Wal-Mart Stores, Inc.

(WMT)

February 25, 2006

Hold
WMT: Competitive and Financial Analysis
By: Ryan Hummer

Company Profile
Wal-Mart Stores, Inc. (Wal-Mart) operates retail stores in
various formats worldwide. The Company organizes its
business into three principal segments: Wal-Mart Stores,
SAM'S CLUB and International. The Wal-Mart Stores
segment is the largest segment of Wal-Mart's business,
accounting for 67.3% sales during the fiscal year ended
January 31, 2005 (fiscal 2005). The segment consists of three
different retail formats, all of which operate in the United
States. The Company's SAM'S CLUB segment consists of
membership warehouse clubs that operate in the United
States, and accounts for 13% of fiscal 2005 sales. The
international segment consists of retail operations in eight
countries and Puerto Rico, and generated 19.7% of WalMart's fiscal 2005 sales. In addition, the Company owns an
unconsolidated minority interest of approximately 37% of
The Seiyu, Ltd., a retailer in Japan.

Summary
I assign WMT a one-year price target of $46.00 based on its
competitive position within the retail industry, current
industry trends, and strategy to grow both domestic and
international sales. The following are key assumptions
underlying my valuation:

LAST UPDATE: February 25, 2006

SECTOR:
INDUSTRY:
CONTACT:

Consumer Staples
Retail
702 Southwest 8th Street
Bentonville, AR 72716
(479) 273-4000
(479) 273-4053

Web:

www.walmart.com

BASIC INFORMATION
Current Price:
Market Cap (Mil):
Shares Outstanding (Mil):
Average Volume:
52 Week Low:
52 Week High:
Latest Dividend:
60-Month Beta:
EPS:
P/E:
P/E/G Ratio (5-Yr. Expected):
P/E (1-Yr. Fwd):
P/B:
P/S:
P/CF:

$45.45
$189,260.30
4,163.49
13,698,600
$42.31
$53.49
$0.15
0.85
$2.68
16.95
0.98
13.61
3.58
0.61
9.62

There is a strong possibility that consumer spending could slow substantially in the near term
as many U.S. consumers have been financing their consumption at least in part by borrowing
against the equity in his or her home. Such consumers have refinanced using adjustable rate
mortgages. This financial trend combined with the rising interest rate environment will likely
slow consumer spending substantially. Present-day low U.S. consumer savings rates could
also hamper future consumer spending in the future.
Despite WMTs position as the largest retailer in the world, its latest sales and earnings growth
rates (FY2006) have declined dramatically. Sales grew at 9.4% in FY2006 compared to sales
growth of 11.3% last year, while earnings growth slowed from 13.4% in FY2005 to 9.4% this
past year.

The Consumer Staples Sector and Retail industry are fairly valued when considering the sector
and industrys P/E, P/S, P/CF, and P/BV ratios (especially relatively to the S&P 500).
Three valuation methods: Free Cash Flow, Dividend Discount Model, and Comparable
Valuation Ratio Technique produce consistent values per share to give WMT a one-year price
target of $46.00.

Company Overview
Introduction
As of January 31, 2005, WMT operated 1,353 Discount Stores, 1,713 Supercenters, 551 SAMS
CLUBs and 85 Neighborhood Markets in the United States. As of January 31, 2005, the Company
operated units in Argentina (11), Brazil (149), Canada (262), Germany (91), South Korea (16),
Mexico (679), Puerto Rico (54) and the United Kingdom (282). WMT also operated 43 stores
through joint ventures in China as of January 31, 2005. Additionally, WMT recently acquired Seiyu
which operates approximately 403 stores throughout Japan and has contributed to WMTs growing
Asian presence. Much of the Companys international growth in recent years has been due to
acquisitions of existing operations in various countries. The three most notable acquisitions include:
1) the Companys December 2002 purchase of Supermercados Amigo, Inc. (Amigo), a supermarket
chain located in Puerto Rico with 37 supermarkets at the time of the acquisition; 2) the Companys
February 2004 purchase of Bompreo S.A. Supermercados do Nordeste (Bompreo), a supermarket
chain in northern Brazil with 118 hypermarkets, supermarkets and mini-markets; and as previously
mentioned, Companys FY2005 acquisition of a 50% stake in Seiyu, a Japanese Retailer with over
403 stores throughout Japan.
As of January 31, 2005, the Company employed approximately 1.7 million Associates worldwide,
with approximately 1.3 million Associates in the United States and approximately 410,000 Associates
in foreign countries.

Industry Segments1
WMT is organized into three operating segments: Wal-Mart Stores, SAMS CLUB, and International.
The Wal-Mart Stores segment includes Discount Stores, Supercenters and Neighborhood Markets in
the United States as well as Walmart.com. The SAMS CLUB segment includes the warehouse
membership clubs in the United States as well as samsclub.com. The International segment consists of
operations in Argentina, Brazil, Canada, China, Germany, Mexico, Puerto Rico, South Korea and the
United Kingdom.
Each operating segments business is somewhat seasonal. Generally, the highest volume of sales
occurs in the fourth fiscal quarter, which includes the holiday season, and the lowest volume occurs
during the first fiscal quarter.
1

Wal-Mart Stores, Inc. FY2005 10-K

2

Wal-Mart Stores Segment

The Wal-Mart Stores segment had net sales of $191.8 billion, $174.2 billion and $157.1 billion for the
fiscal years ended January 31, 2005, 2004, and 2003, respectively. The sales revenue is well
diversified throughout the country as no single Discount Store, Supercenter or Neighborhood Market
location accounted for as much as 1% of total Company sales or net income during the most recent
fiscal year.
Wal-Mart Discount Stores operate in all 50 states, Supercenters in 45 states and Neighborhood
Markets in 14 states. The Discount Stores range in size from 30,000 square feet to 220,000 square
feet, with the average size of a Discount Store at approximately 100,000 square feet. Supercenters
range in size from 100,000 square feet to 261,000 square feet, with the average size of a Supercenter
falling at approximately 187,000 square feet. Neighborhood Markets range in size from 38,000 square
feet to 55,000 square feet, with the average size being approximately 43,000 square feet.
Wal-Mart Discount Stores and the general merchandise area of Supercenters carry apparel for women,
girls, men, boys and infants, domestics, fabrics and notions, stationery and books, shoes, housewares,
hardware, electronics, home furnishings, small appliances, automotive accessories, horticulture and
accessories, sporting goods, toys, pet food and pet accessories, cameras and supplies, health and
beauty aids, pharmaceuticals, jewelry and optical and provide photo processing services. In addition,
WMTs stores offer an assortment of grocery merchandise. The grocery assortment in the
Supercenters consists of a full line of grocery items including meat, produce, deli, bakery, dairy,
frozen foods and dry grocery. Most of the Discount Stores carry a limited assortment of dry grocery
merchandise while a number of the larger Discount Stores in some markets carry a broader assortment
of grocery items, including perishable items. Neighborhood Markets are generally organized into
departments such as: dry grocery, meat, produce, deli, bakery, dairy, frozen foods, pharmaceuticals,
photo processing, health and beauty aids, household chemicals, paper goods, general merchandise and
pet supplies.
Nationally advertised merchandise accounts for a significant portion of sales in the Wal-Mart Stores
segment. WMT also market lines of merchandise under private-label store brands including Sams
Choice, One Source, Great Value, Everstart, Everactive, Ol Roy, Puritan, Equate,
No Boundaries, George, Athletic Works and Kid Connection. The Company also markets
lines of merchandise under licensed brands, some of which include Faded Glory, General
Electric, Disney, Catalina, McDonalds, Mary-Kate and Ashley and Starter.
During the fiscal year ended January 31, 2005, sales in Discount Stores and Supercenters (which are
subject to seasonal variance) by product category were as follows:
PERCENTAGE
OF SALES
CATEGORY

Grocery, candy and tobacco

Hardgoods

28%
19%

Softgoods and domestics

Pharmaceuticals
Electronics
Health and beauty aids
Sporting goods and toys
Stationery and books
Photo processing
Jewelry
Shoes

16%
9%
9%
7%
6%
3%
1%
1%
1%
100%

SAMS CLUB Segment

The SAMS CLUB segment had net sales of $37.1 billion, $34.5 billion and $31.7 billion for the
fiscal years ended January 31, 2005, 2004 and 2003, respectively. The SAMs Club segment is also
well diversified as no single club location accounted for as much as 1% of total Company sales or net
income during the most recent fiscal year.
WMT operates SAMS CLUBs in 48 states. Facility sizes for SAMS CLUBs generally range
between 70,000 and 190,000 square feet, with the average SAMS CLUB facility at approximately
128,000 square feet.
SAMS CLUB offers bulk displays of brand name merchandise, including hardgoods, some
softgoods, institutional-size grocery items, and selected private-label items under the MEMBERS
MARK, BAKERS & CHEFS and SAMS CLUB brands. Generally, each SAMS CLUB also
carries software, electronics, jewelry, sporting goods, toys, tires, stationery and books. Most clubs
have fresh departments, which include bakery, meat, produce, floral and Sams Cafe. Additionally, a
significant number of its clubs offer photo processing, pharmaceuticals, optical departments and
gasoline stations.
During the fiscal year ended January 31, 2005, sales in the SAMS CLUB segment, which are subject
to seasonal variance, by product category were as follows:
PERCENTAGE
OF SALES
CATEGORY

Food
Sundries
Hardgoods
Service Businesses
Softgoods

31%
28%
19%
16%
6%
100%

SAMS CLUBs are membership only, cash-and-carry operations. Limited credit facilities are
available, including the SAMS Direct commercial finance program and Business Revolving
Credit available to qualifying business members. WMT provides Personal Credit program
available to qualifying club members and accept the Discover Card in all clubs. Credit extended to
members under these programs is without recourse to the Company. Typical club members include
business owners and operators. Individuals who are not business owners can become Advantage
members by paying a membership fee. In fiscal 2005, business members paid an annual membership
fee of $30 for the primary membership card with a spouse card available at no additional cost. In
addition, business members can add up to eight business associates for $30 each. The annual
membership fee for an individual Advantage member is $35 for the primary membership card with
a spouse card available at no additional cost. The SAMS CLUB PLUS Membership program offers
additional benefits and value on services. The annual membership fee for a PLUS Member is $100.

