PROFITABILITY AND RISK ANALYSIS OF WAL-MART STORES
Part A
Wal-Mart Stores (Walmart) is the world's largest retailer. It employs an "everyday low price" strategy and operates stores as three business segments: Wal-Mart Stores U.S., International, and Sam's Club.
1. Wal-Mart Stores U.S.: This segment represented 63.7 percent of all 2008 sales and oper- ates stores in three different formats: Discount stores (approximately 108,000 square feet), Supercenters (approximately 186,000 square feet), and Neighborhood Markets (approximately 42,000 square feet). Each format carries a variety of clothing, house- wares, electronic equipment, pharmaceuticals, health and beauty products, sporting goods, and similar items, and Supercenters including a full-line supermarket.40 Wal- Mart U.S. Stores are in all 50 states, Discount stores are in 47 states, Supercenters are in 48 states, and Neighborhood Markets are in 16 states. Customers also can purchase many items through the company's website at https://www.walmart.com.
2. International: The International segment includes wholly owned subsidiaries in Argentina, Brazil, Canada, Japan, Puerto Rico, and the United Kingdom; majority- owned subsidiaries in five countries in Central America, Chile, and Mexico; and joint ventures in India and China. The merchandising strategy for the International segment is similar to that of the Walmart U.S. segment.
3. Sam's Clubs: Sam's Clubs are membership club warehouses that operate in 48 states. The average Sam's Club is approximately 133,000 square feet, and customers can purchase many items through the company's website at https://www.samsclub.com. These ware- houses offer bulk displays of brand name merchandise, including hardgoods, some softgoods, institutional-size grocery items, and certain private-label items. Gross mar- gins for Sam's Clubs stores are lower than those of the U.S. and International segments.
Walmart uses centralized purchasing through its home office for substantially all of its merchandise. It distributes products to its stores through regional distribution centers. During fiscal 2008, the proportion of merchandise channeled through its regional distribu- tion centers was as follows:
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Walmart Stores, Supercenters, and Neighborhood Markets
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81%
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Sam's Club (non-fuel)
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65%
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International
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74%
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Exhibit 4.48 sets out various operating data for Walmart for its most recent three years. Exhibit 4.49 presents segment data. Exhibit 4.50 presents comparative balance sheets for Walmart for 2005-2008 (an extra year to enable average balance computations when nec- essary), Exhibit 4.51 (see page 338) presents comparative income statements for 2006-2008, and Exhibit 4.52 (see page 339) presents comparative statements of cash flows for 2006-2008. Exhibit 4.53 (see page 340) presents selected financial statement ratios for Walmart for 2006-2008. The statutory income tax rate is 35 percent.
Required
a. What are the likely reasons for the changes in Walmart's rate of ROA during the three-year period? Analyze the financial ratios to the maximum depth possible.
b. What are the likely reasons for the changes in Walmart's rate of ROCE during the three-year period?
Note: Parts c and d require coverage of material from Chapter 5.
c. How has the short-term liquidity risk of Walmart changed during the three-year period?
d. How has the long-term solvency risk of Walmart changed during the three-year period?
Text Book: Financial Reporting, Financial Statement Analysis and Valuation: A Strategic Perspective By James Wahlen, Stephen Baginski, Mark Bradshaw.