NYSE: WMT
WALMART STORES INC
Report created Aug 19, 2016 Page 1 OF 7
Wal-Mart is the world's largest retailer. In the fiscal year ended January 31, 2016, sales were $479 billion.
The company has three segments: Wal-Mart Stores, which accounted for about 60% of sales; Sam's Club,
a membership warehouse chain, which comprised 12% of revenue; and the International segment, which
generated 28% of sales. The company, based in Bentonville, Arkansas, ended fiscal 2016 with about
11,500 retail units in about 28 countries. Groceries are the largest produce category in the U.S. market, at
approximately 56% of sales. E-commerce sales were over $12 billion in FY16.
Argus Recommendations
Twelve Month Rating SELL HOLD BUY
Five Year Rating SELL HOLD BUY
Analyst's Notes
Sector Rating
Analysis by Christopher Graja, CFA, August 18, 2016
ARGUS RATING: HOLD
• Earnings and comp sales top consensus
• On an adjusted non-GAAP basis, WMT earned $1.07 per share in 2Q17. This was down from $1.08 in
2Q16, but above our estimate and the StreetAccount consensus of $1.02.
• Comparable sales at Wal-Mart U.S. rose 1.6%, above the StreetAccount consensus of 1.0%.
• E-commerce growth boosted Wal-Mart U.S. comps by 40 basis points in 2Q, and total e-commerce
sales rose 11.8% in constant currency.
• In the just completed 2Q17, trailing 12-month ROI declined by 70 basis points to 15.5%, while
adjusted operating income fell 5.5%. Average invested capital actually fell 1.1%. We were pleased to
see that capital stopped growing, and will be looking for continued capital discipline.
INVESTMENT THESIS
We are maintaining our HOLD rating on Wal-Mart Stores Inc. (NYSE: WMT). Our
thesis is simple: we believe that Wal-Mart must significantly improve its return on invested
capital to become a multiyear outperformer.
Home Depot provides a useful road map for potential improvement at WMT. Based on
Bloomberg data, Wal-Mart ended FY11 with an ROIC of 14.6% and FY16 with an ROIC
of 12.5%. By contrast, Home Depot ended FY11 with an ROIC of 12.8% -- about 180
basis points lower than WMT - but ended FY16 with an ROIC of 26.9%, more than twice
as high as WMT.
Over the last five years, the S&P 500 has delivered an annualized return of 13.3%.
Wal-Mart has underperformed, with an annualized return of 9.5%. By contrast, HD has
nearly tripled the return of the index, with an annualized return of more than 34%. (We
did not tinker with the date range: we simply used the Bloomberg comparative returns
screen as it is configured.)
It is hard to be confident of many things on Wall Street, but we are confident that
WMT will outperform if it can consistently boost ROIC.
Market Data
Pricing reflects previous trading week's closing price.
200-Day Moving Average
52 Week High: $75.19
52 Week Low: $70.89
Closed at $71.14 on 8/26
Price
($)
70
60
Rating
BUY
HOLD
SELL
Key Statistics pricing data reflects previous trading day's closing
price. Other applicable data are trailing 12-months unless
otherwise specified
Market Overview
Price
Target Price
52 Week Price Range
Shares Outstanding
Dividend
$74.30
-$56.30 to $75.19
3.12 Billion
$2.00
Sector Overview
Sector
Sector Rating
Total % of S&P 500 Market Cap.
Consumer Staples
MARKET WEIGHT
10.00%
Financial Strength
Financial Strength Rating
Debt/Capital Ratio
Return on Equity
Net Margin
Payout Ratio
Current Ratio
Revenue
After-Tax Income
MEDIUM-HIGH
35.7%
16.9%
3.0%
0.45
0.93
$483.83 Billion
$14.73 Billion
($)
1.10
1.21
1.15
1.53
1.03
4.99
Annual
1.08
1.03
1.43
0.98
4.57
17.08
16.89
0.48
3.03
$24.55
$231.57 Billion
Forecasted Growth
EPS
1.21
0.94
1.28
4.40 ( Estimate)
0.96
1.15
0.92
1.33
4.35 ( Estimate)
Revenue
1 Year EPS Growth Forecast
-3.72%
5 Year EPS Growth Forecast
2.00%
1 Year Dividend Growth Forecast
2.04%
Risk
($ in Bil.)