International Segment
WMTs International segment is comprised of operations through wholly-owned subsidiaries in
Argentina, Canada, Germany, Puerto Rico, South Korea, and the United Kingdom; operations through
majority-owned subsidiaries in Brazil and Mexico; and operations through joint ventures in China.
Additionally, Wal-Mart has an unconsolidated 37% minority interest in the Japanese retailer, Seiyu
(as of FY2005). The International segments net sales for the fiscal years ended January 31, 2005,
2004 and 2003, were $56.3 billion, $47.6 billion and $40.8 billion, respectively. Again, the sales are
diversified as no single unit accounted for as much as 1% of total Company sales or net income during
the most recent fiscal year.
Operating formats vary by country, and include Discount Stores in Canada and Puerto Rico;
Supercenters in Argentina, Brazil, China, Germany, South Korea, Mexico, Puerto Rico and the United
Kingdom; SAMS CLUBs in Brazil, Canada, China, Mexico, and Puerto Rico; Superamas (traditional
supermarket), Bodegas (combination discount and grocery store), Suburbias (specialty department
store) and Vips (restaurant) in Mexico; Todo Dias (combination discount and grocery store) and
Balaios (discount food and general merchandise store) in Brazil; Neighborhood Markets (traditional
supermarkets) in China; ASDA stores (combination grocery and apparel store) and George stores
(apparel store) in the United Kingdom; and Amigo supermarkets in Puerto Rico.
The merchandising strategy for the International operating segment is similar to that of WMTs
operations in the United States in terms of the breadth and scope of merchandise offered for sale.
While brand name merchandise accounts for a majority of sales, several store brands not found in the
United States have been developed to serve customers in the different markets in which the
International segment operates.

Macro-economic, Sector, and Competitive Analysis

5

Macro-economic Analysis
Introduction
WMT falls within the consumer staples sector which is typically a defensive or counter-cyclical
sector. WMT operates as a discount (food, drug, and merchandise) retail company that is renowned
for its ability to offer consumers every day low prices. WMT will typically see increased sales
during downturns in the economic cycle (and throughout a recession), because consumers divert their
spending from luxury goods to consumer staples that are necessary for every-day life. The demand
for staples that WMT sells such as groceries, clothing, and pharmaceutical drugs is inelastic, that is
consumers will continue to purchase these goods in comparable quantities regardless of the state of the
economy.
Many consumer staples equities move inversely to the market (S&P 500), and therefore have low
market betas (around 0.50). WMT historical stock prices have not displayed the typically negative
correlation. On the following page is a stock price chart of WMT compared to the S&P 500 (SP5A)
over the past ten years and a regression analysis output:

WMT Price Vs. SP5A Price REGRESSION SUMMARY OUTPUT

Regression Statistics
Multiple R
0.585140785
R Square
0.342389739
Adjusted R Square
0.341125104
Standard Error
0.034424929
Observations
522
ANOVA
df
Regression
Residual
Total

Intercept
WMT Market Beta

1
520
521

SS
MS
0.320849671 0.320849671
0.616239367 0.001185076
0.937089038

F
270.7419191

Coefficients
0.001703865
1.030748765

Standard Error
t Stat
0.001511081 1.12758022
0.062643364 16.45423712

P-value
0.260017256
2.79716E-49

Significance F
2.79716E-49

Lower 95%
Upper 95%
-0.001264708 0.004672438
0.907683631 1.153813898

Regressing WMT stock price returns against the SP5A price returns shows that WMTs stock price is
positively correlated with the market price movements. The output gives an adjusted R2 of 34.0%,
which means the SP5As price movements explain 34.0% of WMTs stock price variation. The
regression was performed over a period of ten years and yields a 1.03 (10-year) market beta for WMT.
In my analysis throughout this report, I will use the 60-month market beta of 0.85, because using the
latest market data should improve the accuracy of my projections. Most equity stocks within the
consumer staples sector have 60-month betas well below 0.85 and 10-year betas well below 1.03 (i.e.,
BUDs 60-month beta is 0.55). In other words, while typical consumer staple equities move
conversely to the market, WMT moves coincidentally with the market.
Consumer Spending

Since WMT does not exhibit the typical counter-cyclical stock price behavior that most firms within
the consumer staples sector exhibit (or is less defensive), adverse shocks to the market will
presumably lead WMTs stock price to fall. One such potential
shock that would be detrimental to the retail industry in general
U.S. Retail Sales (Total)
is a sudden, unexpected slowdown in consumer spending and
consumption.
The charts to the right show that consumer spending and
consumption has been increasing steadily over time taking into
account seasonality.
500

400

300

200

100
7
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n03
Ja
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n05
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History (see the charts to the right) has shown that it does not pay
to bet against the U.S. consumer. On the other hand, there are
U.S. Personal (Real) Consumption
new factors that have a consequential impact on consumer
spending that we must now consider including: Adjustable Rate
Mortgages and Consumer Indebtedness and importantly, how the
two factors relate and how their affects can potentially slowdown
consumer spending in the near future. Adjustable Rate
Mortgages (ARMs) provide an alternative for the consumer to
finance his or her home and the use of ARMs has grown in
popularity throughout the past five years, primarily due to
extremely low interest rates. ARM interest rates are typically
priced off of financial instruments with shorter maturities that match the length of the initial
adjustment period2. Since the U.S. Fed Funds rate reached a low at 1.00% in FY2002, the FED has
increased rates a quarter point at a time to where we stand now at 4.50%. This scenario has caused
ARM interest costs to rise. Below is a chart3 that shows the interest rate used to compute interest cost
for 1-year ARMs:
8500
8000
7500
7000
6500
6000
5500

Jan-05

Jan-04

Jan-03

Jan-02

Jan-01

Jan-00

Jan-99

Jan-98

Jan-97

Jan-96

5000

MortgateDailyNews.com. Freddie Mac Issues Annual Adjustable Rate Mortgage Survey.

http://www.mortgagenewsdaily.com/172005_Freddie_Mac_Adjustable_Rate_Mortgage_Survey.asp
3
HSA online: http://library.hsh.com
7

WMT qoq Rev. Growth

Since there is evidence that many consumers

financed or refinanced their homes with ARMs
WMT Revenue Vs. Homeowner Indebtedness
through the past five years (ARMs accounted
25.0%
y = -0.0442x + 0.8263
for approximately 30% of jumbo mortgages in
R2 = 0.2614
20.0%
3Q05 down from about 40% a year earlier4), it
is reasonable to believe the rising interest rate
15.0%
environment, in which we are currently
10.0%
experiencing, will slow consumer spending.
Many analysts are projecting the FED to raise
5.0%
the Fed Funds rate to 4.75% by April of this
0.0%
year, where they expect it to remain at least
15
15.5
16
16.5
17
until July5. Given that nearly half of all
Homeowner Fin. Obligation Ratio
consumer debt and about one-quarter of total
mortgage debt is currently based on adjustable
6
rates , the question is, will this additional expected rate hike be enough to rein in spending, which will
intern slow WMTs sales growth in the U.S.?

*Financialobligationsincludedebt service, rentpaym

ents, autoleasepaym
ents, hom
eownerspropertytaxpaym
ents, andhom
eownersinsurancepaym
ents

Furthermore, personal savings as a percentage of disposable personal income has dipped down to
negative levels (-0.5% for FY2005: see table7 above
Personal Savings As % of Disposable Income
and to the right) for the first time since 1933 when
the country was struggling to cope with the Great
3.0%
Depression. This data indicates that the U.S.
2.0%
consumer has dipped into his or her savings to fuel
1.0%
consumer spending growth in the past year. Much
0.0%
of this savings may have originated from the
2004:Q3
2004:Q4
2005:Q1 2005:Q2
2005:Q3
2005:Q4
-1.0%
consumer borrowing against the equity in his or her
-2.0%
home through refinancing with an ARM. When
you take this together with the rising interest rate
-3.0%
environment, it is very realistic that U.S. consumer
spending could slow at a material rate.
To further investigate the effects of financial strain on the U.S. consumer and its potential effects on
WMTs sales, I performed a series of regression analyses by regressing WMTs sales growth to
various economic data. The best predictor of WMTs sales growth with regard to a consumer debt
ratio was the Homeowner Financial Obligation Ratio. The regression results (see chart to the left)
did show a negative relationship, this means that as U.S. homeowners augment debt, WMT sales are
adversely impacted. Although the inverse relationship between WMTs qoq Revenue Growth and
Homeowners Financial Obligation Ratio supports the claim that WMT is not the typically countercyclical consumer staple, the R2 is a meager 26%. Out of the various consumer debt ratios I used to
regress WMTs sales growth, this was the closest relationship I found (e.g., the highest R2).
4

Simon, Ruth. A Trendy Mortgage Falls From Favor. The Wall Street Journal. November 29, 2005. pg D1
http://www.forecasts.org/fedfunds.htm
6
Valueline. Retail Store Industry Report. February 10, 2006
7
U.S. Department of Commerce
5

Sector& Industry Valuation

Sector Valuation
Since the economy has been in the recovery stage of the economic cycle for the last two to three years,
investors have pulled their money out of large-cap consumer staple stocks like WMT and have found
opportunity in other sectors, such as energy. With most experts forecasting FY2006 GDP growth in
the neighborhood of 3.0%8 the stock market (SP5A) is expected to rise anywhere from 4% to 10%. It
is probable that money will continue to flow out of consumer staples into cyclical sectors where
opportunity for stock price appreciation may be greater. As a result of people investing in other
sectors aside from consumer staples, the consumer staples sector as a whole is approximately fairlyvalued based on valuation ratios: P/E, P/S, P/CF, P/BV.
Cons Staples P/S Relative to SP5A

Cons Staples P/E Relative to SP5A

1.20

1.40
1.20

1.00

1.00
P/E

0.80

P/S

Cons Staples P/CF Relative to SP5A

2/23/05

2/23/04

2/23/03

2/23/02

2/23/01

2/23/00

2/23/99

Cons Staples P/BV Relative to SP5A

2.00

2.40
2.00

1.60

1.60

1.20

P/CF

0.80

P/BV

1.20

2/23/05

2/23/04

2/23/03

2/23/02

2/23/01

2/23/00

2/23/99

2/23/98

2/23/97

0.40

2/23/96

2/23/05

2/23/04

2/23/03

2/23/02

2/23/01

2/23/00

2/23/99

2/23/98

2/23/97

0.80
2/23/96

0.40

2/23/98

2/23/97

2/23/96

0.40

2/23/05

2/23/04

2/23/03

2/23/02

2/23/01

2/23/00

2/23/99

2/23/98

2/23/97

2/23/96

0.40

0.80
0.60

0.60

Consumer Staples Relative to SP5A

P/E
P/S
P/CF
P/BV
High 1.27
0.98
1.54
2.20
Low 0.69
0.50
0.79
1.07
Mean 1.07
0.80
1.26
1.76
Current 1.21
0.74
1.16
1.38

The charts and data above show that the consumer staples index is currently trading at a premium
relative to the market (SP5A) when considering each indexs forward P/E ratio. The forward relative
P/E ratio of consumer staples index is trading well above its ten-year average of 1.21. When
analyzing the other three ratios, we find that the consumer staples index is trading close to its ten-year
average. It depends on which valuation ratio the investor considers most valuable, but regardless, this
analysis gives us evidence that the consumer staples sector is fairly- to over-valued relative to its longrun (ten-year) average.
Industry Valuation
8

Valueline. Retail Store Industry Report. February 10, 2006.

