Wal-Mart Reaches Beyond Low Prices

10/4/2010


  Recent Price
$54
  Dividend
$1.21
  Yield

2.2%

  P/E Ratio
14
  Shares (millions)
3,707
  Long-Term Debt as % of Capital
37%
  52-Week Price Range
$56.27 - $47.77

Last year Wal-Mart Stores ($54; WMT) commanded a 25% share of the U.S. supermarket industry and about 8% of the entire domestic retail market. It generated sales of $417 billion over the past four quarters, 32% more than the second-biggest U.S. company, oil giant Exxon Mobil ($62; XOM). During that same stretch, Wal-Mart grew free cash flow 46% to $10 billion, more than about 60% of companies in the S&P 500 Index generated in revenue.

Wal-Mart attained its colossal size using low prices to gain market share. During the downturn, Wal-Mart stuck with that strategy, deploying a series of aggressive price cuts for everything from bananas to books to electronics to draw in new customers who might buy something in addition to the promoted items.

But price reductions are no longer generating incremental sales growth. U.S. Wal-Mart stores (63% of sales in the last four quarters) posted sales growth of less than 1% in the first half of fiscal 2011, while Sam’s Club (12%) grew just 3%. The discounter hopes to offset weak sales by finding new ways to curb costs, such as combining shipments so trucks carry full loads. But for lasting growth, Wal-Mart will rely on more than low prices — namely a broader product mix and a presence in emerging markets. Wal-Mart, yielding 2.2%, is a Long-Term Buy.

New products, new markets

In fiscal 2010 ended January, 51% of Wal-Mart’s sales were groceries, followed by 14% entertainment, 11% hardlines (including crafts, books, automotive products, hardware, and sporting goods), 10% apparel, and 10% health. These nongrocery products have become a focus for Wal-Mart. The retailer has introduced a cell-phone plan under its own brand that features low-cost phones without contracts. Other efforts include expansion into electronic medical records, mail-order drugs, used video games, and even caskets and urns.

Wal-Mart operates in 15 foreign countries. The international business (25% of company sales) has performed better than its domestic counterpart, generating sales growth of 16% in the six months ended July, lifted by strength in Mexico and expansion in Brazil and China. In June, Wal-Mart bought a U.K. discount supermarket for $1.13 billion. In September, Wal-Mart bid about $4.6 billion for Massmart Holdings, a discount retailer with 290 stores in 13 African countries. Wal-Mart also operates a joint venture in India with Bharti Enterprises. Together, the partners plan to open 10 to 15 outlets in India, a retail market worth at least $300 billion.

Conclusion

Despite weak U.S. sales, Wal-Mart raised its fiscal 2011 guidance in August, now projecting per-share profits of $3.95 to $4.05, implying growth of 8% to 11%. The company returns plenty of its profits to shareholders through dividends and share buybacks. Annualized dividend growth (16%) has outpaced per-share profits (9%) over the last five years. The share count fell 5% in the last year, and Wal-Mart is chewing through a $15 billion repurchase program. An annual report for Wal-Mart Stores Inc. is available at 702 S.W. 8th St., Bentonville, AR 72716; (479) 273-4000; www.walmart.com.

WAL-MART STORES
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Jul '10 $0.97 vs. $0.89 + 3% $54.95 -

$47.77

15 - 13
Apr '10 0.88 vs. 0.77 + 6% 56.27 - 52.66 15 - 14
Jan '10 1.17 vs. 1.03 + 5% 55.20 - 49.52 16 - 14
Oct '09 0.84 vs.

0.77

+ 1% 52.56 - 48.73 15 - 14
           
Year
(Jan.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2010 $408.21 $3.66 $1.06 $55.20
-
$46.25 15 - 13
2009 $402.30 $3.42 $0.93 63.85
-
46.92 19 - 14
2008 $375.38 $3.16 $0.83 51.44
-
42.09 16 - 13
2007 $345.98 $2.92 $0.65 52.15
-
42.31 18 - 14
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
77 47 76 79 42 53 54

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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