Friday, April 21, 2006

Wal-Mart inventory growth compared to sales growth

Back in the 2004 10-K for Wal-Mart Stores Inc., Wal-Mart management introduced a section called Company Performance Measures (in the MD&A portion of the filing). Wal-Mart management wished to use this section to evaluate Wal-Mart’s annual performance for the year.

The four metrics that Wal-Mart listed (along with how each was to be evaluated) were as follows:

Comparative store sales   (year over year change)
Operating income growth   (greater than net sales growth?)
Inventory growth   (at a rate less than half net sales growth?)
Return on assets   (year over year change)

When I first saw this list, the one that jumped out at me was the inventory growth metric.

Wal-Mart used this sentence to describe how they evaluated the metric:

“Inventory growth at a rate less than half of sales growth is a key measure of our efficiency.”

I was quite startled by that statement. Good heavens, inventory growth at a rate less than half of sales growth! This of course means that sales growth would be twice inventory growth. That would be incredible.

Checking the numbers over the last ten years this happened four times.

I think by the time the 2006 10-K was written, though, Wal-Mart realized that this would be an unrealistic performance measurement. The sentence was changed in the 2006 10-K (and Annual Report) to remove the reference to “half” of sales growth. The sentence now reads:
“Inventory growth at a rate less than that of net sales is a key measure of our efficiency.”

That sounds a bit more realistic and attainable.


Additional note:
An April 20, 2006 article in the Wall Street Journal titled "Wal-Mart Aims To Sharply Cut Its Inventory Costs" (by Kris Hudson and Ann Zimmerman) directly addressed this issue.
Chief Financial Officer Tom Schoewe said Wal-Mart's internal goal calls for cutting its inventory growth rate to half of its sales growth rate. "If you look back at the last six or eight quarters, we have not met that objective," he said. "I think the chances of meeting that objective are greater this year than they have ever been before."

2 Comments:

Anonymous Shirley Ziepfel said...

I have heard that wal-mart does alot of donation's at christmas for those in need! If this is true, could you PLEASE tell me how I go about signing up my Grandchildren and family for this year. we have been married for 27 year's and now are in the worst spot we have ever been in, my husband and son lost their job's and we are in trouble, execpially when it comes to Christmas. Is there any way Wal-Mart may be able to help us out. there are 11 of us right now living in a 1 bedroom home. we are not worried about the adult's, but we sure would be gratefull if Wal-mart could help us out with our Grandchildren. they range from ages 1 1/2, 2 1/2, 4, 6, 7. then there are 2 men and 3 women, but like i said, if you could just tell me how to go about getting a couple toy's and maybe some food for Christmas, we would be so grateful

November 21, 2006 3:06 PM  
Anonymous QUALITY STOCKS UNDER 5 DOLLARS said...

Interesting stuff on walmart.

March 16, 2013 5:46 PM  

Post a Comment

<< Home