Wal-Mart Space

Wal-Mart Supercenter growth scaled back; focus is on improving same store sales and returns on invested capital

2007-06-07T18:18:00.000-07:00

In 2006, Wal-Mart originally indicated they planned to open about 270 Supercenters in calendar 2007.

In an announcement on June 1 of this year, they dramatically changed this number.

The new projection is for about 195 new Supercenters this year.

To put this in perspective...

U.S. square footage for Wal-Mart grew by 8.4% last year.
This year it will only grow by about 4.5%.

The previous strategy for Wal-Mart was all about “the growth”, baby.

But recently Wal-Mart has had an efficiency awakening.

Tom Schoewe at Wal-Mart has built something called the “Capital Efficiency Model” and the model is telling them to slow down the hell bent pace of store growth in order to more efficiently manage resources and capital.

In order to better understand what this is about, I have typed out verbatim what Wal-Mart’s Chief Administrative Officer, John Menzer, said on this subject at the briefing for analysts on June 1st.

“On the U.S. Wal-Mart Supercenter program, we kind of came out with an answer that we call the ‘sweet spot.’ We’re trying to balance returns here. We are looking at 1) improving our comp store sales, 2) looking still at total sales, and 3) improving our ROI. And that’s the bundled package we came up with. We spent a lot of time on it and came to where we really thought we want to be as a company. Improving comp store sales is about helping the operations, the marketing, the merchandising team, slow down that growth so they can focus on existing stores. Give them some time to get some of these programs into place.”

The idea here is no longer to fill in the country at a massive speed. The focus is apparently now on efficiently filling in the country in order to maximize the returns on existing stores and cut back on the effect of cannibalization.

I must say that sounds great. ..More to come.

The results of the original September 2004 Share Repurchase Plan

2007-06-04T20:38:00.000-07:00

On June 1, 2007, Wal-Mart unveiled plans for a new share repurchase plan to replace the previous plan instituted in September of 2004.

The new plan: $15 billion (wow!)

The old plan: $6.7 billion in actual purchases + $3.3 billion left unpurchased

The new plan cancels out the remaining $3.3 billion on the older (Sep 2004) plan.

Here are the details on how the old Sep 2004 $10 billion plan was carried out:

In calendar 2005, Wal-Mart repurchased $3.6 billion in shares (the average price per share is unknown). … [In Wal-Mart parlance, this occurred in the first 9 months of Fiscal 2006.]

On October 31, 2006, in their quarterly filing, Wal-Mart announced that $6.1 billion was left remaining on the Sep 2004 plan. This means $300,000 in share repurchases were carried out somewhere along the way (presumably share repurchases from employees to satisfy the exercise price and tax withholding of certain stock option exercises.)

On January 31, 2007, in their Form 10-K, Wal-Mart announced that 38,861,500 shares were purchased for an average price of $46.96 in November, December, and January. This totals about $1.8 billion in total repurchases over those three months, leaving $4.3 billion left to go on the Sep 2004 plan.

In the April 30, 2007 quarterly filing they announced they repurchased $943 million of shares. This leaves $3.357 million left to go on the program. They also announced that $3.3 billion was left on the Sep 2004 plan, so we take out $570,000 in additional minor buybacks somewhere along the way to get to $3.3 billion left on the Sep 2004 plan.

From that April 30, 2007 quarterly filing (filed on June 1), they disclosed that the total number of shares outstanding on May 24, 2007 is exactly: 4,108,777,695

If we go look for the share count number at the beginning of the Sep 2004 plan, we find 4,233,002,095 shares outstanding on March 21, 2005.

This means that net of awarded stock options exercised & stock issued for compensation, Wal-Mart spent $6.7 billion to repurchase a total of 124,224,400 shares. Using these numbers we get to an average purchase price of $53.93 per share.

That’s a bit of a backdoor number because of shares issued for stock options along the way, meaning the net effect of those share issuances were captured in my average price of $53.93.

But regardless, Wal-Mart spent $6.7 billion and there are 124.2 million shares less in circulation during the life of the Sep 2004 Plan.

Wal-Mart blog coming back to life

2007-06-04T19:06:00.000-07:00

I haven't posted here in over a year, but have decided to start blogging again on Wal-Mart's financial statements. I will take a look at Wal-Mart's new plan to drive U.S. store returns in my next posting. Good to be back.

Wal-Mart in China

2006-04-23T20:26:00.002-07:00

If you’re planning a visit to China and you want to visit a Wal-Mart Supercenter while you’re there, here is a list of the China stores along with addresses and phone numbers. (Listed by province then city.) Please take a camera with you and send me some pictures! I'll post them here on the blog.

There are now 51 Supercenters in China. (Unfortunately the site only lists the details for 41 of them.)

If you want to see company news on store openings and other Wal-Mart activities in China, click here.

Wal-Mart inventory growth compared to sales growth

2006-04-21T21:01:00.000-07:00

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."

Wal-Mart's Photo Processing business

2006-04-20T19:00:00.000-07:00

If I am reading the Wal-Mart Stores Inc. 10K correctly, Wal-Mart did about $2 billion worth of business in photo processing last year.

Interestingly, I found a website that compares Wal-Mart's photo processing with Snapfish and Kodak EasyShare. Click here for the website.

Also, there is a review of Wal-Mart's photo processing services. Wal-Mart ranks #4 out of 27 photo processors. Impressive!

Conversions of Wal-Mart Discount Stores for uses by other businesses

2006-04-19T20:22:00.000-07:00

I was researching Wal-Mart’s real estate division and I must say I became fascinated by the creative ways in which former Wal-Mart Discount Stores have been converted for other uses.

Thomas Medical Center in Daphne, Alabama

A place called Incredible Pizza in Warr Acres, OK

A Social Security Office in Baltimore, MD

First Christian Church in Miami, OK

For a full page of photos, click here.

Other former Wal-Mart stores in productive use:
School campus: Acadia Paris School System - Crowley, LA
Civic Center: City of Hillsboro - Hillsboro, TX
Regional office: State Farm Insurance - Portage, MI
Automotive dealer: Holland Cadillac - Harrisburg, IL
Assembly center: National Book Binders - Moberly, MO
Classrooms: Lake Land College - Mattoon, IL
Courtrooms / Offices: Ellis County - Waxahachie, TX
Fitness center: Chase Fitness Marketing - Georgetown, KY
Manufacturing: Novatron - Atlanta, TX
Warehouse: H. E. Butt Grocery - Austin, TX
Satellite College Campus: Weatherford College - Decatur, TX
Church: Open Bible Fellowship - Tulsa, OK
Bank: Community Trust Bank - Pikeville, KY

Wal-Mart projected growth in global retail square footage for 2006

2006-04-17T21:24:00.000-07:00

In late October of 2005, Wal-Mart announced its square footage growth plans for calendar 2006.

"Globally, the company expects to add over 60 million square feet of gross retail space, which is over an 8% increase from the estimated current fiscal year-end square footage."

Net additions
Supercenters:    275
Discount stores:    -135
Neighborhood Markets:    17
Sam’s Clubs:    15

(The above numbers are the median of store range numbers released by Wal-Mart. Also they are net of relocations.)

Using a calculator and the above store numbers, domestically they will add approximately 40,100,000 square feet ... a 7.0% increase in domestic retail space from last year.

This leaves about 19,900,000 square feet they will need to add abroad.

Joe Hatfield over in China recently announced they were going to open 20 new stores there this year. At about 183,000 square feet per store that comes to 3,665,000 new square feet in China.

This leaves at least 16,200,000 million square feet that will be added mainly in Mexico, Canada, Brazil and the UK.

