 3.1
tion, $B
Source: X-FIN.com, 2016
~ 69 ~
Stock Valuation Input Data
Revenue (in 2016), $M 482,130
Initial revenue growth rate, % 2
Terminal revenue growth rate, % 5
Revenue decline factor 0.9
Initial discount rate, % 4.3
Discount rate multiplier 1.05
Variable cost ratio, % 18.9
Fixed operating expenses, $M 374139
Interest rate on debt, % 2.6
Corporate tax rate, % 30
Cash flow adjustment / Revenue, % 0
Production assets / Revenue, % 24.2
Life of production assets, yrs 14.2
Working capital / Revenue, % -1.5
Book value of equity, $M 80546
Shares outstanding, mln 3178.11
Market capitalization, $bln 220.6
Rating & Target str. Buy (+138%)
The End
~ 70 ~
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Financial Analysis of Retail Business Organization: A Case of Wal-Mart Stores,

Thesis · July 2016

4G service quality in Dhaka City View project

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Facultad de Ciencias Económicas y Empresariales

Curso 2015 /2016

Financial Analysis of Retail Business Organization:

TRABAJO PRESENTADO PARA OPTAR AL TÍTULO OFICIAL DE

BADAJOZ, JULIO DE 2016

I convey my humble gratitude to Dr. Juan Monterrey Mayoral, Professor, Department of

I also express my gratitude to my family members; I am especially indebted to my parents

FUNDING .................................................................................................................................................................. III

TABLE OF CONTENTS .......................................................................................................................................... V

LIST OF FIGURES ................................................................................................................................................. VI

LIST OF TABLES ................................................................................................................................................... VI

LIST OF EQUATION............................................................................................................................................. VII

ABSTRACT ............................................................................................................................................................ VIII

CHAPTER-ONE: INTRODUCTION ............................................................................................................................10

CHAPTER-TWO: THEORETICAL FRAMEWORK .................................................................................................13

2.1 OVERVIEW OF RETAILING ..................................................................................................................................... 13

CHAPTER-THREE: PRESENTATION OF WALMART ............................................................................................20

3.1 BRIEF HISTORY ...................................................................................................................................................... 20

CHAPTER-FOUR: WALMART MARKET ANALYSIS .............................................................................................22

4.1 PERFORMANCE METRICS ...................................................................................................................................... 22

6.1 CONCEPTUAL APPROACH TO VALUATION ............................................................................................................ 40

CHAPTER-SEVEN: ANALYSIS, RECOMMENDATION, AND CONCLUSION ...................................................52

7.1 FUNDAMENTAL ANALYSIS AND RECOMMENDATION ........................................................................................... 52

APPENDIX 1: RETAIL BUSINESS IN THE WORLD VS. USA ........................................................................................ 64

Key Words: Walmart, Financial Analysis, Retail Industry, Market Analysis,

Palabras Clave: Walmart, análisis financiero, la industria al por menor, aná-

Figure 1: Fundamental analysis of capital market orientation

Equation 1: Price vs. Value calculation

Figure 2: Organizational Framework of Walmart Financial Analysis

Source: Drake and Fabozzi (2012)

CHAPTER-Two: THEORETICAL FRAMEWORK

2.1 Overview of Retailing

Table 1: UK retail sector in 2014

Output Employment Businesses Employment Businesses

Source: Rhodes (2015)

Table 2: Wholesale and retail sector in the UK, 2014

Output (USD Employment Businesses Output (% of Employment Businesses (%

Source: Rhodes (2015, October 2)

“Tough economic times and emerging technologies are prompting consumers to

2.2 Retailing in the World vs. the USA

Number of CEO Holding Institutional Insider Holdings Net

Source: Damodaran (2016, January 5)

Table 4: Top 10 retailers worldwide, 2012

* Sales-weighted, currency-adjusted composites

Particulars E-commerce Sales as Share of E-commerce Y-O-Y Sales

Sectors No. of Average Share of Share of % of retail Average % of

USA National Impact % of USA Economy

Source: Marcilla (2014)

2.3 Walmart Analysis: Critics and Praise from Literature

“Every Description of Walmart is built on Superlatives: it is the world’s largest

Table 8: Walmart debt ratings by the different rating agency