9

WMT operates within the Retail Industry, which is traditionally a difficult industry in which to
increase earnings mainly because margins are slim to due intense competition. Other firms that
operate within the value-chain, both up-stream (the manufacturer) and down-stream (the consumer)
have the power to extract the majority of the value created in the value-chain. Because growth within
the retail industry is limited, the market typically assigns lower valuation ratios (P/E, P/S, P/CF,
P/BV) to retail firms. Like the consumer staples of which WMT is a part, the retail industry is fairlyvalued based on the aforementioned relative valuation ratios:
Retail Industry P/S Relative to SP5A

Retail Industry P/E Relative to SP5A

0.60

4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00

0.50
0.40
P/E

0.30

P/S

0.20
0.10

Retail Industry P/CF Relative to SP5A

2/23/05

2/23/04

2/23/03

2/23/02

2/23/01

2/23/00

2/23/99

2/23/98

2/23/97

2/23/96

2/23/05

2/23/04

2/23/03

2/23/02

2/23/01

2/23/00

2/23/99

2/23/98

2/23/97

2/23/96

0.00

Retail Industry P/BV Relative to SP5A

3.50

1.40

3.00

1.20

2.50

1.00
0.80

Retail Industry Relative to SP5A

P/E
P/S
P/CF
High 4.13
0.48
3.18
Low 0.97
0.21
0.87
Mean 1.65
0.34
1.41
Current 1.39
0.34
1.14

2/23/05

2/23/04

2/23/03

2/23/02

2/23/01

2/23/00

2/23/99

2/23/98

2/23/05

2/23/04

2/23/03

2/23/02

2/23/01

2/23/00

0.00
2/23/99

0.00
2/23/98

0.20
2/23/97

0.40

0.50
2/23/96

P/BV

0.60

1.00

2/23/97

P/CF

1.50

2/23/96

2.00

P/BV
1.30
0.58
0.97
1.02

Notice the break in the relative forward P/E ratio chart is the result of not meaningful P/E ratios
during that period due to very low earnings (extremely low EPS in the denominator creates very high
and, hence, not meaningful P/E ratios). The data shows that the Retail Industry is trading close to its
average for all four valuation rations and therefore can be considered fairly-valued.
Summary
The Consumer Staples Sector and Retail Industry valuations support my valuation of WMT at
HOLD. If both WMTs sector and the industry are fairly valued, there is a higher probability that
WMT is fairly valued.

Competitive Analysis: Five Forces & Current Strategy

Five Forces Analysis
10

WMT operates in the retail industry as the preeminent low-cost retailer. WMTs strategy is built
around its pricing philosophy of providing EDLP- Everyday Low Prices. WMTs broad assortment
of merchandise that provides one-stop shopping and high in-stock levels provide confidence to
customers that WMT will have what they need, and its long operating hours allow customers to shop
at their convenience. These qualities provide WTM with an additional competitive advantage.
In order to determine whether or not WMT maintains sustainable competitive advantages within the
retail industry as a low-cost retailer, it was necessary to conduct a five forces analysis.
Barriers To Entry (BTE)
Immediate BTEs are relatively low since 1) opening a retail store is relatively low-capital intensive, 2)
fixed costs are low, and 3) specific knowledge of operating a retail store is realistically obtainable.
Evidence of this typically exists in your local strip mall, where proprietary retail operations are
common. On the other hand, when a Wal-Mart store opens in a neighborhood, smaller proprietary
retail operations are frequently driven out of business, because WMT has the ability to set prices
below the long-run average operating cost of a smaller proprietary retailer. WMT is able to do this
because, as the largest retailer in the world, its long-run average operating cost is much lower due to
economies of scale it realizes.
Supplier Power
Supplier power is fairly nonexistent. As the largest retailer in the world, WMT maintains a
tremendous amount of buyer power to demand volume discounts from suppliers. In many cases,
WMTs business represents a large percentage of any one suppliers business, further strengthening
WMTs ability to demand discounts from its suppliers.
Supplier power from a human capital standpoint is also very low since most positions within WMT
can be classified as unskilled labor positions. Furthermore, WMT does not cater to labor unions and
no union is represented in WMTs business.
WMT avoids distribution hold-up by operating its own distribution centers. WMT is well known for
its proprietary pull inventory management system that allows it to avoid inventory build-up and
shortages. This system can help mitigate any supplier power as well. Additionally, during fiscal
2005, approximately 81% of the Wal-Mart Stores segments purchases of merchandise were shipped
from Wal-Marts 99 distribution centers, of which 37 are general merchandise distribution centers, 34
are grocery distribution centers, seven are clothing distribution centers and 16 are specialty
distribution centers. The balance of merchandise purchased was shipped directly to stores from
suppliers. In addition to serving the Wal-Mart Stores segment, some of the grocery distribution
centers also serve the SAMS CLUB segment for perishable items.
Buyer Power

11

The end consumer, WMTs customer, maintains the ultimate buyer power. WMTs pricing
philosophy is to provide Everyday Low Prices to consistently draw consumers who trust WMT will
provide the lowest price available and concurrently avoid erratic price changes due to promotional
activity. By being the most consistent and lowest cost retailer in the market, WMT business model is
appealing to the end consumer.
Online shopping also strengthens the end consumers buyer power by giving them quick and easy
access to pricing information on many comparable goods sold at various retail outlets. To this point,
there is not significant evidence that online sales have harmed retail store sales materially.
Substitutes
A major substitute for shopping at retail stores is shopping online. Trends show that online shopping
is growing rapidly year-over-year. WMT does provide online shopping on www.walmart.com and
the threat of online shopping cannibalizing sales has not been a significant factor to this point. It is
possible that once WMT saturates the market with its retail stores, online shopping could become
detrimental to its store sales.
Competition
Competition is fierce within the retail industry as evidenced by notoriously tight margins: Ave. Gross
Margin (Retail Industry/Market: 26.5% vs. 48.3%); Ave. Operating Margin (Retail Industry/Market:
8.5% vs. 12.6%); Ave. Net Margin (Retail Industry/Market: 3.4% vs. 7.0%)9. WMT competes within
many different retail sub-industries: discount, department, drug, variety and specialty stores and
supermarkets, many of which are national chains. WMT also compete with other retailers for new
store sites. As of January 31, 2005, the Wal-Mart Stores segment ranked first, based on net sales,
among all retail department store chains and among all discount department store chains.
Summary
WMT maintains a strong, sustainable competitive advantage in a highly competitive industry based its
lowest-cost, one-stop-shop business model. WMTs realizes many cost advantages through its
tremendous buyer power which is generated by its sheer size (volume of business). Unlike many
other Fortune 500 companies, WMT has managed to avoid the problems that labor unions present for
earnings growth by strategically avoiding labor unions all together. WMTs business model works
with the end consumers demand for consistent, low-cost retail products and helps to mitigate buyer
power. Meanwhile, WMT is consistently able to eliminate competition though setting low prices and
subsequently driving competition out of business.

Current Strategy10
9

Hoovers Online. Available at http://premium.hoovers.com

Tang, Charmaine; Weinswig, Deborah. WMT: 4Q05 EPS Review: Lackluster Sales Saved by SG&A and Gross
Margin. Citigroup. February 21, 2006.
10

12

Wal-Mart has started to drive sales by attracting the selective customer that is, customers that
shop at Wal-Mart for basics but do not see it as an alternative for home, apparel or electronics. For
example, Metro 7 continues to perform well and Wal-Mart plans to expand the number of stores that
carry this brand to 1,500 by September 2006.
Wal-Mart has reorganized their field operations to allow an Associate to take ownership and improve
customer service. Wal-Mart will change its field organization to better improve the customer
experience. This includes changes related to:
1) Store cash office redesign
2) Front-end service
3) Customer needs scheduling
4) Positive associate experience and store manager routines
5) Merchandise flow
6) Increasing customer touch points
This structure will enable Wal-Mart to extract more market knowledge from the customer, which
should help it improve profitability.
As part of the new structure, Wal-Mart announced several changes at its year-beginning meeting,
including a completely redesigned compensation program which rewards all store associates based on
achieving their individual store goals, including sales and return on inventory. With this planning
process, the Company hopes to significantly improve execution and close the gap between strategy
and performance.
As Wal-Mart makes progress with its in-store process redesign, the Company should continue to see
improvements in its cost structure. Wal-Mart is also upgrading existing stores to provide customers
with an environment that looks and feels like the Companys most recent prototypes (similar to the
one opened last summer in Rogers, Arkansas). Wal-Mart has undertaken a very aggressive remodel
program that will impact 1,800 stores within the next 18 months. This remodel program is being
executed by market and will focus on five areas: home, apparel, electronics, food and the restrooms.
In 300 stores, Wal-Mart will introduce a new concept for its pharmacies that will have pharmacists
more accessible to customers.
The Company has a TV ad campaign that illustrates to consumers that they can find what they need at
low prices. The Company has also made changes to its printed circular advertisements. The Company
is increasing the number of circulars to 23 this year, up from 12 last year, but the overall page count
will be reduced (and as a result, the associated expense is not expected to increase).
Wal-Mart has made significant investments in its marketing organization led by John Fleming. His
team now includes Stephen Quinn, Senior Vice President Marketing, formerly Chief Marketing
Officer at Frito Lay; Julie Roehm, Senior Vice President of Marketing & Communications, formerly
Director of Marketing Chrysler; Robert Atencio, formerly Director of Insight & Consumer strategy
13

for Frito Lay; and Steve Bertschy, Vice President Category Marketing and who formerly was the
Senior Vice President and Chief Marketing Officer at Specialty Brands. Another example here WalMart is investing in people is in operations. The Company tries to grow talent internally, and it has
developed a detailed selection process to identify the best talent and is providing formal training to
build the skills required in these new and expanded roles. Wal-Mart has also complemented its senior
leadership teams and operations by offering these new roles to high potential senior executives from
other areas of the Company, such as merchandising and logistics. Additionally, the company has also
brought in external talent to complement internal promotions. This has been particularly important, as
the Company decentralizes its field organization, placing the business units' key leadership teams in
the market that they are responsible for.
During 4Q05, Wal-Mart continued its international growth through acquisitions. The company
acquired the Sonae retail operations in Southern Brazil and increased its ownership of Seiyu to 53%,
up from 42% (at 3Q05-end) resulting in the consolidation of Seiyu in Wal-Marts financial statements
beginning in January 2006. Wal-Mart is now in 15 countries and expects that number to increase. The
company acquired 545 new international stores and 50,000 associates in just one week through
acquisition. Wal-Mart plans to build or relocate another 220 international stores in 2006.