To sum up, this means retail square footage growth rates approximately as follows for this year:

United States:      7.0%
International:    12.7%

(For the numbers released by Wal-Mart, click here.)

FY 2006 Wal-Mart financial statements - Part One

2006-04-15T15:51:00.000-07:00

The first thing I always look for when viewing a new set of annual financial statements from Wal-Mart is how did things change due to restatements or reclassifications?

Reclassifications happen for example when Wal-Mart buys or sells a business. The sale of McLane is the most recent historical example. (In FY 2004, Wal-Mart sold McLane to Berkshire Hathaway and so McLane’s assets and liabilities were removed from Wal-Mart’s balance sheet.)

Let’s quickly look at what happened in FY 2006…

The main thing that occurred was the consolidation of Seiyu (Japan) and Sonae Distribuicao (Brazil) onto Wal-Mart’s balance sheet. This consolidation happened for FY 2006.

I noticed, though, that numbers also changed on the FY 2005 balance sheet.

Wal-Mart notes that “Certain reclassifications have been made to prior periods to conform to current presentations.” I wish we had a better explanation of what happened, though. I always like to keep everything neat and tidy.

The 2005 balance sheet changed in the 2006 10-K, but I guess since the change was small enough it was considered immaterial and did not require specific explanation. Inventory increased by 315 million on the left side of the balance sheet offset by a similar increase in accounts payable on the right side …Did a percentage of Seiyu’s balance sheet and a percentage of Sonae Distribuicao’s balance sheet get applied to FY 2005? I guess we won’t know. All I can do is just post spreadsheets of the restatements before moving on.

2006 Restatements for FY 2005

    Restated 2005 Wal-Mart Balance Sheet
    Restated 2005 Wal-Mart Income Statement
    Restated 2005 Wal-Mart Cash Flow Statement

2006 newly updated Financial Statements

    2006 (multi-year) Wal-Mart Balance Sheet
    2006 (multi-year) Wal-Mart Income Statement
    2006 (multi-year) Wal-Mart Cash Flow Statement

Introduction to the fiscal 2006 Wal-Mart financial statements

2006-04-15T11:07:00.000-07:00

I have finally taken the time to read and digest Wal-Mart’s 2006 Annual Report as well as its 2006 10-K filing. The next series of posts on this blog will be simply be observations I made while reading these documents in detail. Please note that these observations will almost assuredly be considered incredibly boring by casual Wal-Mart observers. … If I were to review this blog as an outsider, I would probably say something along the lines of the following: “Mainly a highly technical look at Wal-Mart’s financial statements with some material on overall operations. Blog apparently run by a bookish type who probably spends way too much time poring over Wal-Mart’s filings when he should instead be outside enjoying a fine weekend.”

With that said, let’s begin now on Wal-Mart’s filings for fiscal 2006.

It is important to remember that Wal-Mart’s fiscal year ends on January 31st. This means that Wal-Mart’s fiscal 2006 = 11 months of calendar 2005 plus one month of calendar 2006. In essence, we are really looking at the numbers for calendar 2005 when we examine the annual report for 2006. (Easy, however, to become confused by the 2006 title.)

Wal-Mart in Houston

2006-02-18T17:49:00.000-08:00

I did not previously realize this, but the conversion from Discount Stores to Supercenters is very advanced in Houston.

There are currently only 7 Discount Stores within fifty miles of downtown Houston. (The Discount Stores are a dying breed!)

There are 39 Supercenters within fifty miles of downtown Houston.

On a store count basis, 72% of Wal-Mart's core stores (i.e. non-Sam's Club) in Houston are Supercenters.

On a square footage basis, 87% of Wal-Mart's core retail space (i.e. non-Sam's Club) in Houston is Supercenters.

Here is a link to a spreadsheet of Houston area stores.

Los Angeles Times article on Wal-Mart in November 21, 2005 issue

2005-11-21T00:20:00.000-08:00

Michael Hiltzik wrote an interesting article on Wal-Mart in the Los Angeles Times, and although I refuted some of his points by posting on his blog, I actually liked his article quite a bit. The article is viewable right on the blog and is titled "Wal-Mart Up Against a Stagnant Stock Price."

The article outlined the media's main points about why Wal-Mart is no longer such a hot growth story. (I disagree with this conclusion, but I do appreciate having the argument framed clearly.)

Kevin Brancato, greatest Wal-Mart blogger of all time, closing down all new writing on his blog

2005-11-14T22:06:00.000-08:00

I am quite sad to learn of this news.

Kevin performed an incredible service that will be impossible to replicate by anyone in the blogging community. Kevin's dedication to increasing the awareness of the many sides of the Wal-Mart story and his presentation of well-balanced views of the issues surrounding Wal-Mart's operations will be sorely missed.

Fortunately his blog's contents will stay online for now. Although new content will not be added, the voluminous material already present will remain available to all of us.

Trivia question ... If Wal-Mart were a state, where would it rank in size?

2005-11-03T14:54:00.000-08:00

If you took all of the Wal-Mart Supercenters, Discount Stores, and Neighborhood markets as well as all of Wal-Mart's distribution centers and put them all next to each other (laying them all out in a square) and then compared the overall size of the square to the size of the 50 States, where would Wal-Mart's size rank on the list of states from largest to smallest?

I posted the answer as the first comment to this entry.

Wal-Mart U.S. real estate (as of Sep 31, 2005) equals 23.4 square miles

2005-11-03T12:19:00.000-08:00

The slide below comes from Tom Schoewe's presentation at the recent analysts' meeting in Bentonville.

Please note that the square footage below is building footprint square footage. It does not include the parking lots around the stores. [I will need to research what the average parking lot square footage is per store type to add those figures.]

The total number of square feet above equals 23.4 square miles.

Wal-Mart plans to add 60 million square feet of retail space worldwide in calendar 2006

2005-11-03T09:51:00.000-08:00

At the recent analysts’ meeting in Bentonville, Tom Schoewe announced that Wal-Mart would add 60 million square feet of new retailing space worldwide in calendar 2006 (which is their Fiscal Year 2007).

I made a spreadsheet projection of the U.S. component of retail square footage growth out to fiscal 2016.

These numbers frankly boggle my brain and at first glance I would have guessed that a good bit of this was going to fall into the category of impossible. But maybe not. Why would it be impossible?

Rule #10 of Sam Walton's Ten Rules for Building a Business is "Swim Upstream." I think Wal-Mart has digested that rule very well.

Click on the graphic above to see the spreadsheet.

Wal-Mart structure

2005-10-29T13:18:00.000-07:00

Sometimes I find myself reading through the court documents for lawsuits filed against Wal-Mart. Usually those documents are filled with a bunch of garbage posing as factual information. Occasionally, though, some interesting information is found.

Below is a description of Wal-Mart’s operating structure which was published in a court document in 2003. The only advantage to reading the text here is that I removed all of the legal cross references and footnotes to make the text readable. [The following should be taken with a grain of salt in that this information was produced from an anti-Wal-Mart lawsuit and does not come from the company's official filings.]

There are a total of 41 regions: 35 Wal-Mart regions and six Sam's Club regions.

Each region is supervised by a Regional Vice President (RVP), who is based in Bentonville and travels for three weeks out of each month to the region.

Because the regional management is based in Bentonville, Wal-Mart has an unusually high concentration of executives and managers based in the Home Office.

Regional management meets at least weekly with Bentonville-based corporate and executive leadership to discuss developments in the individual stores.

Each region, in turn, contains approximately eleven districts; each district contains approximately six to eight stores.

Each district is run by a District Manager, who lives in the field.

At Sam's Club, district managers are called Directors of Operations, but the job responsibilities are identical.