115.0
120.1 119.0
485.7
131.6
114.8
120.2 117.4
482.1
129.7
115.9
Q1
Q2
Q3
2015
Q4
Q1
Q2
Q3
2016
Q4
Q1
Annual
FY ends
Jan 31
Key Statistics
Current FY P/E
Prior FY P/E
Price/Sales
Price/Book
Book Value/Share
Market Capitalization
80
Quarterly
Argus assigns a 12-month BUY, HOLD, or SELL rating to each
stock under coverage.
• BUY-rated stocks are expected to outperform the market (the
benchmark S&P 500 Index) on a risk-adjusted basis over the
next year.
• HOLD-rated stocks are expected to perform in line with the
market.
• SELL-rated stocks are expected to underperform the market
on a risk-adjusted basis.
The distribution of ratings across Argus' entire company
universe is: 47% Buy, 47% Hold, 6% Sell.
Valuation
90
Quarterly
Under Market Over
Weight Weight Weight
120.9 118.6 131.0
486.3 ( Estimate)
Q2
Q3
2017
Q4
119.4
Q1
124.5 122.1 134.9
500.9 ( Estimate)
Q2
Q3
2018
Beta
Institutional Ownership
0.70
29.29%
Q4
Please see important information about this report on page 7
©2016 Argus Research Company
Argus Analyst Report
NYSE: WMT
WALMART STORES INC
Report created Aug 19, 2016 Page 2 OF 7
Analyst's Notes...Continued
What exactly does WMT have to do? Very simply, the retail
giant has to grow income faster than sales and sales faster than its
capital base. The implication is that it is not enough to simply
boost earnings by opening more mildly profitable stores or to boost
comp sales by stuffing stores with more inventory.
Since the end of FY11, WMT has increased square footage by
17%. During this period, sales have declined to $422 per square
foot from $435, and EBIT has declined to $21 per square foot from
$26, according to Bloomberg data.
Meanwhile, HD has increased square footage by just 1% over
the same period. But HD sales have increased to $374 per square
foot from $289, and EBIT has doubled from $25 per square foot to
$50.
Our intent isn't to be judgmental. We simply want to show that
megacap retailers have the potential to outperform if they follow
the HD roadmap, and get operating and capital efficiency on track.
We thus believe that WMT has a significant opportunity to
improve. However, rather than speculate on whether this will
actually occur, we want to see tangible results.
In the just completed 2Q17, trailing 12-month ROI declined by
70 basis points to 15.5%, while adjusted operating income fell by
5.5%. Average invested capital actually fell 1.1%. We were pleased
to see that capital stopped growing, and will be looking for
continued capital discipline. On the income side, WMT's success in
driving traffic and comp sales in 1H were certainly positives.
We are optimistic about the company's new plan to invest more
in its staff. Based on the stores we visit, the company has a
significant opportunity - and need - to provide better in-store
service, have the shelves better stocked, and have faster checkout
times. The challenge for management will be to make sure that a
better shopping experience translates into attractive returns on
incremental investments. To his credit, the new head of the U.S.
stores has made it a priority to fix 'the basics.'
We are also pleased by the company's recent plan to close
stores. We want to see management more focused on the
productivity of the U.S. big-box stores. While the closings are an
encouraging step, we believe that they represent only about 1% of
sales.
In the event of an upgrade, WMT might make most sense for
income-oriented equity portfolios. WMT has a dividend yield of
2.8% and we expect continued slow growth in the quarterly
payout. On the negative side, we remain concerned that it will be
hard to raise margins in a world where Amazon seems obsessed
with lowering prices to gain market share. That said, Kroger has
thrived by offsetting lower gross margins with greater efficiency,
suggesting that there is a similar opportunity for WMT.
RECENT DEVELOPMENTS
On August 18, Wal-Mart reported second-quarter GAAP
earnings from continuing operations of $1.21 per share, which
includes a $0.14 per share gain on the sale of Yihaodian, a Chinese
e-commerce site.