Accounting Analysis
It is necessary to conduct an accounting review of WMTs financial statements before developing
projections and a valuation of its current and future operations. There were a few necessary
adjustments to make to WMTs current financial statements in order to paint a more accurate picture
of its financial standing. The adjustments were made to WMTs Balance Sheet and Income Statement
to account for its off-balance sheet debt obligations, namely its operating leases and contingency
exposures. See Exhibit VI on page 29 for pro forma financial statements that take into account these
adjustments.

Operating Leases
In order to get a more complete picture of WMTs financial standing by analyzing financial measures
such as ROE, it was appropriate to capitalize WMTs off-balance sheet financing. Off-balance sheet
obligations mainly took the form of operating leases. In addition to operating leases mentioned in
WMTs 10-K, WMT also mentioned that leases amounting to $30M in annual expenses were (at the
time) being finalized, but not included in the operating lease table given in its 10-K. On the next page
is the operating lease schedule provided in WMTs 10-K.

14

Fiscal year
2006
2007
2008
2009
2010
Thereafter
Total minimum rentals

Leases
730
700
626
578
530
5,908
9,072

In order to capitalize the operating leases, I needed to determine the present value of the future total
minimum operating rentals. I also added in an additional $30M annually for new leases mentioned in
the 10-K. I determined an average annual operating lease expense to be $633M by averaging
operating lease expense numbers given from FY2006 to FY2010. The weighted-average effective
interest rate on long-term debt was given in the 10-K to be 4.08%. With an average annual operating
lease expense of $633M and a total of $9,072, the average life over which the present value of the
minimum operating rentals would be amortized was approximately fourteen years ($9,072M/$633M).
See graphic below for present value calculations:
Average Annual Op. Lease Expense (FY06-FY10)
Weighted-Average Effective Interest Rate on LT Debt
Projected Off-Balance Sheet Obligations
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total

Operating Leases
730
700
626
578
530
633
633
633
633
633
633
633
633
633
213
$9,072

633
4.08%
Additional Proj. Leases
30
30
30
30
30
30
30
30
30
30
30
30
30
30
30
$450

Present Value
760.00
701.38
605.58
539.26
477.22
542.68
521.41
500.97
481.33
462.46
444.33
426.92
410.18
394.10
138.82
$7,407

I added the present value of WMTs operating leases of $7,407M to its FY2006 balance sheet under
fixed assets and capital leases. Furthermore, when capitalizing leases, one must not only add the
present value of the assets (PV of minimum rent payments) to the balance sheet, but must also account
for the affects on the income statement.

15

Operating Lease Capitalization Schedule

FY
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020

Beg. Principal Total Pmt Principal Pmt Interest Pmt Ending Principal Depreciation
$7,116
$663
$373
$290
$6,744
$508
$6,744
$663
$388
$275
$6,356
$508
$6,356
$663
$404
$259
$5,952
$508
$5,952
$663
$420
$243
$5,532
$508
$5,532
$663
$437
$226
$5,095
$508
$5,095
$663
$455
$208
$4,640
$508
$4,640
$663
$474
$189
$4,166
$508
$4,166
$663
$493
$170
$3,673
$508
$3,673
$663
$513
$150
$3,160
$508
$3,160
$663
$534
$129
$2,626
$508
$2,626
$663
$556
$107
$2,070
$508
$2,070
$663
$579
$84
$1,491
$508
$1,491
$663
$602
$61
$889
$508
$889
$663
$627
$36
$262
$508
$262
$273
$262
$11
$0
$633

WMTs annual rent expense, after capitalizing its operating leases, grows to $1,186M annually. This
figure is larger than the annual operating lease expense of $730M in FY2006. The expense on the
income statement is higher after capitalizing the operating leases because now WMT would have to
charge an additional depreciation expense since the assets are now on its balance sheet (see Exhibit VI
on page 29 for pro forma balance sheet).

Other Concerns
Aside from operating leases WMT, does not have many accounting issues of which an investor needs
to be aware. The only other minor concerns are potential liabilities which WMT may be subject to
pay in the future due to litigation and contingency agreements with affiliates and suppliers. There are
currently multiple lawsuits currently being tried in the U.S. court system. WMT was unable to
estimate financial impacts of such lawsuits. WMT mentions that it has contracts in place with certain
suppliers and affiliates and that, if unlikely events were to occur, WMT could be liable to pay out
$394M in contingency fees. Specifically, WMT mentions three of these types of contingency
contracts, which amounts to the $394M.

Financial Analysis
In order to accurately assess WMTs financial health, it was necessary to conduct both a time-series
analysis and a cross-sectional analysis of its financial ratios that measure the Companys: 1) Cash
Flow, 2) Profitability, 3) Efficiency, 4) Liquidity and, 5) Leverage. See Exhibit VIII on page 30 for a
compilation of WMTs financial ratios.

16

Cash Flow
Time-Series Analysis
WMTs cash flow seems to be healthy and growing (See Exhibit V on page 28 for WMTs Statement
of Cash Flows). WMTs cash flow from operations (CFO) has seen double-digit growth from
FY2002 to FY2006, with one year of negative growth (from FY2004 to FY2005) primarily due to
cash outflow in its working capital accounts (mostly due to inventory build-up). From FY2001 to
FY2006, Net Income as a percentage of CFO has remained relatively constant ranging from 60% to
68%, aside from FY2004 when NI was 55% of CFO mostly due to slower yoy net earnings growth.
Overall cash flow has been positive and fairly steady.
Cross-Sectional Analysis
Since WMT operations span multiple retail industries, I compared WMT to both the retail drug
industry and retail department stores. WMT is in the middle of the pack with regards to Free Cash
Flow/Total Cash Flow:
Company
STEIN MART INCORPORATED
FEDERATED DEPARTMENT STORES INC
GOTTSCHALKS INCORPORATED
PENNEY J C INCORPORATED
RITE AID CORPORATION
NORDSTROM INCORPORATED
LONGS DRUG STORES INCORPORATED
DILLARDS INCORPORATED
TARGET CORPORATION
WAL-MART STORES INCORPORATED
WALGREEN COMPANY
KOHLS CORPORATION
JACOBSON STORES INCORPORATED
RETAIL VENTURES INCORPORATED
BON-TON STORES INCORPORATED
CVS CORPORATION
Median
Mean

Free CF/
Ticker Total CF
SMRT
83.56
FD
69.01
GOT
64.33
JCP
63.44
RAD
63.2
JWN
59.29
LDG
49.72
DDS
48.5
TGT
19.71
WMT
14.3
WAG
9.75
KSS
6.13
JCBSQ
5.93
RVI
5.24
BONT
-9.08
CVS
-47.42
34.11
31.60

FCF is important to investors because it is commonly regarded as the amount of cash generated by
operations remaining (after changes in working capital and cap ex) that can be devoted to pay
shareholders, both debt-holders and equity-holders.

17

Profitability
Time-Series Analysis
WMTs Net Income along with EPS has exhibited double-digit growth since FY2002 until this past
year.
Earnings Growth (YOY)
Diluted net income per common share
Net Income

2002
6.4%
6.0%

2003
20.1%
19.2%

2004
15.6%
13.8%

2005
16.4%
13.4%

2006
11.2%
9.4%

The major contributor to WMTs net income growth in the future should be its International segment,
which has shown substantially increasing growth in its sales and operating margin.
Sales:
YOY (QOQ) Growth
Wal-Mart Stores
Sam's Club
International

2002
14.1%
9.7%
10.5%

2003
12.9%
7.8%
15.0%

2004
10.9%
8.9%
16.6%

2005
10.1%
7.5%
18.3%

2006
9.4%
7.2%
11.4%

2002
7.3%
3.5%
3.7%

2003
7.5%
3.2%
4.9%

2004
7.4%
3.3%
5.0%

2005
7.4%
3.4%
5.3%

2006
7.3%
3.5%
5.3%

Operating Margin:
Operating Margin
Wal-Mart Store Operating Margin
Sam's Club Margin
International Margin

2001
7.9%
3.5%
3.0%

Return on Equity (ROE) is an important measure for measuring the return generated on the
stockholders investment. Below is WMTs ROE from FY2001 to FY2006. It is broken down into
components (using the DuPont Analysis method):

ROE
25
23
21
19
17
15

Jan-05

Jan-04

Jan-03

Jan-02

Jan-01

Jan-00

Jan-99

Jan-98

Jan-97

Jan-96

WMTs ROE has been very consistent over the

past five years and has grown slightly. Included
in Adjusted 2006 numbers is the capitalization
of operating leases and its effects on WMTs
balance sheet and income statement (which are
relatively non-material). The only change has
come in asset turnover (decreasing from 2.7 in
FY2002 to 2.3 in FY2006) and an increase in
leverage ratio. This is to be expected given WMTs asset growth (mainly through debt financing)
from its recent international acquisitions and domestic store growth. WMTs ten-year average ROE is
18

21.1%, and in the long-run, assuming a mean-reversion scenario, WMTs ROE should settle around
21.1%.
Cross-Sectional Analysis
On the next page is a comparison chart for the retail industry (drug and department stores) that
compare yoy revenue and EPS growth (for the past three years).
Stock Name
BON-TON STORES INCORPORATED
CVS CORPORATION
KOHLS CORPORATION
WALGREEN COMPANY
TARGET CORPORATION
WAL-MART STORES INCORPORATED
NORDSTROM INCORPORATED
RETAIL VENTURES INCORPORATED
FEDERATED DEPARTMENT STORES INC
RITE AID CORPORATION
STEIN MART INCORPORATED
PENNEY J C INCORPORATED
LONGS DRUG STORES INCORPORATED
GOTTSCHALKS INCORPORATED
DILLARDS INCORPORATED
JACOBSON STORES INCORPORATED
WAL-MART DE MEXICO SA ADR CL V
Mean (not incld. "NM" or "NEG")
Median

Symbol
BONT
CVS
KSS
WAG
TGT
WMT
JWN
RVI
FD
RAD
SMRT
JCP
LDG
GOT
DDS
JCBSQ
WMMVY

Rev Grw EPS Grw

Rate
Rate
3yr PTP 3yr PTP
21.7
18.56
15.23
16.32
13.99
9.59
13.43
15.21
11.33
19.61
10.88
14.39
8.9
46.99
5.88
NEG
5.17
8.62
2.39
NMN
2.38
33
1.81
67.15
1.15
4
-0.66
9.77
-2.25
-17.19
-6.09
NEG
8.79
5.525

23.04
15.21

Stock Name
NORDSTROM INCORPORATED
WAL-MART STORES INCORPORATED
PENNEY J C INCORPORATED
WALGREEN COMPANY
STEIN MART INCORPORATED
WAL-MART DE MEXICO SA ADR CL V
TARGET CORPORATION
CVS CORPORATION
KOHLS CORPORATION
FEDERATED DEPARTMENT STORES INC
LONGS DRUG STORES INCORPORATED
BON-TON STORES INCORPORATED
GOTTSCHALKS INCORPORATED
DILLARDS INCORPORATED
RETAIL VENTURES INCORPORATED
JACOBSON STORES INCORPORATED
RITE AID CORPORATION
Mean
Median

Symbol
JWN
WMT
JCP
WAG
SMRT
WMMVY
TGT
CVS
KSS
FD
LDG
BONT
GOT
DDS
RVI
JCBSQ
RAD

The above list is sorted by Revenue Growth and WMT is near the top of the list, but remains below its
major competitors in both the retail department store and retail drug industries. It remains in the
middle of the pack with regards to EPS growth (a relative measure considering that the calculation
depends on weighted-average number of shares outstanding which can be manipulated through sharebuyback programs).
WMTs ROE is high compared to the market (13.4% on average11), but about average for the entire
retail industry (20.0%12). Notice that the ROE numbers in the chart above are 4Q05 (in WMTs case,
4Q06) numbers. Compared to its major competitors, WMT does have a substantially higher ROE. If
we again consider a reversion to the mean scenario, we would expect to see WMTs ROE figure drop
to the industry average at about 20.0%.