On personnel matters, District Managers work in conjunction with Regional Personnel Managers (RPM).

The RPMs are based in Bentonville and are responsible for recruiting and assist in selecting store management and monitoring personnel policies.

RPMs visit the stores on a weekly basis and submit reports to five People Directors in the Home Office.

Each Wal-Mart store has the same job categories, job descriptions and management hierarchy.

At the bottom of the ladder, the primary entry level hourly positions are cashier, sales associate and stocker.

The first step up is hourly Department Manager.

Other hourly supervisor positions include Customer Service Manager (CSM), known as Check-Out Supervisor (COS) at Sam's Club.

The highest level hourly manager at Wal-Mart is Support Manager.

The next step up is to management trainee, a four-to-five month program which prepares employees for positions as Assistant Managers.

The first salaried management position is Assistant Manager.

Each store has several Assistant Managers, varying with the size of the store.

The next level is Co-Manager, a position used only in larger stores.

The top store position is Store Manager, called General Manager in Sam's Clubs.

The stores contain 40-50 different departments.

Wal-Mart data sources

2005-10-29T12:59:00.000-07:00

All of the data on my blog comes from public data sources.
The primary source of this public data is Wal-Mart's filings with the SEC.

Wal-Mart's CIK number with the SEC is 104169.
The CIK number is the Central Index Key and it is the number that the SEC uses to identify all filings related to Wal-Mart.

The link below will take anyone to all of the most recent Wal-Mart filings at the SEC.

http://www.sec.gov/cgi-bin/browse-edgar?CIK=0000104169&action=getcompany

Form 10-K = annual financial statements
Form 10-Q = quarterly financial statements
Form Def 14A = the proxy statement

You can get almost everything from those three types of forms.
For some additional information, you can consult the company's official annual report, which is available here.

Wal-Mart and the concept of upscale shopping

2005-10-17T10:02:00.000-07:00

My friend Kevin Brancato recently wrote the following:

Wal-Mart will have the challenge of keeping its low-price inventory, but also must provide a more upscale experience. Wal-Mart will stay (relative to its competitors) near the bottom in terms of service and shopping experience, but the expectations of the bargain shopper will have risen, so that people will expect greater service and comfort along with prices.

This point is very interesting to me. I have to think about that one. If Wal-Mart ever aims for a more upscale demographic category, or wishes to broaden out of its main base more into that category, I would assume they would have to increase the capex per store where they want to do this. If anyone hears of a store in the system (Supercenter or Discount) where this is happening, please let me know. I will go visit the store to see what's happening there.

Mainly I would be interested in an existing store with a known lower end demographic customer base that Wal-Mart is trying to move up the demographic chain. I would in fact be astounded to see that. I would secondarily be interested in a store that is new that was clearly built with greater than average capex. Before pointing it out, please make sure that the upscale nature of the store is clearly evident.

Also, any articles or press releases about any moves by Wal-Mart to increase its capex per store (above the rate of CPI for example) would be interesting to me.

Regarding consumer preferences for a more upscale shopping experience, I don't know. We have the number one Supercenter in the region at 2727 Dunvale Road in Houston ..#2066. (It was running around #2 or #3 before Katrina and went to #1 after so many people moved here from Louisiana.) You go in there and it's basically a mob scene most of the time. No one is going there for an upscale shopping experience and no one really cares about an upscale shopping experience. They just want their stuff and they want lots of it and they want it cheap.

We also have what I believe is the number one Discount Store in the region. Wal-Mart Store #2718 at 9555 South Post Oak Road. I'm told they do almost as much business in there as a Supercenter. It's also a zoo most of the time and again no one is thinking about a more upscale shopping experience.

Regarding the upscale shopping experience idea.. I can't help but think about Wal-Mart's primary business model: sell it cheaper than the next guy, and do it by keeping your costs lower than the next guy.

Rose Blumkin (the great Mrs. B) who started the Nebraska Furniture Mart in Omaha used to say something along the lines of "If you have the lowest prices, customers will find you at the bottom of a lake."

I think the low cost, low price idea is the primary driver, the primary concept, behind all of Wal-Mart's activities. As long as customers are pounding their way through the door, if it costs less to sell at the bottom of a lake, why spend the money to sell in a nicer looking store?

Wal-Mart graphs and charts

2005-10-15T17:53:00.000-07:00

I've added a web page that has every graph I've made so far. These graphs include:

Wal-Mart U.S. Store Count By Store Type (current)
Wal-Mart U.S. Store Count By Store Type (projected)
Wal-Mart Sales Per Square Foot by Operating Segment
Wal-Mart International Square Footage (countries over 10 million sq. feet)
Wal-Mart International Square Footage (countries under 10 million sq. feet)
Wal-Mart inventory as a percent of sales (system wide)
Wal-Mart U.S. Comp Store Sales Increase AND Sales Per Sq Foot
Wal-Mart U.S. Comparable Store Sales Increases

There are more graphs to come.

Gasoline prices and Wal-Mart's profitability

2005-10-12T18:32:00.000-07:00

A bit of a debate is occurring on this subject over at Kevin Brancato's blog Always Low Prices.

I've contributed to the debate and you can click here to find it.

ps. The main takeaway from the debate, I think, is really just that, in a price competitive business, the low cost operator wins.

Wal-Mart's Best Bargain

2005-10-09T17:41:00.000-07:00

The article below came out in Barron's over the weekend. I will probably need to delete it off this site in a week or so as it is copyrighted.

By Robin Goldwyn Blumenthal
Barron’s, 10/8/05

IT WAS A LONG, LONG TIME AGO that shares of Wal-Mart Stores were last this cheap. Newt Gingrich was speaker of the House, most people hadn't heard of the Internet and O.J. Simpson was on trial for murder. Chances are, it'll be quite awhile before they're this cheap again.

At a recent price of about 44, the shares are trading at just 14.6 times estimated earnings for next year, the stock's lowest multiple since 1995. And for the first time in practically as long, Wal-Mart's P/E isn't any higher than the broad market's; it has often been about 30% higher.

The world's largest retailer is famous for its "everyday low prices," but investors today may be getting something even better: a once-in-a-decade low price.

While the stock has been sliding for the better part of two years, it could soon get a lift from a variety of forces -- from changes in Wal-Mart's management and merchandise to Americans' renewed zeal for bargains in a time of high gas prices. Just last Thursday, the Bentonville, Ark., behemoth reported that same-store sales climbed 3.8% in September, at the high end of estimates, easing fears about the hurricanes' impact. The news caused Wal-Mart's stock to buck the day's drop in the Dow and climb by 1%.

That may be just the beginning. Citigroup analyst Deborah Weinswig thinks the shares can rise more than 40% over the next year, to $63. Says she: "In an environment like this, with higher gas prices, the idea of a hypermarket where you can do one-stop shopping is a success."

Wal-Mart, and its shares, do face some real challenges. As anyone with a passing familiarity with the company knows, Wal-Mart in recent times has been the subject of almost uniformly bad publicity over labor practices. At the same time, it has been facing cutthroat competition around the world.

But through it all, another story has been quietly playing out: Wal-Mart has actually increased its profitability.

The company's profit margins this year, 3.5%, are higher than the average of the past 10 years, points out Marsh Douthat, an Atlanta money manager who runs Financial/Market Management, which focuses on large-cap companies from a value-oriented, quantitative perspective.

And Wal-Mart has only gotten bigger. With 1,253 Wal-Mart stores, 1,876 Supercenters, 555 Sam's Clubs and 95 Neighborhood Markets (geared to urban areas), as well as more than 1,600 stores internationally, Wal-Mart has more than tripled its revenues in the past 10 years, to an expected $317 billion next year. Despite its sheer size, the company has managed to grow twice as fast as U.S. GDP.