Growth & Valuation Analysis
GROWTH ANALYSIS
($ in Millions, except per share data)
Revenue
COGS
Gross Profit
SG&A
R&D
Operating Income
Interest Expense
Pretax Income
Income Taxes
Tax Rate (%)
Net Income
Diluted Shares Outstanding
EPS
Dividend
GROWTH RATES (%)
Revenue
Operating Income
Net Income
EPS
Dividend
Sustainable Growth Rate
VALUATION ANALYSIS
Price: High
Price: Low
Price/Sales: High-Low
P/E: High-Low
Price/Cash Flow: High-Low
Financial & Risk Analysis
2012
446,509
334,993
111,516
85,025
—
26,491
2,159
24,332
7,924
33
15,699
3,474
4.52
1.46
2013
468,651
352,297
116,354
88,629
—
27,725
2,063
25,662
7,958
31
16,999
3,389
5.02
1.59
2014
476,294
358,069
118,225
91,353
—
26,872
2,216
24,656
8,105
33
16,022
3,283
4.88
1.88
2015
485,651
365,086
120,565
93,418
—
27,147
2,348
24,799
7,985
32
16,363
3,243
5.05
1.92
2016
482,130
360,984
121,146
97,041
—
24,105
2,467
21,638
6,558
30
14,694
3,217
4.57
1.96
5.8
3.7
-4.2
8.4
20.7
16.0
5.0
4.7
8.3
10.6
8.9
15.2
1.6
-3.1
-5.7
-3.2
18.2
12.5
2.0
1.0
2.1
2.9
2.1
11.1
-0.7
-11.2
-10.2
-8.4
2.1
12.8
$77.60
$57.18
0.6 - 0.4
17.2 - 12.7
9.7 - 7.2
$81.37
$67.72
0.6 - 0.5
16.2 - 13.5
11.7 - 9.7
$88.09
$72.27
0.6 - 0.5
18.1 - 14.8
11.3 - 9.2
$90.97
$56.30
0.6 - 0.4
18.0 - 11.1
10.5 - 6.5
—
—
—-—
—-—
—-—
FINANCIAL STRENGTH
2014
2015
2016
Cash ($ in Millions)
7,281 9,135 8,705
Working Capital ($ in Millions) -8,160 -1,975 -4,380
Current Ratio
0.88
0.97
0.93
LT Debt/Equity Ratio (%)
58.4
53.4
54.7
Total Debt/Equity Ratio (%)
74.3
61.6
62.1
RATIOS (%)
Gross Profit Margin
Operating Margin
Net Margin
Return On Assets
Return On Equity
24.8
5.6
3.4
7.9
21.0
24.8
5.6
3.4
8.0
20.8
25.1
5.0
3.0
7.3
18.1
RISK ANALYSIS
Cash Cycle (days)
Cash Flow/Cap Ex
Oper. Income/Int. Exp. (ratio)
Payout Ratio
11.9
—
11.6
27.1
12.1
—
11.1
40.2
11.1
—
9.5
41.8
The data contained on this page of this report has been
provided by Morningstar, Inc. (© 2016 Morningstar, Inc.
All Rights Reserved). This data (1) is proprietary to
Morningstar and/or its content providers; (2) may not be
copied or distributed; and (3) is not warranted to be
accurate, complete or timely. Neither Morningstar nor its
content providers are responsible for any damages or
losses arising from any use of this information. Past
performance is no guarantee of future results. This data
is set forth herein for historical reference only and is not
necessarily used in Argus’ analysis of the stock set forth
on this page of this report or any other stock or other
security. All earnings figures are in GAAP.
Please see important information about this report on page 7
©2016 Argus Research Company
Argus Analyst Report
NYSE: WMT
WALMART STORES INC
Report created Aug 19, 2016 Page 3 OF 7
Analyst's Notes...Continued
On an adjusted, non-GAAP basis, WMT earned $1.07 per share
in 2Q17, which was down from $1.08 in 2Q16, but above our
estimate and the StreetAccount consensus of $1.02.
WMT provided 3Q17 adjusted EPS guidance of $0.90-$1.00,
compared to $1.03 in the third quarter of last year and a prerelease
consensus of $0.93. Our prerelease estimate had been $0.91.