Efficiency
Time-Series Analysis
WMTs degree of operational efficiency can be measured by calculating its margins: 1) Gross Margin,
2) Operating Margin, and 3) Net Margin. Gross Margin normally measures how efficiently a firm can
produce a product, but in this case since WMT is a retailer, gross margin measures the spread WMT
11
12

Hoovers Online. Available at http://premium.hoovers.com/

Hoovers Online. Available at http://premium.hoovers.com/
19

ROE
T4Q
26.65
22.17
19.32
18.1
17.76
17.31
17.15
15.3
15.03
10.9
7.48
6.28
4.93
3.89
-22.58
-99.9
NMN
4.99
15.17

makes on the products it sells. Meanwhile, Operating Margin will measure how efficiently it can
bring these products to market. Below is a breakdown of WMTs margins over time.
Margins
Gross Margin (% of Net Sales)
Operating Margin
Wal-Mart Store Operating Margin
Sam's Club Margin
International Margin
Other
Total Operating Margin
Net Margin

2001
22.4%

2002
22.1%

2003
23.2%

2004
23.4%

2005
23.9%

2006
24.1%

7.9%
3.5%
3.0%
-0.1%
5.9%
3.3%

7.3%
3.5%
3.7%
-0.3%
5.4%
3.0%

7.5%
3.2%
4.9%
-0.6%
5.7%
3.4%

7.4%
3.3%
5.0%
-0.5%
5.8%
3.5%

7.4%
3.4%
5.3%
-0.5%
6.0%
3.6%

7.3%
3.5%
5.3%
-0.5%
5.9%
3.6%

Each of WMTs three margins is increasing over time. I would expect all margins to increase at a
decreasing rate in the future, aside from WMTs International Segments operating margin. I would
expect this to near the Wal-Mart Store Segments operating margin of 7.3%. Since WMTs major
sales growth comes from the International Segment (a trend which should continue), it is important
that WMT International continue to increase its operating margin. This will be the key factor
affecting WMTs overall earnings growth in the near-future.
Cross-Sectional Analysis
Below is a chart that compares WMTs margins to those of its competitors (note, margins are
computed five-year averages for each company). WMT stands above average with regards to net
margin and EBITDA Margin, which is equivalent to operating margin, but below average when it
comes to gross margin. WMTs margin figures makes sense considering its low-cost retailer strategy
-- WMT charges a smaller mark-up, but is more efficient than many of its competitors at bringing
products to market, given its aforementioned competitive advantages. WMTs higher than average
operating and net margins make sense given its tremendous, world-leading volume of sales.

Stock Name
KOHLS CORPORATION
FEDERATED DEPARTMENT STORES INC
TARGET CORPORATION
NORDSTROM INCORPORATED
WALGREEN COMPANY
WAL-MART STORES INCORPORATED
CVS CORPORATION
STEIN MART INCORPORATED
PENNEY J C INCORPORATED
BON-TON STORES INCORPORATED
DILLARDS INCORPORATED
LONGS DRUG STORES INCORPORATED
GOTTSCHALKS INCORPORATED
RETAIL VENTURES INCORPORATED
RITE AID CORPORATION
JACOBSON STORES INCORPORATED
Mean
Median

Symbol
KSS
FD
TGT
JWN
WAG
WMT
CVS
SMRT
JCP
BONT
DDS
LDG
GOT
RVI
RAD
JCBSQ

Gross
Margin
5yr Avg
34.18
39.98
34.94
34.09
27.08
22.39
25.89
25.18
35.46
36.44
32.73
25.45
35.13
37.2
23.83

EBITDA
Margin
5yr Avg
12.92
13.19
10.11
10.3
6.88
7.58
6.47
4.35
6.41
6.19
7.82
3.51
4.34
1.16
1.59

31.33
34.09

6.85
6.47

Net Prof
Marg Adj
5yr Avg
6.31
4.53
3.75
3.61
3.6
3.47
3.09
1.99
1.68
1.56
1.07
1.05
0.58
-0.47
-1.34
-1.58
2.06
1.84

20

Liquidity
Time-Series Analysis
In order to measure WMTs degree of liquidity or solvency, I used three ratios: 1) Interest Coverage
Ratio, 2) Current Ratio, and 3) Quick Ratio. These three ratios will give an investor insight as to any
dangers WMT might run into with regard to having cash on hand to service immediate obligations. I
calculated the ratios in the following manner: Interest Coverage Ratio (FCF/Interest Expense);
Current Ratio (Current Assets/Current Liabilities); Quick Ratio (Cash and Cash Equivalents plus
Accounts Receivable/Current Liabilities).
Liquidity
Interest Coverage Ratio
Current Ratio
Quick Ratio

2001
15.3
0.92
0.13

2002
15.7
1.02
0.15

2003
24.8
0.93
0.15

2004
31.7
0.91
0.17

2005
28.7
0.90
0.17

2006
28.0
0.90
0.19

Adjusted
2006
22.2
0.89
0.18

WMT, the largest retailer in the world, has plenty of free cash flow to meet its annual, short-term debt
obligations. Its interest coverage ratio increased dramatically from FY2001 to FY2006 an account of
WMTs rapidly growing CFO. Despite the fact that adjustments from capitalizing operating leases
brings down the interest coverage ratio from 28.0 to 22.2, it is still a high number and it is evident that
WMT does not have much solvency risk at this point.
Cross-Sectional Analysis
WMT ranks absolute last for Current Ratio
and Quick Ratio with regards to its peers (See
chart to the right). This is not a problem for
WMT since it holds $6.4B of cash and its
CFO was $17.6B (both figures from FY2006).
In my opinion, WMT is doing a good thing by
maintaining low liquidity ratios, because it
forces management to manage WMTs cash
and cash flows efficiently and provides less
freedom to squander cash on investments that
will decrease the return to shareholders
(ROE).

Stock Name
KOHLS CORPORATION
PENNEY J C INCORPORATED
BON-TON STORES INCORPORATED
DILLARDS INCORPORATED
STEIN MART INCORPORATED
GOTTSCHALKS INCORPORATED
NORDSTROM INCORPORATED
WALGREEN COMPANY
RITE AID CORPORATION
FEDERATED DEPARTMENT STORES INC
TARGET CORPORATION
RETAIL VENTURES INCORPORATED
CVS CORPORATION
LONGS DRUG STORES INCORPORATED
JACOBSON STORES INCORPORATED
WAL-MART STORES INCORPORATED
Mean
Median

Symbol
KSS
JCP
BONT
DDS
SMRT
GOT
JWN
WAG
RAD
FD
TGT
RVI
CVS
LDG
JCBSQ
WMT

Current
Ratio
2.5
2.44
2.38
2.19
2.19
2.18
1.92
1.86
1.8
1.75
1.69
1.66
1.63
1.51
1.21
0.9
1.86
1.83

Quick
Ratio
1.1
1.48
0.66
0.49
0.56
0.15
0.78
0.55
0.39
1
0.89
0.1
0.44
0.46
0.5
0.17
0.61
0.53

Leverage
Time-Series Analysis

21

WMTs leverage ratios were not as high as one would expect. As a result of its reasonable debt
structure and plush cash flow from operations, WMT continues to maintain an AA S&P credit
rating13. I analyzed WMTs: 1) Leverage Ratio, 2) Debt/Equity, and 3) Long-term Debt/Total Capital.

Stock Name
RITE AID CORPORATION
RETAIL VENTURES INCORPORATED
TARGET CORPORATION
GOTTSCHALKS INCORPORATED
PENNEY J C INCORPORATED
NORDSTROM INCORPORATED
DILLARDS INCORPORATED
FEDERATED DEPARTMENT STORES INC
BON-TON STORES INCORPORATED
WAL-MART STORES INCORPORATED
KOHLS CORPORATION
LONGS DRUG STORES INCORPORATED
CVS CORPORATION
STEIN MART INCORPORATED
WALGREEN COMPANY
JACOBSON STORES INCORPORATED
Mean
Median

Liquidity
Leverage Ratio
Debt/Equity
Debt/Total Capital

Symbol
RAD
RVI
TGT
GOT
JCP
JWN
DDS
FD
BONT
WMT
KSS
LDG
CVS
SMRT
WAG
JCBSQ

LT Debt
/Tot Cap
5Yr Avg%
100
59.25
47.44
45.37
45.19
44.48
41.12
36.5
32.76
32.39
23.47
18.96
15.21
11.16
0.14
36.90
36.50

2001
2.5
49.9%
28.5%

2002
2.4
53.4%
30.9%

2003
2.4
49.8%
29.7%

2004
2.4
46.1%
28.2%

2005
2.4
47.9%
28.9%

2006
2.5
56.7%
33.2%

Adjusted
2006
2.7
70.0%
41.2%

Here, the affects of capitalizing WMTs operating leases are profound. Notice that the D/E ratio rises
from 56.7% to 70% and D/TC grows from 33.2% to 41.2%. While WMTs debt ratios are increasing
with time, it is not in much danger of being over-levered at its current capital structure. Again, given
its vast amounts of cash on hand and CFO, WMT can easily handle the debt service at this point. I
would expect WMTs debt level to continue to grow slightly given its plans for international and
domestic expansion, and its recent quest to refurbish over 1,800 of its stores already in existence.
Cross-Sectional Analysis
When it comes to the retail industry, WMT maintains a capital structure that puts it in the middle of
the pack with regard to its use of debt. Adding in the changes made by capitalizing WMTs operating
leases, its five-year average LTD/TC would most likely increase to approximately 40%. One would
also have to capitalize WMTs competitors operating leases and make the necessary adjustments to
make an apples-to-apples comparison. Assuming most of WMTs competitors maintain a comparable
percentage of operating leases, WMT would most likely remain near the industry average for
LTD/TC.