Douthat describes Wal-Mart as "basically a sales- per-share and multiple-expansion story." He notes a projection by Value Line that Wal-Mart's sales per share will rise to $123 annually from $86 over the next three to five years. If profit margins remain roughly at the current 3.5% level, "even if the multiple doesn't do anything the stock will go up 65%," says Douthat.

Then there are stock buybacks, another seldom-noticed piece of the Wal-Mart story. With 4.16 billion shares outstanding, the company has bought back about 320 million shares over the past five years, a trend that could well continue over the next five years. That would only enhance per-share earnings growth, which already is expected to be in the high teens.

"At some point," Douthat quips, "who's left to hate Wal-Mart?"

To some extent, Wal-Mart's shares are caught up in a broad funk for big stocks. Many have been going nowhere for the past several years. But Wal-Mart, unlike many of the others, has kept up its earnings growth, more than doubling profits over that span.

In fact, Wal-Mart has achieved a hefty average return on equity of 22% in the past five years. Moreover, Wal-Mart, in contrast to other large-cap names, is actually underleveraged, with debt of just 14% of enterprise value (market value plus net debt), no unfunded pension liabilities and scant stock-option grants. With the exception of Home Depot, Wal-Mart is among the cheapest of the best-known big-caps, such as Coca-Cola, General Electric and Microsoft.

To bulls, Wal-Mart's stock price is an opportunity not to be missed. They point out that Warren Buffett has stated several times that his worst investment mistake was not buying a full position in Wal-Mart in 1997 -- and the stock was trading at a higher price/earnings multiple then. Some other noted value investors are said to have started buying shares earlier, at prices higher than today's.

Still, there's hardly unanimity on Wal-Mart's prospects. Skeptics argue that it will be difficult for Wal-Mart to continue to expand stores domestically without cannibalizing its existing store base, and that international expansion, which has very low margins, won't be enough to make up the differences.

CEO Lee Scott begs to differ; he has said there's enough demand for about 4,000 additional supercenters in the U.S., including the expansion of 1,200 existing stores. And the overseas push looks to be far more successful than similar forays by other big companies. Wal-Mart's international sales, at $60 billion a year, match the size of Target's whole operation.

While analysts have voiced concerns that high gas prices will crimp consumer spending, that view may prove to be short-sighted. Wal-Mart's customer base could very well widen in tough times, with the stores maintaining their lower-income base and gaining some higher-income consumers who are looking to save some money. The first look at winter heating bills just might convince some Bloomingdale's shoppers that the time has come to step down to Wal-Mart.

Wal-Mart is certainly courting such buyers. It has been trying to spruce up its fashion image, putting the highly regarded John Fleming, who spent 19 years at Target (TGT), in charge of marketing and offering more in the way of higher priced, branded fashions. It has been rumored to be considering buying Tommy Hilfiger (TOM), the upscale clothing brand. It already has started selling such higher-end essentials as 400-thread-count sheets and making the stores more inviting with such touches as faux-wooden floors.

The strategy of bringing in more fashionable products and making the stores more appealing should help to drive up the average ticket and increase the number of sales.

Citigroup's Weinswig says she's heard that Metro 7, a new line of urban apparel for women due to be rolled out in 450 stores this fall, has "blown the doors off" the stores it's been tested in.

Wal-Mart, for its part, has been sending out positive signals about its total sales. CEO Scott told a recent Prudential Equity conference that back-to-school shopping "was just awesome," adding, "I think it sets the tone for what the holidays are going to be like."

Scott has moved aggressively to beef up his management team, creating what Weinswig calls "deep bench." In just the past year, Wal-Mart has hired brand expert Stephen Quinn from Frito-Lay as senior vice president of marketing, and moved Eduardo Castro-Wright, formerly chief operating officer of Wal-Mart's successful Mexican operations, to chief executive of the domestic operations.

Castro-Wright "does a phenomenal job of assessing the markets and making sure you have the right product in the right market," says Weinswig.

Wal-Mart, she predicts, will now spend more time looking at "how every store and every market will be tailored to the local customer."

In another key move, the company recently named its head of domestic operations, Mike Duke, and the head of international operations, John Menzer, as vice chairmen, and swapped their jobs. The appointments have helped take up the slack after Tom Coughlin, the former vice chairman, resigned amid a federal investigation into expense-account fraud.

Meanwhile, Wal-Mart has increased its stake in Japanese retailer Seiyu and taken a 33% interest in Carhco, Central America's largest retailer -- moves that Weinswig says will help move the company toward its goal of generating one-third of earnings growth from international operations.

In all, Weinswig sees a sense of urgency from the CEO, a real focus on expenses, and improved marketing and merchandising.

Her $63 price target is based on an '06 multiple of 20.5. That, in turn, reflects her expectation that the merchandising shifts and 15% to 18% growth in square footage will help drive more consistent same-store sales growth -- in the 3% to 5% range -- and translate into earnings growth of 15% to 18%, as well.

Says investment manager Douthat: "You have to look at these financials and say, who are we to distrust the people who have created this?"

Bergdahl on cost consciousness of Wal-Mart

2005-10-08T00:22:00.000-07:00

Chapter 5 of Michael Bergdahl's book is about Wal-Mart's legendary cost-control culture. Most of us have already heard the examples of Wal-Mart executives (including CEO Lee Scott) sharing hotel rooms while out on the road.

My favorite example, though, is the one about Wal-Mart personnel in the corporate headquarters in Bentonville being required to use both sides of a piece of paper before throwing it away.

From page 122..
"Even the janitor gets into the cost-control act. One morning I walked into my office and the night before the janitor had carefully placed a 'Grim Reaper paper waster' card squarely in the middle of my desk to point out to me I was wasting company resources. As it turns out, I had thrown paper that hadn't been used on both sides into my trash can. ... That was the last time I wasted a piece of paper. I became obsessed like everyone else about controlling paper costs."

A photo from the 1980 Annual Report

2005-10-07T16:28:00.000-07:00

I love the old Wal-Mart logo on the side of that truck.

Believe it or not, you can still find some of those old logos out on the road occasionally. Here is a link showing some modern day Wal-Mart truck pictures. (Take a look at the third one down on the right.)

Everything you need on Seiyu ... in English!

2005-10-06T15:57:00.000-07:00

Just as I was bemoaning that Seiyu's financials aren't available in English, a very smart colleague pointed out that they are available in English.

And now... Seiyu's financials in English.

Wal-Mart's interest in Seiyu is held by Wyoming Holding GmbH, a Swiss subsidiary of Wal-Mart Stores Inc. That structure is not unusual. I point this out just so you can locate Wal-Mart's ownership entity on page 33 of Seiyu's 2005 Annual Report.

Wal-Mart valuation

2005-10-06T14:22:00.000-07:00

In case you're dismayed with the falling market price of Wal-Mart and want to call the Walton family to suggest a joint buyout of the company with them, I have added a valuation page here with all the pertinent private equity valuation metrics.

Wal-Mart Supercenter projected growth in U.S.

2005-10-05T23:28:00.000-07:00

As mentioned before, the white hot core of Wal-Mart’s business is the Wal-Mart Stores operating segment (U.S. Supercenters, Discount Stores, and Neighborhood Markets).

Nothing in retailing, to my knowledge, on the face of the earth comes close to the awesome power of the Supercenters + Discount Stores operation. (Operating margins on the order of 7.8% with $524 million PER DAY flowing through this system.)

From 1997 onward, the average square footage growth rate of the Supercenters + Discount Stores operation has been 8.1%.