The company provided full-year adjusted EPS guidance of
$4.15-$4.35, up from a prior $4.00-$4.30. The prerelease
consensus was $4.26. There are two items in the adjusted guidance
that are not strictly comparable. First, the guidance now includes
$0.05 per share in 4Q costs related to the planned acquisition of
Jet.com (assuming that the deal closes at the beginning of 4Q).
Second, management now expects the full-year tax rate to be at the
low end of its previous forecast.
In the second quarter, comparable sales at Wal-Mart U.S. were
up 1.6%. This was above the StreetAccount consensus, which
called for comparable growth of 1.0%.
CEO Doug McMillon said that customer satisfaction scores are
increasing and that the U.S. Stores team is doing a better job of
managing inventories. He cited this as a driver for seven
consecutive quarters of comparable traffic increases in the U.S.
division.
Same-store sales at Sam's Club were up 0.6%, excluding fuel.
The StreetAccount consensus called for a 0.1% decrease. Sales of
fresh foods were down due to deflation, and sales in the consumer
electronics department were hurt by weak sales of televisions.
Total revenue of $120.9 billion (which includes membership
fees) rose 0.5%. This was below our estimate of $121.4 billion but
above the StreetAccount consensus of $120.2 billion. Membership
fees and other fees increased 61% to $1.44 billion and were above
our estimate of $917 million. Excluding the $535 million gain on
the sale of Yihaodian, 'fees and other' were $914 million, which
basically matched our estimate.
Comparable traffic was up 1.2% and the average ticket was up
0.4% at Wal-Mart U.S. E-commerce growth helped Wal-Mart U.S.
comps by 40 basis points in the second quarter. Total 2Q
e-commerce sales rose 11.8% on a constant-currency basis, though
management would like them to grow faster.
Management expects 3Q17 comps at U.S. Wal-Mart stores to
be up 1.0%-1.5%.
Sam's Club posted a 0.4% decline in comp traffic and a 1%
increase in the average ticket, despite deflation. Management
seemed pleased with the division's online performance. For 3Q,
Sam's expects comparable sales (excluding fuel) to be slightly
higher.
Full-company operating income of $6.17 billion was up 1.6%
in 2Q on a GAAP basis. Excluding the gain on Yihaodian,
operating income fell 7.2% to $5.6 billion, still above our estimate
of $5.4 billion.
The adjusted operating margin was 4.66% versus 5.05% a year
earlier. Our estimate was 4.43% and the StreetAccount consensus
was 4.6%. Operating expenses rose 53 basis points on higher
Peer & Industry Analysis
Ticker Company
WMT Wal-Mart Stores Inc
COST Costco Wholesale Corp
Peer Average
Growth
COST
30
P/E
WMT vs.
Market
WMT vs.
Sector
More Value
More Growth
Price/Sales
WMT vs.
Market
WMT vs.
Sector
25
More Value
More Growth
Price/Book
WMT vs.
Market
WMT vs.
Sector
20
WMT
P/E
The graphics in this section are designed to
allow investors to compare WMT versus its
industry peers, the broader sector, and the
market as a whole, as defined by the Argus
Universe of Coverage.
• The scatterplot shows how WMT stacks
up versus its peers on two key
characteristics: long-term growth and
value. In general, companies in the lower
left-hand corner are more value-oriented,
while those in the upper right-hand corner
are more growth-oriented.
• The table builds on the scatterplot by
displaying more financial information.
• The bar charts on the right take the
analysis two steps further, by broadening
the comparison groups into the sector
level and the market as a whole. This tool
is designed to help investors understand
how WMT
might fit into or modify a
diversified portfolio.
Value
5
5-yr Growth Rate(%)
Market Cap
($ in Millions)
231,567
73,485
152,526
5-yr
Growth
Rate (%)
2.0
12.0
7.0
Current
FY P/E
16.9
31.4
24.1
Net
Margin
(%)
3.0
2.0
2.5
More Value
More Growth
More Value
More Growth
PEG
10
1-yr EPS
Growth
(%)
-1.1
13.1
6.0
Argus
Rating
HOLD
BUY
WMT vs.