Valuation Analysis
13

Business Week Online. Available at http://research.businessweek.com

22

I used three different techniques to value WMT: 1) Free Cash Flow Model, 2) Dividend Discount
Model, and 3) Comparable Valuation Ratio technique. Each valuation turns out very similar numbers
for a one-year price target, all of which are in the vicinity of where WMT is trading today ($45.45).
The FCF valuation assigns WMT an intrinsic value of $46.73. The DDM model gives WMT an
intrinsic value of $44.50. The Comparable Valuation Ratio technique gives WMT an average intrinsic
value of $47.20. Considering all three models, I give WMT a one-year target price of $46.00.

FCF Valuation Model

See Exhibits I, II, and III on pages 24, 25, and 26 for a complete description of the FCF valuation
model used, including all major assumptions used in calculating WMTs intrinsic value of $46.73,
which is a 2.8% discount compared to its current price of $45.45. Below is a list of major
assumptions that were made:

Discount Rate used was 10%, which is relatively high compared to its computed average cost
of capital.
Earnings projections were made up to and including FY2015, and afterward, a terminal growth
of 5.5% was used to calculate the terminal present value of future cash flows.
Changes in working capital would remain consistent and would near zero.
Depreciation and Amortization would remain a constant percentage (1.5%) into the future. It
has been very consistent, near 1.5% in the past five years.
Cap Ex would decrease as a percentage of assets due to decreasing growth prospects.
The terminal growth rate coupled with the discount rate would give WMT a terminal intrinsic
value to earnings ratio that could be compared with WMTs present day P/E ratio.

Furthermore, I performed a stress test to note the affects of using different discount and terminal
growth rates.

PV of FCF

8%
$59.07
$75.53
$108.45
$207.20
NM

Discount Rate
10%
$37.26
$42.94
$51.47
$65.68
$94.11

12%
$26.53
$29.17
$32.69
$37.61
$44.99

15%
$17.97
$19.06
$20.39
$22.05
$24.18

4%
5%
6%
7%
8%

Terminal
Value

5%
$258.65
NM
NM
NM
NM

The stress test gives us an idea of what WMTs intrinsic value would be if our assumptions were
different. WMTs intrinsic value grows as the terminal rate gets bigger and as the discount rate gets
smaller. Normally, one would discount the FCFs using the companys WACC. I computed the
WACC for WMT, but it was abnormally low at about 6.8% (See WACC Calculation in Exhibit VII on
page 30). I felt 6.8% was too low and does not accurately capture the risk of owning WMT.
23

Discounting WMTs expected cash flows by its WACC gives WMT a target price of $177, which is a
288% discount. Apparently the market agrees that discounting WMT at its WACC does not account
for all risk of owning WMT.

Dividend Discount Model

The DDM values WMT at $44.50. The DDM discounts expected dividends a stockholder would
receive in the future. I kept the discount rate at 10%, but I used a different terminal growth for
WMTs dividends. I assumed dividend growth would be higher than WMTs FCF growth at 8.3%. I
believe this assumption is justified because WMTs current dividend payout ratio is relatively low
(22%). Assuming that WMT is a maturing company, many investors would expect WMT to begin
paying out more of its earnings at a
Comparable Valuation Ratios
higher payout rate (30%+).
Below is a graphic that contains the
DDM valuation and assumptions.

Price/"X"
Current
P/E-1yr Fwd
13.61
P/S
0.61
P/CF
9.62
P/BV
3.58
Average
Discount (Premium)

Expected "X" per Share Implied Value

3.08
41.89
86.88
53.00
4.63
44.50
13.80
49.40
$47.20
3.8%

DDM
2003
2004
2005
2006
2007
2008
2009
2010
Termimal
================
===============
===============
===============
===============
===============
===============
===============
===============
Dividends Per Share
yoy % Change

Terminal Growth Rate

Discount Rate
PV of Expected Divs. Per Share

0.30

0.36
20.0%

0.52
44.4%

0.60
15.4%

0.69
15.0%

0.79
15.0%

0.91
15.0%

1.05
15.0%

66.85

8.3%
10.0%
$44.50

To arrive at the $44.40 valuation, I assumed WMTs dividend would grow at 15% for each of the next
four years, and at a terminal 8.3% afterwards.

Comparable Valuation Ratio Technique

The Comparable Valuation Ratio technique produced an average intrinsic value for WMT of $47.20.
Since I wanted to determine a one-year price target, I assumed WMT would trade at the same levels
that it currently is trading at with regard to P/E-1year forward, P/S, P/CF, and P/BV. Using this
method to determine a 5-year (or longer price target), one would use long-term mean or median
data for the firms P/E, P/S, P/CF and P/BV. Using my earnings, sales, book value and cash flow
estimates for FY2007, I determined projected EPS, Sales per Share, Cash Flow per Share, and Book
Value per Share. Next, I used that data to compute WMTs intrinsic value today.
The major assumption that I made here is that WMT would be trading at its current multiples one year
from now. This scenario will mostly likely not be the case. See the graphs below for a historical
24

range of WMTs valuation ratios. Currently, WMT is trading at low multiples, and in the long-run, an
investor should expect to see a reversion to the mean for each ratio. It is also important to consider
WMTs relative (to SP5A) valuation ratio range, which shows that WMT is trading at normal
valuation multiples (See Exhibit IX on page 31).
Notice with this more imprecise methodology for valuing a firms shares, there is a wider value per
share range. The range in this case is from $41.89 (using the P/E ratio and EPS estimate for FY2007)
to $53.00 (using the P/S ratio and Sales per share estimate for FY2007). Given the impreciseness of
this method, the average implied price is $47.20 (averaging all four implied price figures from the
above chart). This number is still very consistent with the figures generated by the other two
valuation methodologies.
WMT P/E (1-Yr Forward)

WMT P/S

60

2.5

50

40

1.5

30

2/23/2002

2/23/2003

2/23/2004

2/23/2005

2/23/2006

2/23/2003

2/23/2004

2/23/2005

2/23/2006

2/23/2001

2/23/2002

WMT P/CF

WMT P/BV
14
12
10
8
6
4

2/23/2001

2/23/2000

2/23/1999

2/23/1998

2/23/1997

2/23/1996

2/23/2006

2/23/2005

2/23/2004

2/23/2003

2/23/2002

2/23/2001

2/23/2000

2/23/1999

2/23/1998

2/23/1997

2
2/23/1996

50
45
40
35
30
25
20
15
10
5
0

2/23/2000

2/23/1999

2/23/1998

2/23/1997

2/23/2006

2/23/2005

2/23/2004

2/23/2003

2/23/2002

2/23/2001

2/23/2000

2/23/1999

2/23/1998

2/23/1997

0.5
2/23/1996

10

2/23/1996

20

Summary
All three valuation models provide a consistent one-year forward valuation of WMTs firm value per
share that I averaged to get $46.00 per share. I have taken into account all data mentioned in this
report concerning the consumer staples sector, the retail industry, and WMTs firm-specific
competitive advantages to develop specific sales growth estimates, cost estimates, and earnings
estimates for the coming years.

25

Exhibit I: Pro Forma Income Statement

(Amounts in millions except per share data)

Fiscal years ended January 31,
Revenues:
Wal-Mart Stores
Sam's Club
International
Other
Net sales
Other income, net
Total Revenue

2002

2003

121,889
26,798
32,100
10,542
191,329
1,787

139,131
29,395
35,485
13,788
217,799
1,873

157,120
31,702
40,794

174,220
34,537
47,572

229,616
1,961
$231,577

$193,116

$219,672

Costs and expenses:

Cost of sales
Operating, selling, general and administrative expenses

150,255
31,550

171,562
36,173

Operating Income:
Wal-Mart Stores
Sam's Club
International
Other
Operating income

9,600
942
949
(196)
$11,311

1,104
279
(188)

Interest:
Debt
Capital leases
Interest income
Interest, net

Actual
2004 01/31/2005

2001

07/31/2005 10/31/2005

01/31/2006

2006 4/30/2006E

7/31/2006E

Projected
10/31/2006E

2005

04/30/2005

42,133
7,976
11,958

191,826
37,119
56,277

47,641
9,155
14,112

51,809
9,969
15,033

50,243
10,019
15,174

60,218
10,655
18,400

209,911
39,798
62,719

51,929
9,704
15,805

57,249
10,567
16,837

55,016
10,821
17,450

256,329
2,352

62,067
469

285,222
2,767

70,908
772

76,811
709

75,436
817

89,273
854

312,428
3,152

77,438
811

84,653
744

$258,681

$62,536

$287,989

$71,680

$77,520

$76,253

$90,127

$315,580

$78,249

1/31/2007E

2007E

2008E

66,842
11,721
27,600

231,036
42,812
77,693

251,829
45,809
93,231

83,287
858

106,162
897

351,541
3,310

390,869
165

$85,397

$84,145

$107,059

$354,850

$391,035

178,299
39,983

243,656
198,747
44,909

48,447
9,667

219,793
51,105

54,571
13,168

58,787
14,054

57,988
14,216

69,045
15,222

240,391
56,660

59,240
14,645

64,760
15,856

64,131
15,016

81,214
19,506

269,345
65,022

295,888
71,968

10,200
1,028
1,305
(617)
$11,937

11,840
1,023
1,998
(1,290)
$13,295

12,916
1,126
2,370
(1,387)
$15,025

3,552
272
774
(176)
$4,422

14,163
1,280
2,988
(1,340)
$17,091

3,307
295
667
(328)
$3,941

3,992
371
750
(434)
$4,679

3,312
342
797
(402)
$4,049

4,714
377
1,116
(347)
$5,860

15,325
1,385
3,330
(1,511)
$18,529

3,635
330
790
(391)
$4,364

4,007
359
842
(427)
$4,782

4,126
368
925
(421)
$4,998

5,013
398
1,463
(535)
$6,339

16,782
1,456
4,020
(1,774)
$20,483

18,635
1,558
4,941
(1,955)
$23,179

1,083
274
(171)

799
260
(132)

729
267
(164)

86
80
(31)

934
253
(201)

199
53
(52)

301
60
(59)

348
60
(59)

324
76
(78)

1,172
249
(248)

235
78
(78)

256
85
(85)

252
84
(84)

321
107
(107)

1,065
355
(355)

1,173
391
(391)

1,195

1,186

927

832

135

986

200

302

349

322

1,173

235

256

252

321

1,065

1,173

10,116

10,751

12,368

14,193

4,287

16,105

3,741

4,377

3,700

5,538

17,356

4,129

4,525

4,746

6,018

19,418

22,006

Provision for income taxes:

Current
Deferred

3,350
342

3,712
185

3,883
474

4,941
177

Total Provision for Taxes

3,692

3,897

4,357

5,118

1,620

5,589

1,212

1,503

1,254

1,835

5,804

1,404

1,539

1,614

2,046

6,602

7,482

Income from continuing operations before

minority interest
Minority interest

6,424

6,854

8,011

9,075

2,667

10,516

2,529

2,874

2,446

3,703

11,552

2,725

2,987

3,132

3,972

12,816

14,524

(129)