In the 2005 Annual Report, Lee Scott says that he believes Wal-Mart can add another 4,000 Supercenters to the 1,713 Wal-Mart had at January 2005. That would mean a total of 5,713 Supercenters in the U.S.

I tried to imagine what that would look like.

I used an average annual growth rate in square footage of the Supercenters + Discount Stores of 8.3%. This got me to 5,483 Supercenters by January 2016.

What in the world is CapEx?

2005-10-03T11:05:00.000-07:00

After reading the last post, if you’re confused about CapEx, let me help explain more about what that term means.

CapEx is short for “capital expenditures.” In its simplest terms, a capital expenditure is what the company pays (usually in cash) when it buys, for example, a new shelving unit to go in one of its stores. The new shelving unit is an asset, and, as such, the purchase of the shelving unit is not an expense (like the electricity bill) but rather an investment (a capital expenditure) in a new asset. That new shelving unit has a value and the value of the shelving unit needs to be placed on the balance sheet as an asset. Expensed items, on the other hand, are never placed on the balance sheet as they simply pass through the income statement as expenses.

Returning to the shelving fixture… Buying a new shelving unit would generally cost more than buying a used shelving unit. This is the same principle that applies to new and used automobiles. A used car is usually worth less than a new car of the same make and model. The used car is worth less because it has “depreciated” due to the passage of time and the general usage that occurred during the passage of that time. This “depreciation” occurs with many (although certainly not all) assets placed on a company’s balance sheet. Shelving units depreciate. Forklifts depreciate. Buildings depreciate. The land underneath buildings does not depreciate. Bars of gold do not depreciate. And so you can think of a “capital expenditure” as a transfer of capital from a non-depreciable asset (like cash) to another non-depreciable asset (like land) or to a depreciable asset (like a shelving unit).

When Wal-Mart buys a shelving unit, the unit depreciates on a fixed schedule from its purchase price (the capex amount) all the way down to zero value. Each year Wal-Mart recognizes a portion of that depreciation according to the depreciation schedule. The schedule determines how much Wal-Mart will recognize each year in depreciation on its capital expenditure. The depreciation itself is recognized as an expense and all expenses pass through the income statement as, yes, you guessed it, expenses.

When Wal-Mart builds a new store it buys a lot of new shelving units to go into that new store. Because these shelving units are going into a new store, we can categorize the capital expenditure for the shelving units as a “growth capital expenditure” or “growth capex”. Wal-Mart is investing capital (the shareholder's capital) in its own growth by building the new store and buying the new shelving units. There will be a new income stream from this new store once it opens, and once all the bills are paid (expenses for things like electricity), Wal-Mart can see how much money it has left over at the end of the year in profits. The net profit from that store divided by the growth capex will be the year 1 return on our invested capital (i.e. the shareholder's capital). …Remember the growth capex is what Wal-Mart invested to create a new revenue stream. The profits from that revenue stream show us how successful they were in making the investment. If they lose money at the new store, they will have made a poor investment. If they make money at the new store, they will have made a good investment based on how much they earn above a more risk free rate of return such as putting the money in a bank CD earning 3.50%.

Okay, I think we’ve covered growth capex fairly well.

Now let’s say we're Wal-Mart managers and we go back and visit that same store in ten years. Let's also say that during the time that passed, we never spruced the store up. We never bought any new units for the store or made any changes or additions to the store’s infrastructure. That Wal-Mart store would be looking pretty shabby by now and customers would not be having a great experience shopping there. Certainly Wal-Mart does not want its customers to be repulsed by the condition of its stores. Therefore, in order to prevent its stores from looking shabby, Wal-Mart invests new capital in its existing stores every couple of years or so to keep them looking good. This investment is called “maintenance capex”. It involves capital expenditures to maintain a store.

All retail operations require significant amounts of maintenance capex. You can’t just build a store and leave it alone to depreciate through time. After a while customers are just not going to want to shop there.

So in order to keep all of its stores looking good, Wal-Mart has to invest capital in the form of maintenance capex every year back into its stores.

Note that we have now broken down overall capital expenditures (“capex”) into two subcategories, growth capex and maintenance capex. Most companies (Wal-Mart included) do not break out or disclose their growth capex versus their maintenance capex as a percentage of their overall capex.

If we knew the growth capex figure we could then analyze the increase in sales or the increase in operating income in the following fiscal year as a function of the current year’s growth capex. This would allow us to directly see how profitable Wal-Mart is in re-investing capital on behalf of the shareholders into its own growth.

Also, if we knew the maintenance capex amount we could arrive at a normalized free cash flow figure and then come to understand the company on a free cash flow basis. Normalized free cash flow would be net income + depreciation – maintenance capex. This would give us a good idea of how much the company would be making in cold hard cash if it suddenly stopped growing.

And so the key here is to understand Wal-Mart as almost two kinds of businesses..
1. the Wal-Mart as it physically exists right now, already formed and out there in the world, and
2. the future physical Wal-Mart, the piece that will be added via growth.

Maintenance capex is the use of capital by category 1.
Growth capex is the use of capital by category 2.

If we could break out the growth capex from the maintenance capex, wow, we would really have a cool insight into the profitability and efficiency of Wal-Mart as a financial entity. …I will attempt to do this in the next post.

Reconciling the net income valuation to the cash flow model... Part 1 in a discussion of Wal-Mart's free cash flow

2005-09-27T07:54:00.000-07:00

I think it’s time to reconcile the Discounted Net Income valuation for Wal-Mart with a more classic Discounted Cash Flow (DCF) model. As I wrote earlier, I feel it is near impossible to perform a practical valuation of Wal-Mart based on discounted cash flows. This is because Wal-Mart requires massive amounts of capital every year for its own growth (i.e. growth cap-ex). That growth cap-ex is an investment in a future income stream, one that should be significantly higher depending on the growth rate of the company. The “free cash flow,” then, is in a sense artificially low in the near term in order to facilitate a much greater free cash flow in the future.

For those somewhat familiar with free cash flow, let me quickly define the term as I’m using it…

Free Cash Flow =
Net income + Depreciation and Amortization – Capital Expenditures

The above formula gives us the total amount of cash that we can actually take out of the business every year. (Wal-Mart actually does take this cash out of the business every year in the form of dividends to shareholders.)

I am now going to modify the above formula to tailor it more specifically for Wal-Mart’s cash related operations.

Free Cash Flow =
Net cash from operations + Depreciation and Amortization – Capital Expenditures

The “net cash from operations” is different than “net income”. Net income is of course the first line of the cash flow statement. I am choosing to take into account all of the cash produced by operations and this includes things like reductions in cash due to increases in inventories and additions to cash due to increases in accounts payable. The net cash from operations is in fact the whole top portion of the cash flow statement listed under “Operating Activities.” Net income is the first line item in that section.

Now let me quickly indicate how I am defining CapEx from Wal-Mart’s cash flow statement:

Payments for property and equipment
+
Investment in international operations
-
Proceeds from the disposal of fixed assets

Initially I thought I would not include the third portion above, but in the end decided to include it as Wal-Mart is slowly selling off its old real estate as they acquire new real estate in the conversion process from Discount Stores to Supercenters. The rebate they get by selling the old real estate (i.e. during the conversion process) should be considered here and so I included it in the calculation.

So, given all of the above definitions, Wal-Mart’s free cash flow in fiscal 2005 was $2.79 billion. That number is obviously significantly less than the $10.27 billion in net income for fiscal 2005. When we go down the road of cash flow analysis we have to be very clear about what is going on, and so in doing the cash flow analysis on Wal-Mart, let’s be very clear that a large amount of Wal-Mart’s net income (and actually even more than its net income) is being re-invested back into the business on our behalf (on behalf of the shareholders). This should not be considered problematic in any way. Remember that it is the RETURN on the re-invested capital, it is the return on that cap-ex, that we then must take into account if we wish to perform a fair and correct cash flow analysis.