Market
WMT vs.
Sector
5 Year Growth
WMT vs.
Market
WMT vs.
Sector
More Value
More Growth
Debt/Capital
WMT vs.
Market
WMT vs.
Sector
More Value
More Growth
Please see important information about this report on page 7
©2016 Argus Research Company
Argus Analyst Report
NYSE: WMT
WALMART STORES INC
Report created Aug 19, 2016 Page 4 OF 7
Analyst's Notes...Continued
compensation and technology spending.
Sales (not including membership fees) rose 0.1% for the quarter,
to $119.4 billion. Our estimate was $120.5 billion.
Without the currency impact, total revenue would have
increased 2.8%. International sales decreased 6.6%, to $28.6
billion, but were up 2.2% in constant currency. Comp sales were
positive in Mexico, Canada and Brazil. They decreased slightly in
China. U.K. comps were down 7.5% on a 6.0% decline in traffic.
We believe the issue hurting the U.K business is fierce competition.
Total company gross margin increased by 53 basis points, to
25.06%. Our estimate was 24.2%. The StreetAccount consensus
was 25%. The gross margin in U.S. stores rose 33 basis points,
with improvements in food, consumables and healthcare products.
WMT is seeing some benefit from acquiring products at lower
prices.
As a percentage of sales, selling, general and administrative
expenses matched our estimate of 20.5%. On a year-over-year
basis, they were 30 basis points higher as a percentage of sales.
Excluding the revenue benefit of the Yihaodian sale, SG&A would
have been approximately 20.9%. The StreetAccount consensus was
20.8%. Digging a bit deeper, we note that the expense rate for U.S.
stores rose 90 basis points, primarily due to store investments and
wage increases that were implemented in February. Net interest
expense was $566 million, just below our forecast of $570 million.
Cash flow from operations was $14.9 billion in 1H17 versus
$10.1 billion in the prior-year period. A major factor was that
WMT's inventories were a source of cash in 1H17 rather than a
use of cash, as they were in 1H16.
The trailing 12-month return on capital declined to 15.5% in
2Q17 from 16.2% in the prior-year period. This downtick was the
result of a 5.5% decrease in operating income. Average invested
capital was actually down 1.1%. While this is hardly a significant
move, we will be watching to see if WMT can grow earnings by
making existing stores more productive, as Home Depot has done
so effectively. WMT's return on capital has fallen significantly from
18.1% in FY13.
EARNINGS & GROWTH ANALYSIS
We are raising our FY17 EPS estimate to $4.40 from $4.15,
with five cents of this change coming from the better-than-expected
2Q earnings on an apples-to-apples basis. Another fourteen cents
reflects the gain on the sale of Yihaodian. The remainder of the
increase comes from a slightly lower tax rate and our expectations
for slightly higher comp sales. The company's GAAP guidance is
now $4.29-$4.49. Our 3Q estimate is $0.94. The company's 3Q
guidance is $0.90-$1.00.
We are raising our FY18 EPS estimate to $4.35 from $4.25,
primarily reflecting a small increase in our sales forecast. This does
not assume a repeat of the $0.14 per share gain on the Yihaodian
sale.
Our five-year earnings growth rate estimate is 2%. We expect
FY19 EPS to be approximately flat with FY16, and are modeling
approximately 5% EPS growth in both FY20 and FY21, to about
$5.00.
FINANCIAL STRENGTH & DIVIDEND
Our financial strength rating for Wal-Mart remains
Medium-High, the second-highest rank on our five-point scale. The
credit agencies give the company ratings in the AAs, and outlooks
are stable. The company's commercial paper ratings are top tier,
A1/P1. We believe this is a real advantage at times when the credit
market is jittery, although we don't think Wal-Mart is likely to
have any difficulty borrowing money.
WMT had $7.7 billion in cash and equivalents on the balance
sheet at the end of the second quarter. Total debt/capital was about
38%, which is in line with the company's target.