(183)

(193)

(214)

(40)

(249)

(68)

(69)

(72)

(114)

(323)

(68)

(75)

(78)

(99)

(320)

(363)

Income from continuing operations

Income from discontinued operation, net of tax

6,295

6,671

7,818
137

8,861
193

2,627

10,267

2,461

2,805

2,374

3,589

11,229

2,657

2,912

3,054

3,873

12,496

14,161

$2,627

$10,267

$2,461

$2,805

$2,374

$3,589

$11,229

$2,657

$2,912

$3,054

$3,873

$12,496

$14,161

0.86

0.86

0.64

0.71

0.76

0.97

3.08

3.54

0.86

2.68

0.64

0.71

0.76

0.97

3.08

3.54

Income from continuing operations before

income taxes and minority interest

Net income

$6,295

Basic net income per common share:

Income from continuing operations
Income from discontinued operation
Basic net income per common share

1.41

Diluted net income per common share:

Income from continuing operations
Income from discontinued operation
Diluted net income per common share
Weighted-average number of common shares:
Basic
Diluted
Dividends per common share

$6,671

$7,955

$9,054

5,326
263

1.49

1.77
0.03
1.80

2.03
0.05
2.08

0.59

1.40

1.49

1.76
0.03
1.79

2.03
0.04
2.07

0.59

4,465
4,484

4,465
4,481

4,430
4,446

4,363
4,373

0.30
16.8%

0.36
17.4%

0
0

2.41
2.41

0
0

0.58

0.67

0.57

0.86

0.86

0.64

0.71

0.75

0.97

3.08

3.54

2.41

0.58

0.67

0.57

0.86

2.68

0.64

0.71

0.75

0.97

3.08

3.54

4,259
4,266

4,259
4,266

4,228
4,234

4,175
4,180

4,165
4,169

4,166
4,170

4,166
4,170

4,124
4,128

4,083
4,087

4,042
4,046

4,002
4,006

4,042
4,046

4,002
4,006

0.0%

0.52
21.6%

0.0%

0.0%

0.0%

0.0%

0.60
22.4%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

2.41

27

Exhibit II: Pro Forma Income Statement Assumptions

Assumptions
As a % of Net Sales
Wal-Mart Stores
Sam's Club
International

2002

2003

63.7%
14.0%
16.8%

63.9%
13.5%
16.3%

68.4%
13.8%
17.8%

68.0%
13.5%
18.6%

67.9%
12.9%
19.3%

67.3%
13.0%
19.7%

2002
14.1%
9.7%
10.5%
13.8%
4.8%
13.8%

2003
12.9%
7.8%
15.0%
5.4%
4.7%
5.4%

2004 01/31/2005
10.9%
11.3%
8.9%
7.8%
16.6%
48.0%
11.6%
16.4%
19.9%
171.1%
11.7%
16.9%

2005
10.1%
7.5%
18.3%
11.3%
17.6%
11.3%

0.0%
-0.1%

-0.8%
-0.8%

-1.5%
-1.6%

-1.5%
-1.6%

-2.4%
-2.4%

-1.5%
-1.6%

-2.1%
-2.2%

-1.8%
-1.9%

22.4%

22.1%

23.2%

23.4%

22.7%

23.9%

24.1%

24.4%

7.9%
3.5%
3.0%
-0.1%
5.9%
3.3%

7.3%
3.5%
3.7%
-0.3%
5.4%
3.0%

7.5%
3.2%
4.9%
-0.6%
5.7%
3.4%

7.4%
3.3%
5.0%
-0.5%
5.8%
3.5%

8.4%
3.4%
6.5%
-0.3%
7.1%
4.2%

7.4%
3.4%
5.3%
-0.5%
6.0%
3.6%

6.9%
3.2%
4.7%
-0.5%
5.6%
3.4%

0.6%
0.1%
-0.1%
0.6%

0.5%
0.1%
-0.1%
0.5%

0.3%
0.1%
-0.1%
0.4%

0.3%
0.1%
-0.1%
0.3%

0.1%
0.1%
0.0%
0.2%

0.3%
0.1%
-0.1%
0.3%

33.1%
3.4%
36.5%

36.7%
1.7%
36.2%

38.4%
3.8%
35.2%

48.8%
1.2%
36.1%

0.0%
0.0%
37.8%

-2.0%
3.3%

-2.7%
3.0%

-2.4%
3.4%

-2.4%
3.5%

-1.5%
4.2%

YOY (QOQ) Growth

Wal-Mart Stores
Sam's Club
International
Net Sales
Other income, net
Total Revenue
Weighted Ave. Shares:
Basic
Diluted
Margins
Gross Margin (% of Net Sales)
Operating Margin
Wal-Mart Store Operating Margin
Sam's Club Margin
International Margin
Other
Total Operating Margin
Net Margin
Interest as a % of Sales:
Debt
Capital leases
Interest income
Interest, net
Taxes as % of EBTMI:
Current
Deferred
Total Provision for Taxes
Income From Minority Interest as % of Inc. from Cont Ops.
Net Income Margin
YOY (QOQ) Growth

Actual
2004 01/31/2005

2001

2005

04/30/2005 07/31/2005 10/31/2005 01/31/2006

67.2%
12.9%
19.9%

67.4%
13.0%
19.6%

66.6%
13.3%
20.1%

2006 4/30/2006E

7/31/2006E

Projected
10/31/2006E 1/31/2007E

2007E

2008E

67.5%
11.9%
20.6%

67.2%
12.7%
20.1%

67.1%
12.5%
20.4%

67.6%
12.5%
19.9%

66.1%
13.0%
21.0%

63.0%
11.0%
26.0%

65.7%
12.2%
22.1%

64.4%
11.7%
23.9%

04/30/2005 07/31/2005 10/31/2005 01/31/2006

9.3%
10.4%
9.5%
42.9%
5.9%
5.9%
10.3%
33.6%
12.4%
12.3%
12.0%
53.9%
9.5%
10.2%
10.1%
43.8%
13.5%
-3.8%
7.2%
82.1%
9.5%
10.0%
10.1%
44.1%

2006
9.4%
7.2%
11.4%
9.5%
13.9%
9.6%

9.0%
6.0%
12.0%
9.2%
5.0%
9.2%

10.5%
6.0%
12.0%
10.2%
5.0%
10.2%

9.5%
8.0%
15.0%
10.4%
5.0%
10.3%

11.0%
10.0%
50.0%
18.9%
5.0%
18.8%

10.1%
7.6%
23.9%
12.5%
5.0%
12.4%

9.0%
7.0%
20.0%
11.2%
5.0%
10.2%

-2.2%
-2.3%

-2.2%
-2.3%

-1.0%
-1.0%

-1.0%
-1.0%

-1.0%
-1.0%

-1.0%
-1.0%

-3.0%
-3.0%

-1.0%
-1.0%

24.2%

23.6%

24.1%

23.5%

23.5%

23.0%

23.5%

24.3%

24.3%

7.7%
3.7%
5.0%
-0.6%
6.1%
3.6%

6.6%
3.4%
5.3%
-0.5%
5.4%
3.1%

7.8%
3.5%
6.1%
-0.4%
6.6%
4.0%

7.3%
3.5%
5.3%
-0.5%
5.9%
3.6%

7.0%
3.4%
5.0%
-0.5%
5.6%

7.0%
3.4%
5.0%
-0.5%
5.6%

7.5%
3.4%
5.3%
-0.5%
5.9%

7.5%
3.4%
5.3%
-0.5%
5.9%

7.3%
3.4%
5.2%
-0.5%
5.8%

7.4%
3.4%
5.3%
-0.5%
5.9%

0.3%
0.1%
-0.1%
0.3%

0.4%
0.1%
-0.1%
0.4%

0.5%
0.1%
-0.1%
0.5%

0.4%
0.1%
-0.1%
0.4%

0.4%
0.1%
-0.1%
0.4%

0.3%
0.1%
-0.1%
0.3%

0.3%
0.1%
-0.1%
0.3%

0.3%
0.1%
-0.1%
0.3%

0.3%
0.1%
-0.1%
0.3%

0.3%
0.1%
-0.1%
0.3%

0.3%
0.1%
-0.1%
0.3%

33.1%
1.6%
34.7%

0.0%
0.0%
32.4%

0.0%
0.0%
34.3%

0.0%
0.0%
33.9%

0.0%
0.0%
33.1%

0.0%
0.0%
33.4%

32.0%
2.0%
34.0%

32.0%
2.0%
34.0%

32.0%
2.0%
34.0%

32.0%
2.0%
34.0%

0.0%
0.0%
34.0%

32.0%
2.0%
34.0%

-2.4%
3.6%

-2.7%
3.4%

-2.4%
3.6%

-2.9%
3.1%

-3.1%
4.0%

-2.8%
3.6%

-2.5%
3.4%

-2.5%
3.4%

-2.5%
3.6%

-2.5%
3.6%

-2.5%
3.5%

-2.5%
3.6%

*Assumptions made to forecast income statement line items are highlighted in green.

Exhibit III: Pro Forma Statement of FCF and FCF Valuation

29

Year (in millions, except per share)

2006A
2007E
2008E
2009E
2010E
2011E
2012E
2013E
2014E
2015E
==================================================================
===============
===============
===============
===============
===============
===============
===============
===============
===============
===============
Net Revenue
% Growth

$315,580
9.6%

$354,850
12.4%

$391,035
10.2%

$430,138
10.0%

$473,152
10.0%

$518,101
9.5%

$564,731
9.0%

$615,556
9.0%

$667,879
8.5%

$721,309
8.0%

Operating Income
Operating Margin

18,529
5.9%

20,483
5.8%

23,179
5.9%

25,808
6.0%

28,389
6.0%

31,086
6.0%

33,884
6.0%

36,933
6.0%

40,073
6.0%

43,279
6.0%

Interest and Other- net

Interest % of Sales

(1,173)
0.4%

(1,065)
0.3%

(1,173)
0.3%

(1,290)
-0.3%

(1,419)
-0.3%

(1,554)
-0.3%

(1,694)
-0.3%

(1,847)
-0.3%

(2,004)
-0.3%

(2,164)
-0.3%

Taxes
Tax Rate
Equity Income, net
% of sales

(5,804)
33.4%
(323)
-0.1%

(6,602)
-34.0%
(320)
-0.1%

(7,482)
-34.0%
(363)
-0.1%

(7,846)
32.0%
0
0.0%

(8,630)
32.0%
0
0.0%

(9,450)
32.0%
52
0.0%

(10,301)
32.0%
282
0.1%

(11,228)
32.0%
616
0.1%

(12,182)
32.0%
668
0.1%

(13,157)
32.0%
721
0.1%

Net Income
% Growth
Add Depreciation/Amort
% of Sales
% of Capex
Plus/(minus) Changes WC
Initial Working Capital
Subtract Cap Ex
Capex % of sales
Free Cash Flow
YOY growth