I am going to take a break here to allow for all of the above to be digested, and next we’ll begin to analyze what the returns on cap-ex look like.

Wal-Mart International Square Footage # 1

2005-09-25T21:17:00.000-07:00

Above is a graph of Wal-Mart's international square footage in countries where they have a total of more than 10 million square feet.

Wal-Mart International Square Footage # 2

2005-09-25T21:02:00.000-07:00

Above is a graph of Wal-Mart's international square footage in countries where they have a total of less than 10 million square feet.

CFO Tom Schoewe presentation

2005-09-21T22:49:00.000-07:00

An excellent post-Katrina update is available about Wal-Mart from CFO Tom Schoewe.

This presentation comes from the Goldman Sachs Twelfth Annual Global Retail Conference. Scroll down that page to find the link to Tom Schoewe's presentation.

Also, Eduardo Solorzano gives a detailed presentation on Wal-Mart Mexico.

Wal-Mart Sales Per Square Foot by Operating Segment

2005-09-21T22:16:00.000-07:00

I think people are digging the graphs, so let me be sure to keep a steady stream of these coming.

In a previous graph (below), I showed how overall sales per square foot had grown every year for Wal-Mart and I juxtaposed this against the slowing rate of comparable store sales increases.

In the graph above I simply break out the sales per square foot by operating segment. The slope of the "Wal-Mart Stores" segment is tapering off ever so slightly in the last couple of years and this has people (mainly stock analysts) freaking out to a certain degree. The steeper the slope upwards, the faster Wal-Mart makes money and the faster it takes sales away from its competitors.

[I did not enter data in the graph for the International segment before 2000. The International segment has a history back to the early 1990's but the data is a bit hard to "normalize" (i.e. smooth out to account for acquisitions etc.) International growth happens for Wal-Mart primarily through acquisition, while domestic growth is primarily organic.]

Hurricane Rita

2005-09-21T18:00:00.000-07:00

Hurricane Rita is bearing down on me here in Houston, and I have to evacuate the city. I will post again when I figure out how to get to a computer over the weekend.

Competing with Wal-Mart ... Lesson # 1 from Bergdahl's book

2005-09-20T15:41:00.000-07:00

Michael Bergdahl says many interesting things in his book, but the main point I got from the book is that if you want to compete with Wal-Mart as a small business retailer, it's going to have to be through specialization and superb customer service.

On page 178, Bergdahl lays it out as openly and bluntly as I've ever heard it laid out. When I read this section, it helped remind me that the backbone of business success in America is hard work and digging out some kind of competitive advantage through that hard work. ..Be advised this quoted paragraph may sound a bit brutal. Is there such a thing as soft and fuzzy competition, though? Real competition?

"If Wal-Mart's arrival in town is the catalyst for your business to start improving customer service, it is in all likelihood too late. A good merchant by definition should have been providing great service to customers already. Once the big box arrives it is too late to atone for past service sins and you will experience payback from customers who are well aware that they have been historically slighted. When you were the only store in town your customers were forced to shop there, but not anymore. In small towns across America, and the world for that matter, Mom-and-Pop operators who failed to serve their customers have been forced to close their doors upon the arrival of Wal-Mart. In many cases they didn't have to shut down if they had a viable retail concept that could have survived. But higher prices coupled with lackluster customer service causes customers to seek other alternatives."

Wal-Mart operating margins

2005-09-17T15:44:00.000-07:00

Digging into the annual report is necessary to break out the margins of each segment. Operating margin is the only margin by segment that one can derive from disclosures in Wal-Mart's documents. (Gross margin by segment and net margin by segment are impossible to derive at this time.)

Operating Margins by segment

	fiscal years
	Jan 2005	Jan 2004	Jan 2003
Wal-Mart Stores	7.38%	7.41%	7.54%
Sams Club	3.45%	3.26%	3.23%
International	5.31%	4.98%	4.90%

Operating margin is segment operating income as a percentage of segment sales. This is also known as EBIT/Sales (Earnings before interest expense and tax expense divided by sales).

Remember that the "Wal-Mart Stores" segment includes all U.S. discount stores, supercenters, and Neighborhood Markets. It should be noted that the operating margins in this area are PHENOMENAL, and that this is really the white hot core of all of Wal-Mart's operations. In retailing, operating margins north of 7% are astounding. I need to put in some comparable margins from other retailers to highlight the stupendous aspect of this.

[There is one slight caveat that needs to be mentioned here. Remember that all corporate overhead expenses for Wal-Mart are slotted into the "Other" operating segment (i.e. a segment not included above). Eventually I am going to need to "normalize" the above margins to take the missing corporate overhead into account. Corporate overhead includes things like salaries and bonuses to Wal-Mart execs and insurance. I still have some work to do on the "Other" segment before I can perform this step.]

And now, the million dollar question.. What is Wal-Mart worth? ..okay, $215 billion

2005-09-17T13:24:00.000-07:00

I have been working on the problem for some time now, and funnily enough I created a ridiculously complicated spreadsheet which took in lots of different variables such as increasing labor costs, increasing energy costs, increasing future interest rates, increasing taxes, yada yada yada. In the end, I scrapped the puppy. Too damn complicated.

What I did notice in the exercise, though, was that the ultimate answer to this question is simply what is happening at the bottom line, i.e. what will future growth be at the net income line? (..Duh.)

I can mess around with all the variables at the operating level, the interest rate level, and the tax payment level, and cause 1 to 2% changes in the growth rate for net income.

So, here is my simplified result..

Assumptions
Start with FY 2005 net income of $10.267 billion
10% average net income growth rate
10% discount rate
10x multiple in year 2016.

Wal-Mart, using these assumptions, is worth $215.607 billion right now.

Current market value ($183 billion) is at a 15% discount to intrinsic value of $215.6 billion.

[No, this is not a discounted cash flow (DFC) analysis. This is a discounted net income analysis. Buffett followers would chide me for not factoring in Cap Ex and Depreciation. My answer to that is this: I have never really found it useful to do a DCF analysis on a growing retail company. A DCF analysis really is only useful for a retailer that is not going to grow in the future. I don't think Wal-Mart falls into that category. Growth cap-ex is an investment in a future net income stream, one that should be significantly higher depending on the growth rate of the company. At some point, after growth slows to zero, cap-ex will stabilize and net income will become a function of how much operating efficiency can be wrung out of the system. While a retailer is still in growth mode, you can dumb the analysis down to net income (barring anything very unusual). There is lots of growth cap-ex left to come with Wal-Mart, I know. When Wal-Mart stops growing, it'll just be maintenance cap-ex. Eventually maintenance cap-ex and depreciation will cancel each other out. I just did it now to keep things simple.]

Wal-Mart U.S. Store Count By Type

2005-09-17T12:10:00.000-07:00

Note the ramp up of the Supercenters in relation to the decline of the Discount Stores. Many Discount Stores have been converted to Supercenters. This conversion process, which will continue in the future, can add to "cannibalization" (a term used by Wall Street analysts to refer to one store taking sales away from another). Wal-Mart itself prefers the term "market development."

Cannibalization, it should be noted, does not refer to the conversion process itself. Cannibalization is a new store taking sales from another still existing store, a phenomenon one would see once a retailer had started to saturate a certain geographic area. A Starbucks opening across the street from another Starbucks would presumably take sales from the original Starbucks. This is called cannibalization because it's a store gobbling down sales from another of its own kind. [...In the Houston Starbucks example, by the way, apparently sales at the old location went up after the new one opened across the street. And yes, they are both doing strong sales. You know you've got a good business when this happens.]