WMT's market position, earnings stability and real estate
ownership are all very solid even allowing for a couple of difficult
years. Moreover, we think the company's sales of food and
medicine, which tend to depress margins, add to earnings stability
as well as inventory turnover and store traffic. In our opinion, it
might be difficult for a competitor to topple a low-cost,
high-volume retailer like WMT or Costco because it is so hard to
get the inventory management and logistics right. It also takes
considerable capital to build the necessary computer systems,
distribution centers, transportation and stores. Margins are a bit
lower than we would normally look for in a company with a High
financial strength rating, and WMT's debt is not exceptionally low.
Wal-Mart owns about 86% of its domestic discount stores,
supercenters and neighborhood markets and 85% of Sam's Clubs
locations. This is a high percentage relative to many other retailers
we follow. In some additional cases, WMT owns the building and
leases the land. The company has a combination of owned and
leased properties outside the U.S. We believe that approximately
one-third of those properties are owned.
The balance sheet lists the value of property and equipment at
about $109 billion net of depreciation, down from $113 billion a
year earlier. We believe that about 70% of the pre-depreciation
value is in land and buildings.
Treating operating leases as debt, we estimate that the present
value of leases at about $12.5 billion, which puts adjusted debt at
approximately 43% of capital, which is slightly below average for
retailers we follow. We estimate that lease-adjusted debt was about
2-times EBIT plus depreciation and rent at the end of FY12 and
FY13. It was about 1.9-times in FY11. This is a very solid level
relative to other retailers we follow. Adjusted debt was
approximately 2.1-times in FY14 and 1.8-times in FY15 and FY16.
We believe that investors are going to hold management's feet
to the fire to make sure that the company uses its capital as
productively as possible. Trailing ROI was 15.5% in FY16, 16.9%
in FY15, 17% in FY14, 18.1% in FY13, 18.6% in FY12 and
19.2% in FY11.
The company paid dividends of $0.95 in FY09 and $1.09 in
FY10. WMT raised the quarterly dividend to $0.3025 per share
from $0.2725 in March. Dividend payments totaled $1.21 per
share in FY11, $1.46 in FY12, $1.59 in FY13, $1.88 in FY14,
$1.92 in FY15 and $1.96 in FY16. In the 4Q release, the company
announced a dividend increase to $2.00 for FY17. We are
maintaining our FY17 estimate at $2.00. According to
management, Wal-Mart has increased its payout every year since it
first declared a dividend in 1974. We expect a very small dividend
increase in FY18, to $2.04 per share.
The company repurchased about $7.3 billion of its stock in
FY10, $14.8 billion in FY11, and $6.3 billion in FY12. In FY13, it
repurchased $7.6 billion. WMT repurchased $6.7 billion of its
stock in FY14, $1 billion in FY15, and $4.1 billion in FY16. WMT
recently authorized a new $20 billion repurchase plan that it
expects to complete in two years. At the end of 2Q17, the company
had a remaining authorization of $12.6 billion.
Please see important information about this report on page 7
©2016 Argus Research Company
Argus Analyst Report
NYSE: WMT
WALMART STORES INC
Report created Aug 19, 2016 Page 5 OF 7
Analyst's Notes...Continued
MANAGEMENT & RISKS
Even Wal-Mart faces intense competition from Amazon and
online retailers. This is especially true in categories like
entertainment and electronics. But Wal-Mart's size, distribution
capabilities, focus on low prices and emphasis on food and other
low-margin consumer product leave it better positioned than most
retailers.
In late June 2010, Bill Simon became president and CEO of
Wal-Mart U.S. He had a number of accomplishments at the
company, including the $4 generic program. In July of calendar
2014, Mr. Simon was replaced by Greg Foran who had been
President and CEO of Wal-Mart Asia. Mr. Foran seems to be
devoting a lot of attention to 'Shopkeeping 101,' or the very basics
of running a retail store, which we commend.
Over the last few years, Wal-Mart has made a significant effort
to improve its image in the U.S., which was somewhat marred by
the allegations of bribery in Mexico that were published by the
New York Times. Then CEO Mike Duke said that the company
was working to determine what happened and would take
aggressive action if violations of the law or company policies
occurred. The company is also aware of allegations related to
violations of the Foreign Corrupt Practices that may have occurred
in Brazil, China and India. WMT incurred $157 million of costs in
FY13 and $282 million in FCPA expenses in FY14 and $173
million in FY15. Management does not believe that the issue will
have a material adverse impact on the business. Materiality is
obviously a high bar for a company with over $480 billion in
annual sales, $8 billion of cash, and $200 billion of assets.
