Thursday, June 07, 2007

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

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.

Monday, June 04, 2007

The results of the original September 2004 Share Repurchase Plan

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

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.

Sunday, April 23, 2006

Wal-Mart in China

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.

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."

Thursday, April 20, 2006

Wal-Mart's Photo Processing business

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!

Wednesday, April 19, 2006

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

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

Monday, April 17, 2006

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

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.)

Saturday, April 15, 2006

FY 2006 Wal-Mart financial statements - Part One

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

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.)