When a Discount Store is converted to a Supercenter, this itself is not cannibalization. It is just conversion from one store type to another. But, due to the conversion process, Wal-Mart experiences a big increase in sales at the new location. SOME of the increase in sales will be from customers NOT shopping at other nearby Discount Stores and instead taking their business to the Supercenter. This shift of shoppers from surrounding Discount Stores to the Supercenter is cannibalization.

The cannibalization process may have a lot to do with the Comparable Store Sales figues decline (see below). If a Discount Store is converted to a Supercenter, both the Discount Store sales (now zero) and the new Supercenter sales are not included in the Comparable Store Sales statistics. But surrounding Discount Stores (open at least a year) are included in the Comparable Store Sales statistics and may face sales loss due to the cannibalization.

Wal-Mart Comparable Store Sales vs. Sales Per Square Foot

2005-09-16T19:06:00.000-07:00

The chart here comes from:
1. Comparable Stores Sales data provided by Wal-Mart and
2. Sales Per Square Foot data that I derived from dividing all U.S. sales by the total square footage of U.S. retailing space. (Wal-Mart reports these figures separately in its 10K filings.)

Obviously Wal-Mart analysts have all been aflutter about the Comp Store Sales figures (the blue line). They are freaking out about the downward trend from 1999.

I don't know, I'm kind of impressed with the steadily rising Sales per Square Foot figures (the red line). The Sales per Square foot figure includes both new and old square footage and up to date sales, so it's not a comp stores sales derivative. As such it is less volatile than the Comp Stores Sales percentages.

The “Other” operating segment

2005-09-16T16:16:00.000-07:00

I finally found out what is in the “Other” segment for Wal-Mart (..you know, the one with $44 billion in assets and no explanation). I simply read all the annual reports going back until the first appearance of the “Other” segment. It first appears in the 1998 Annual Report.

In June 1997, the Financial Accounting Standards Board (FASB) issued Statement No. 131, “Disclosures about Segments of an Enterprise and Related Information,” which Wal-Mart adopted in Fiscal Year 1998. Wal-Mart identifies such segments based on “management responsibility within the United States and geographically for all international units.”

All of Wal-Mart’s real estate assets in the United States are included in this “Other” operating category. Those are the primary assets of the category. The real estate is then leased to the Wal-Mart Stores segment and the SAM’S Club segment.

All of the international real estate, by the way, is placed in the “International” segment.

[Back in 1998, by the way, Wal-Mart still owned McLane Company Inc., the grocery distribution business. McLane existed in the "Other" operating segment all the way up until it was sold to Berkshire Hathaway in Fiscal Year 2004. (Sale was completed on May 23, 2003 for $1.5 billion in cash from Berkshire.) Most of the revenue in the "Other" operating segment came from McLane. When McLane left Wal-Mart in FY 2004, operating income for the "Other" segment went negative, i.e. more expenses than income.]

Wal-Mart's stock falls to near 5 year lows

2005-09-16T12:44:00.000-07:00

The last time Wal-Mart stock traded under $44 per share was October 30, 2000.

This weakness in the stock price is quite interesting to me because for a long time (i.e. for most of its history as a public company) Wal-Mart employees have been able to build a significant amount of wealth for themselves simply by owning the stock. This phenomenon of employees building wealth for themselves separate from their low salaries has been not only spectacular, it has probably in many ways kept a lid on discontent about the salary levels. Why complain about making $20,000 a year when you've got a retirement nest egg ballooning at $400,000 or so after years of service? [See examples from Sam Walton's autobiography of regular employees building this kind of wealth.]

The lack of ability of regular employees to build wealth from ownership of Wal-Mart stock over the last five to six years could have an interesting effect on the background noise of grumbling over salaries.

To be fair here, Wal-Mart went through a period of zero price appreciation in their stock from 1993 to 1997. That period of zero price appreciation, though, lasted 4 years.

We are currently in about a 6 year stretch of overall zero price appreciation dating back to August of 1999.

How odd that would be if the lack of stock price appreciation over the last six years actually caused Wal-Mart to suffer on an operating cost basis (i.e. having to raise salaries). That's just a bizarre phenomenon, more commonplace I would imagine in a place like Silicon Valley.

S&P 500 index completes move to free-float methodology.. index funds must sell some Wal-Mart stock to comply.

2005-09-16T11:57:00.000-07:00

To put this as simply as possible, Standard & Poors announced last year that they were changing their weighting methodology for the S&P 500 index and that this change would occur in 2005.

The S&P 500 is a stock market index comprised of the stocks of five hundred of the largest and most significant public companies in the U.S. and is one of the most commonly used benchmarks for the overall U.S. stock market.

Wal-Mart is part of the S&P 500 and since the S&P 500 is a market capitalization (or “market cap”) weighted index, Wal-Mart (with its enormous market cap) makes up a significant portion of the index.

Since the Walton family owns approximately 39% of all of the stock of Wal-Mart, Standard & Poors considers this portion of Wal-Mart’s stock to be “not available to the public.” Therefore they want to adjust Wal-Mart’s weighting in the S&P 500 to reflect this.

There is approximately $1 trillion invested in index funds that track the S&P 500. Those index funds will need to make adjustments to their portfolio to reflect the new index methodology (i.e. the free-float methodology). Half of the adjustment occurred back on March 18th of this year. The second half of the adjustment is occurring today.

This means you should expect to see an enormous number of Wal-Mart shares change hands today. The trading volume today should easily be twice the normal volume.

The graphic below shows that the index re-weighting will be complete by today.

[Please note that on page 28 of the 2005 Annual Report, Wal-Mart suggests that they will be taking advantage of the index re-weighting to step into the market to buy shares under their current share buyback program. See the first comment on this post for that text.]

What actual space does Wal-Mart compete in?

2005-09-14T22:09:00.000-07:00

The framework for addressing this question I believe has to be the NAICS (or North American Industry Classification System) which is used by the U.S. Department of Commerce. There is no other more complete framework that I know of.

In my post dated September 9 (below), I outline the four main NAICS categories that Wal-Mart competes in. There are specific reasons for using those four categories. However, I feel reducing Wal-Mart to that set is too limiting.

Let me list ALL of the retail trade categories that exist in the NAICS. When we zoom out to the more macro level, we only look at the first 3 digits of the codes, and those categories break down as follows: (this is the full set of retail)

441   Motor vehicle & parts dealers
442   Furniture & home furnishings stores
443   Electronics & appliance stores
444   Building material & garden equipment & supplies dealers
445   Food & beverage stores
446   Health & personal care stores
447   Gasoline stations
448   Clothing & clothing accessories stores
451   Sporting goods, hobby, book, & music stores
452   General merchandise stores
453   Miscellaneous store retailers
454   Nonstore retailers

Now while I had limited Wal-Mart to the 445 and 452 categories, this isn't exactly correct. Wal-Mart is competing in some of these other categories as well.

Eventhough a "Discount or mass merchandising dept stores" (category 4521102 in the NAICS) sells clothing, the clothes sold there are classified as being sold from a different retail industry than macro category 448 which is "Clothing & clothing accessories stores." Putting Wal-Mart in the first category but not the second is the equivalent of saying that Wal-Mart does not compete with The Gap. ..I think Wal-Mart ultimately does compete with The Gap.

