INTEGRATIVE EXAMPLE: FINANCIAL ANALYSIS OF WAL-MART STORES 6

INTEGRATIVE EXAMPLE: FINANCIAL ANALYSIS OF WAL-MART STORES 6

Now that you are familiar with the concepts behind the financial ratios, we will demonstrate how to look at ratios over time and across an indus- try, using data for an actual firm that has a past (and a future). Let’s look at and analyze the financial ratios of Wal-Mart Stores. But first, we’ll take

a brief look at the business of Wal-Mart, the industry, and the economy, which we must always do to properly analyze any financial ratio.

The Business Sam Walton founded Wal-Mart Stores in 1945. Its main business is

operating discount department stores (Wal-Mart stores and Wal-Mart Supercenters) and wholesale clubs (Sam’s Clubs). By the end of 2001, Wal-Mart had 1,647 department stores, 1,066 supercenters, and 500 wholesale clubs and was the largest retailer in the United States in terms of dollar sales. It operates over 1,100 foreign stores, mostly in Canada, Mexico, and the United Kingdom. Wal-Mart leases the vast majority of its stores from developers and local governments.

Most of Wal-Mart’s new stores in the United States are super- centers, which sell grocery products in addition to general consumer goods. The grocery line of business traditionally has smaller profit mar- gins than the general consumer goods.

The Industry Wal-Mart is a discount retailer. Other discount retailers include Kmart,

Target Stores, and Costco Wholesale. Kmart was once the industry leader, but in recent years it has retrenched, closing stores and restruc- turing; in 1992, Kmart had over 4,000 stores, but in 2002 Kmart had less than 2,100. Kmart filed for bankruptcy in January 2002.

Traditionally, retailers such as Sears Roebuck and Company and J.C. Penney did not compete with the discount retailers, but in the past decade they have entered the fray, making for a very competitive retail industry. The leaders in the industry and the breakdown of the indus- try’s sales for 2001 are shown in Exhibit 22.6.

6 The sources of information used in this analysis are the companies’ annual reports for various years and Yahoo! Finance.

Financial Ratio Analysis

EXHIBIT 22.6 Retail Industry Sales, 2001

Source: Based on data obtained from Value Line Investment Survey Much of Wal-Mart’s growth in the 1970s and 1980s was at the

expense of small, local retailers. In the 1990s and beyond, Wal-Mart’s competition consists of the other behemoth retail companies; growth can no longer come from mom-and-pop stores because many of these smaller stores have gone out of existence.

Because most of these retailers have expanded as far as they can in the United States, future growth requires expansion outside of the United States or expansion into different lines of business. Wal-Mart has recently opened stores in China and Germany, though the initial success is limited.

Several retailers are shifting more of their stocked goods to private- label brands, which can provide much lower, competitive prices. Further, several retailers are focusing on operating efficiencies in warehousing, dis- tribution, and store layout, which may pay off in lowering operating costs.

A big uncertainty is whether Kmart will be able to emerge from bank- ruptcy and regain its position in the industry. It will be some time before we know whether Kmart will continue to play a role in the industry.