Doug McMillon recently replaced Mr. Duke as CEO. Mr.
McMillon started as an hourly associate in 1984 and has since
served as CEO of Sam's and the International business.
We believe that the company's response to natural disasters, the
initiative to cut medicine prices, programs to be more
environmentally conscious, the settlement of class-action lawsuits,
and a new plan to hire military veterans are all steps toward
improving the company's image. WMT also took a very active role
following the earthquake and tsunami in Japan. Wal-Mart has
taken very visible steps to improve healthcare for its employees and
to become more environmentally friendly. The recent initiative to
increase training and wages should also help.
We believe that the banking and financial crisis probably
improved WMT's image. The company has created jobs as other
companies fired workers and it continued to grow as financial
firms went bankrupt or required billions in public money.
The company is involved in a range of litigation including
various suits that allege unfair treatment of female employees.
These issues are discussed in the annual report.
As the company continues to expand, market saturation and
ongoing cannibalization within and among Wal-Mart's various
formats in its main U.S. market pose significant risks. Management
has noted that it would rather split sales among its own formats
than cede them to competitors. We have previously been critical of
the company's store environment, which can be cluttered. It
appears that customers liked the stores with less merchandise in the
aisles, but they don't necessarily buy more. We still believe that
WMT as a whole has room to improve if it is to reach the level of
in-store execution as the Target stores we visit. Several years ago
we walked a store with Blake Nordstrom. He was very quick to
recognize that the competition is no longer made up of just
immediate brick-and-mortar peers. Shoppers compare any
experience with that available from a range of best-in-class
companies. For Wal-Mart, these may include, Amazon, Zappos,
L.L. Bean and Whole Foods.
A risk related to international expansion is that the company
may not be embraced warmly in some overseas markets; it may
also have to deal with unfamiliar regulations and is likely to face
volatile currency fluctuations. We believe that there is also a risk
that the company may not be able to gain the scope to maximize
profits in some markets. The counter point is that everyone likes to
save money and WMT has the potential to use its buying power
and logistical expertise to offer low prices on items that are
relevant and desired in markets outside the U.S.
Currency fluctuation is an ongoing risk. A strong dollar hurts
earnings as foreign profits are translated into fewer dollars. A weak
dollar might be a bigger long-term threat because it could cost
Wal-Mart more to purchase the large number of items it imports
from Asia.
The economy is a risk for all retailers because of their sensitivity
to changes in consumer discretionary spending. Wal-Mart has often
been somewhat insulated from downturns in consumer spending,
given its low-price leader status and the growing number of food
items that it sells. However, the discounters have been hit harder by
price hikes for gasoline and other commodities, which
disproportionately affect the discretionary income of lower-income
consumers. Deflation can also be a challenge as it can reduce unit
revenue on selected products such as groceries.
An additional risk is that management may simply stumble in
executing one or more of its various strategies, from real-estate
acquisition to cost control, product mix and employment practices.
Despite a range of risk factors, we don't think Wal-Mart is
affected by a very important risk for retailers - irrelevance. A great
many retailers could easily be replaced or vanish completely, but
we believe that there is a need for Wal-Mart. It plays an important
role in the economy. Its buying power, inventory management and
logistical prowess represent a real barrier to entry.
The Walton family controls approximately half of the
company's outstanding shares.
COMPANY DESCRIPTION
Wal-Mart is the world's largest retailer. In the fiscal year ended
January 31, 2016, sales were $479 billion. The company has three
segments: Wal-Mart Stores, which accounted for about 60% of
sales; Sam's Club, a membership warehouse chain, which
comprised 12% of revenue; and the International segment, which
generated 28% of sales. The company, based in Bentonville,
Arkansas, ended fiscal 2016 with about 11,500 retail units in
about 28 countries. Groceries are the largest produce category in
the U.S. market, at approximately 56% of sales. E-commerce sales
were over $12 billion in FY16.
VALUATION
Over the last year, Wal-Mart shares have returned about 10%.