So to take this to a more macro level, I suggest adding up ALL of the above categories and subtracting out "Motor vehicle & parts dealers." ..Wal-Mart doesn't actually sell cars (yet), and it is unclear to me how big they are in the auto parts business. Therefore, I am looking for Wal-Mart's competitive category to be "Retail and Food Sales (excl. Motor vehicle and parts dealers)."

If I do this, and I compare the economic census data to Wal-Mart's total U.S. sales, I find the following:

Wal-Mart's sales account for the following percentages by year of ALL retail sales in the United States (excluding auto sales and auto parts sales)

      1995    4.6%
      1996    4.8%
      1997    5.1%
      1998    5.5%
      1999    5.8%
      2000    6.0%
      2001    6.6%
      2002    7.1%
      2003    7.5%

Wal-Mart data compared to 2002 U.S. Census economic data

2005-09-14T21:25:00.000-07:00

Total retail sales in the United States in 2002 for the four NAICS retail categories (listed in post below) were:
$ 828.825 billion

Wal-Mart's 2002 (calendar) U.S. sales were:
$188.822 billion

Wal-Mart's 2002 sales represented 22.78% of the total U.S. sales in the main categories it competes in.

[For detailed information on data source, see post immediately below.]

Wal-Mart data compared to 1997 U.S. Census economic data

2005-09-09T22:09:00.000-07:00

I spent a fair amount of time going through the U.S. Census material to try to figure out what the percentage is that Wal-Mart has of the overall retailing space that it operates in here in the U.S.

Let me quickly breakout the 4 NAICS codes that apply when comparing Wal-Mart data to U.S. Census economic data.
They are:

NAICS
code      Description
445110   Supermarkets & other grocery
445120   Convenience stores
452110   Department stores
452910   Warehouse clubs and superstores

Total retail sales in the United States in 1997 for the four categories listed above were:
$670.277 billion

Wal-Mart's 1997 (calendar) U.S. sales were:
$104.488 billion

Wal-Mart's 1997 sales represented 15.59% of the total U.S. sales in the main general categories it competes in.

[I made the selection of those specific NAICS categories above based on the 1997 Economic Census Retail Trade publication by the U.S. Census Bureau published in October 2000. The reference number for this publication is EC97R44S-SB. It may seem odd that I included "Convenience Stores" as Wal-Mart would not seem to compete in this category. I did so because there are only two categories of "Grocery Stores" in the entire census. These are "Supermarkets & other grocery (except convenience) stores" and "Convenience stores." The U.S. Census Bureau generally includes Convenience Stores when they are discussing the overall grocery business. Wal-Mart is in the grocery business. For a more advanced look at all of the NAICS retail categories, see the first comment below.]

9,256 football fields and counting

2005-09-09T17:55:00.000-07:00

A football field is 120 yards long by 53 yards wide. (..people often forget about the 10 yard depth of the end zones.)

As of Jan 2005, Wal-Mart had a total of 529,835,000 square feet of retailing space in the United States.

This is the equivalent of 9,256 football fields.

Between Jan 2004 and Jan 2005, Wal-Mart added 678 new football fields of retailing space.

If all of the fixtures and inventory were pulled out of all of Wal-Mart's U.S. retailing space and each store was filled with 1 person per square yard, Wal-Mart stores would hold 58,868,160 people (or 20% of the entire 2005 population of the United States.)

U.S. population growth by state

2005-09-09T17:04:00.000-07:00

As you can see in the above diagram, population growth is greatest in the west. If you look at the store saturation map below, you can see that Wal-Mart (as of 1995) had plenty of room to grow out west. I need to try to determine how much Wal-Mart growth has actually happened in the west by 2000 and 2005.

Wal-Mart store growth in U.S. 1970 - 1995

2005-09-09T16:14:00.000-07:00

This image comes from Emek Basker's paper on Wal-Mart.

Recent Wal-Mart stock price weakness

2005-09-09T14:22:00.000-07:00

It's amazing to see Wal-Mart's stock price hovering down near three year lows lately. The recent low point was $44.53 (on Sep 2nd). Mainly this is an ongoing reaction to the latest quarterly earnings which were released on August 16th.

Operating profit growth and net profit GROWTH for the quarter ending 7/31/2005 were half the rate of the year earlier quarter.

	13 weeks ending	13 weeks ending
	7/31/2005	7/31/2004
Net sales growth (yoy)	10.2%	11.3%
Operating income growth (yoy)	6.2%	16.1%
Net income growth (yoy)	5.8%	8.5%

This is especially significant because on page 12 of the most recent annual report (year ending 1/31/2005), CEO Lee Scott goes out of his way to discuss the "outstanding growth prospects" for Wal-Mart.

Also note that Mr. Scott states there is room "for almost 4,000 more Supercenters" in the U.S.
(As of 1/31/2005 there were 1,713 Supercenters. Adding 4,000 more would mean a total of 5,713 Supercenters in the United States. ..That's a lot of square footage!..)

Wal-Mart's components

2005-09-08T17:38:00.000-07:00

There is only one way to break down Wal-Mart’s overall operations in order to gain clarity by its various operating units.

It is the same way that Wal-Mart breaks itself down. There are no separate disclosures other than via the following four segments.

- Core Wal-Mart U.S. operations
- Sam’s Club U.S. operations
- Wal-Mart international operations
- “Other”

Core Wal-Mart U.S. operations are comprised of Discount Stores (the original Wal-Mart store concept), Supercenters, and Neighborhood Markets in the United States.

Sam’s Club operations are comprised of domestic U.S. Sam’s Club stores.

Wal-Mart International operations are comprised of multiple store formats (including Supercenters, Sam’s Clubs, and local brand name stores) all located outside of the United States.

It is unclear to me exactly what is in the “Other” segment, although we do have a couple of clues (which I will mention later).

Operating income (EBIT) by segment dollars in thousands

	fiscal years
	Jan 2005	Jan 2004	Jan 2003
Wal-Mart Stores	14,163	12,916	11,840
Sams Club	1,280	1,126	1,023
International	2,988	2,370	1,998
Other	-1,340	-1,387	-1,566
Total	17,091	15,025	13,295

The only bummer about the above numbers is the weighting of the assets in the non-core U.S. segments (as shown below).

Total Assets by segment dollars in thousands

	fiscal years
	Jan 2005	Jan 2004	Jan 2003
Wal-Mart Stores	29,489	27,028	24,868
Sams Club	5,685	4,751	4,404
International	40,981	35,230	30,709
Other	44,068	38,396	30,709
Total	120,223	105,405	92,900

The EBIT return on Assets (EBIT/Assets) from the above tables is as follows for 2005:

Wal-Mart Stores 50%
Sams Club 25%
International 8%
Other -3%
Total (weighted) 15%

What the above tables show is that the shocking returns (EBIT/Assets) on core domestic assets is tempered by the much lower returns on the international and “other” assets.

The real bummer of the above data, of course, is this negative return on the whopping $44 billion of assets in the "Other" category.

Wal-Mart discloses very little about this "Other" operating segment.

What we do know is this:
Corporate overhead is placed in this category.
Seiyu is in this category.
McLane’s used to be in this category.

Since McLane’s is long gone, I am more than a bit befuddled as to what the heck is actually in this segment. ..$44 billion in assets and no explanation? The investment in Seiyu makes up only $670 million of the $44 billion.

(The Seiyu investment will eventually rotate out of “Other” and into “International” when Seiyu is consolidated.)

The only tantalizing figures we have for the "Other" segment for 2005 are as follows.
Revenues from external customers $ 0
Intercompany real estate income $ 3,267
Depreciation & amortization expense $ 1,510
Operating loss $ 1,340

Based on the above information, I believe that Wal-Mart has put all of its real-estate assets into this "Other" segment. I need to think about this in regard to how to better demystify this segment.