The shares are currently trading at about 17-times our FY17 EPS
forecast and 17-times our FY18 forecast.
The current-year multiple is just below the S&P 500's multiple
of 18-times our current-year estimate. We believe this is reasonable.
Wal-Mart is a mature business and is facing earnings pressure as it
raises employee wages and invests in e-commerce capabilities. The
company still has a strong balance sheet and solid cash flow
Please see important information about this report on page 7
©2016 Argus Research Company
Argus Analyst Report
NYSE: WMT
WALMART STORES INC
Report created Aug 19, 2016 Page 6 OF 7
Analyst's Notes...Continued
generation. On a relative trailing basis, WMT is trading at a 15%
discount to the S&P 500's trailing multiple, which is slightly deeper
than the five-year average of a 10% discount. We believe that the
company will need to improve ROI and comparable sales to see
higher multiples on an absolute and relative basis.
WMT trades at a forward-four-quarter P/E of 17, which is
below the median of 19 for its mass-merchant peers. We believe
that the company's financial strength argues for a premium
multiple, but a soft earnings outlook suggests a discount until the
market sees an inflection point. The company's consensus growth
rate, which has recently declined to 3% from 6% is now well
below the group median of about 11%.WMT has raised its
dividend every year since it initiated a payout in 1974. Over the
last five years, the company has raised the dividend at an annual
rate of 8%, but we expect slower growth over the next few years.
WMT's indicated dividend yield is 2.7%. We believe this is
attractive at a premium to the 10-year Treasury yield.
Based on a simple discounted earnings model that assumes
earnings of $5 per share in 4.5 years (helped by share repurchases)
and that the shares trade at a terminal multiple of 18, the shares
would be worth about $65, which is slightly below the current
stock price. We're using a discount rate of 8%. The terminal
multiple is slightly above the five-year average of approximately
15-times on a trailing basis because the company should be
emerging from the downturn we expect over the next few years.
WMT shares trade at an enterprise value of about 11.5-times
trailing EBIT, versus a five-year average of 10.5. The range for the
period is 9-to 13-times. We think the current multiple is fair given
WMT's market position, financial strength, and earnings
challenges. Based on WMT's financial strength, it could move
higher, though it will likely be constrained until earnings growth
accelerates.
In a future note, we will dig deeper into the company's levers
for making its capital more productive and increasing shareholder
value.
On August 18, HOLD-rated WMT closed at $74.30, up $1.37.
Please see important information about this report on page 7
©2016 Argus Research Company
Argus Analyst Report
NYSE: WMT
METHODOLOGY & DISCLAIMERS
Report created Aug 19, 2016 Page 7 OF 7
About Argus
Argus Research, founded by Economist Harold Dorsey in 1934,
has built a top-down, fundamental system that is used by Argus
analysts. This six-point system includes Industry Analysis, Growth
Analysis, Financial Strength Analysis, Management Assessment,
Risk Analysis and Valuation Analysis.
Utilizing forecasts from Argus’ Economist, the Industry Analysis
identifies industries expected to perform well over the next
one-to-two years.
The Growth Analysis generates proprietary estimates for
companies under coverage.
In the Financial Strength Analysis, analysts study ratios to
understand profitability, liquidity and capital structure.
During the Management Assessment, analysts meet with and
familiarize themselves with the processes of corporate management
teams.
Quantitative trends and qualitative threats are assessed under
the Risk Analysis.
And finally, Argus’ Valuation Analysis model integrates a
historical ratio matrix, discounted cash flow modeling, and peer
comparison.
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Argus uses three ratings for stocks: BUY, HOLD, and SELL.
Stocks are rated relative to a benchmark, the S&P 500.
• A BUY-rated stock is expected to outperform the S&P 500 on
a risk-adjusted basis over a 12-month period. To make this
determination, Argus Analysts set target prices, use beta as the
measure of risk, and compare expected risk-adjusted stock
returns to the S&P 500 forecasts set by the Argus Market
Strategist.
• A HOLD-rated stock is expected to perform in line with the
S&P 500.
• A SELL-rated stock is expected to underperform the S&P 500.
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Argus Analyst Report