Terminal Value
===============

$11,229
$12,496
$14,161
$16,672
$18,339
$20,133
$22,171
$24,475
$26,555
$28,679
9.4%
11.3%
13.3%
17.7%
10.0%
9.8%
10.1%
10.4%
8.5%
8.0%
===============
===============
===============
===============
===============
===============
===============
===============
===============
===============
4,734
5,322.8
5,866
6,452
7,097
7,772
8,471
9,233
10,018
10,820
1.5%
1.5%
1.5%
1.5%
1.5%
1.5%
1.5%
1.5%
1.5%
1.5%
34.9%
34.9%
34.9%
37.5%
37.5%
40.5%
40.5%
42.9%
42.9%
45.5%
1,000
900
500
500
(500)
(500)
(400)
(300)
(200)
(100)
(13,570)
4.3%

(15,259)
4.3%

(16,814)
4.3%

(17,206)
4.0%

(18,926)
4.0%

(19,170)
3.7%

$3,392.76

$3,459.92
2.0%

$3,711.77
7.3%

$6,418.70
72.9%

$6,010.57
-6.4%

$8,235.19
37.0%

(20,895)
3.7%

(21,544)
3.5%

(23,376)
3.5%

(23,803)
3.3%

$9,347.25 $11,863.39
13.5%
26.9%

$12,997.28
9.6%

$15,595.68
20.0%

Valuation
Discount Rate
Terminal Growth Rate

NPV of FCF
NPV of Terminal Value
Present Value of Firm (M)
FCF Yield
Shares Outstanding (M)
Current Historical P/E
Implied Value Per Share
Current Price
Current Discount (Premium)

10.0%
5.5%

$44,296
$155,064
$199,359
1.7%

'06-10 Cash/Op's
Cash/Op's % of Sales

$104,768
5.3%

Terminal Value
P/E
FCF Yield

$365,632
12.75
4.3%

% Of Total
22.2%
77.8%

4266.0
18.9
$46.73
$45.45
2.8%

30

Exhibit IV: Balance Sheet

(Amounts in millions except per share data)

2001

2002

2003

2004

2005

2006

2,054
1,768
21,442
1,291

2,161
2,000
22,614
1,103

2,758
2,108
24,891
726

5,199
1,254
26,612
1,356

5,488
1,715
29,447
1,841

6,414
2,662
32,191
2,591

$26,555

$27,878

$30,483

$34,421

$38,491

$43,858

9,433
24,537
12,964
879

10,241
28,527
14,135
1,089

11,228
33,750
15,946
1,313

12,699
40,192
17,934
1,269

14,472
46,582
21,461
1,530

Property and equipment, at cost

Less accumulated depreciation

47,813
10,196

53,992
11,436

62,237
13,537

72,094
15,684

84,045
18,637

97,302
21,427

Property and equipment, net

Property under capital lease
Less accumulated amortization

37,617
4,620
1,303

42,556
4,626
1,432

48,700
4,814
1,610

56,410
4,286
1,673

65,408
4,997
1,838

75,875

3,317
9,059
1,582

3,194
8,566
1,333

3,204
9,521
2,777

2,613
9,882
2,079

3,159
10,803
2,362

3,415
12,188
2,833

$78,130

$83,527

$94,685

$105,405

$120,223

$138,169

2,286
15,092
6,355
841
4,234
141

743
15,617
7,174
1,343
2,257
148

1,079
17,140
8,945
739
4,538
176

3,267
19,425
10,671
1,377
2,904
196

3,812
21,671
12,155
1,281
3,759
210

3,754
25,373
13,465
1,322
4,595
299

$28,949

$27,282

$32,617

$37,840

$42,888

$48,808

12,501
3,154
1,043
1,140

15,687
3,045
1,204
1,207

16,607
3,001
1,761
1,362

17,102
2,997
2,359
1,484

20,087
3,582
2,947
1,323

26,429
3,742
4,552
1,467

447

445

440

431

423

1,411
(684)
30,169

1,484
(1,268)
34,441

1,482
(509)
37,924

2,135
851
40,206

2,425
2,694
43,854

3,013
1,053
49,105

Total shareholders equity

$31,343

$35,102

$39,337

$43,623

$49,396

$53,171

Total liabilities and shareholders equity

$78,130

$83,527

$94,685

$105,405

$120,223

$138,169

January 31,
Assets
Current assets:
Cash and cash equivalents
Receivables
Inventories
Prepaid expenses and other
Total current assets
Property and equipment, at cost:
Land
Buildings and improvements
Fixtures and equipment
Transportation equipment

Property under capital lease, net

Goodwill
Other assets and deferred charges
Total assets
Liabilities and shareholders equity
Current liabilities:
Commercial paper
Accounts payable
Accrued liabilities
Accrued income taxes
Long-term debt due within one year
Obligations under capital leases due within
one year
Total current liabilities
Long-term debt
Long-term obligations under capital leases
Deferred income taxes and other
Minority interest
Commitments and contingencies
Shareholders equity:
Preferred stock (0.10 par value; 100 shares
authorized, none issued)
Common stock (0.10 par value; 11,000 shares
authorized, 4,234 and 4,311 issued and
outstanding in 2005 and 2004, respectively)
Capital in excess of par value
Other accumulated comprehensive income
Retained earnings

32

Exhibit V: Cash Flow Statement

33

(Amounts in millions)
Fiscal years ended January 31,
Cash flows from operating activities
Income from continuing operations
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization
Deferred income taxes
Other operating activities
Changes in certain assets and liabilities,
net of effects of acquisitions:
Decrease (increase) in accounts receivable
Increase in inventories
Increase in accounts payable
Increase in accrued liabilities
Net cash provided by operating activities
of continuing operations
Net cash provided by operating activities
of discontinued operation
Net cash provided by operating activities

2001

2002

2003

2004

2005

2006

6,295

6,671

7,818

8,861

10,267

11,231

2,868
342
244

3,290
185
66

3,364
474
685

3,852
177
173

4,405
263
378

4,717

(422)
(1,795)
2,061
11

(210)
(1,235)
368
1,125

(159)
(2,219)
1,748
1,212

373
(1,973)
2,587
1,896

(304)
(2,635)
1,694
976

(456)
(1,733)
2,390
975

9,604

10,260

12,923

15,946

15,044

17,633

82

50

$9,604
$0.66

Cash flows from investing activities

Payments for property and equipment
(8,042)
Investment in international operations
(627)
Proceeds from the disposal of fixed assets
284
Proceeds from the sale of McLane
Other investing activities
(329)
Proceeds from termination or sale of net investment hedges
Net cash used in investing activities of
continuing operations
Net cash used in investing activities of
discontinued operation
Net cash used in investing activities

(8,714)

$10,260
$0.65

$13,005
$0.60

509

$15,996
$0.55

$15,044
$0.68

$17,633
$0.64

(12,893)
(315)
953

(14,563)
(601)
1,049

(96)

(68)

(12,351)

(14,183)

(8,383)
0
331

(9,245)
(749)
311

(228)
1134

(73)

(10,308)
(38)
481
1,500
78

(7,146)

(9,756)

(8,287)

(83)

(25)

($8,714)

($7,146)

($9,839)

($8,312)

($12,351)

($14,183)

(2,022)
3,778
(193)
(1,070)
(1,519)
(173)
176
581

(1,533)
4,591
(1,214)
(1,249)
(3,519)
(167)
113

1,836
2,044
(3,383)
(1,328)
(1,261)
(216)
(62)

688
4,099
(5,046)
(1,569)
(3,541)
(305)
111

544
5,832
(4,549)
(2,214)
(2,131)
(204)
113

(704)
7,691
(3,580)
(2,511)
(2,724)

($442)

($2,978)

($2,370)

($5,563)

($2,609)

($2,422)

Effect of exchange rate changes on cash

(250)

(29)

(199)

320

205

(102)

Net increase in cash and cash equivalents

Cash and cash equivalents at beginning
of year (1)

198
1,856

107
2,054

597
2,161

2,441
2,758

289
5,199

926
5,488

Cash flows from financing activities

Increase in commercial paper
Proceeds from issuance of long-term debt
Purchase of Company stock
Dividends paid
Payment of long-term debt
Payment of capital lease obligations
Other financing activities
Proceeds from issuance of Company stock
Net cash used in financing activities

Cash and cash equivalents at end of year

Supplemental disclosure of cash flow information
Income tax paid
Interest paid
Capital lease obligations incurred

$2,054

3,509
1,319
576

$2,161

3,196
1,312
225

$2,758

4,539
1,085
381

$5,199

4,358
1,024
252

$5,488

(594)

$6,414

5,593
1,163
377

34

Exhibit VI: Pro Forma Balance Sheet & Income Statement After Capitalizing Operating Leases
Pro Forma Balance Sheet

Pro Forma Income Statement

2006

Adjusted
2006

6,414
2,662
32,191
2,591

6,414
2,662
32,191
2,591

Total current assets

Property and equipment, at cost:
Land
Buildings and improvements
Fixtures and equipment
Transportation equipment

$43,858

43,858

Property and equipment, at cost

Less accumulated depreciation

97,302
21,427

97,302
21,427

Property and equipment, net

Property under capital lease
Less accumulated amortization

75,875

75,875

Property under capital lease, net

Goodwill
Other assets and deferred charges

3,415
12,188
2,833

10,822
12,188
2,833

$138,169

$145,576

3,754
25,373
13,465
1,322
4,595
299

3,754
25,373
13,465
1,322
4,595
660

$48,808

$49,169

26,429
3,742
4,552
1,467

26,429
10,788
4,552
1,467

(Amounts in millions except per share data)

January 31,
Assets
Current assets:
Cash and cash equivalents
Receivables
Inventories
Prepaid expenses and other

(Amounts in millions except per share data)

Fiscal years ended January 31,

Revenues:
Wal-Mart Stores
Sam's Club
International
Other
Net sales
Other income, net
Total Revenue
Costs and expenses:
Cost of sales
Operating, selling, general and administrative expenses
Operating income

Total assets
Liabilities and shareholders equity
Current liabilities:
Commercial paper
Accounts payable
Accrued liabilities
Accrued income taxes
Long-term debt due within one year
Obligations under capital leases due within
one year
Total current liabilities
Long-term debt
Long-term obligations under capital leases
Deferred income taxes and other
Minority interest
Commitments and contingencies
Shareholders equity:
Preferred stock (0.10 par value; 100 shares
authorized, none issued)
Common stock (0.10 par value; 11,000 shares
authorized, 4,234 and 4,311 issued and
outstanding in 2005 and 2004, respectively)
Capital in excess of par value
Other accumulated comprehensive income
Retained earnings
Total shareholders equity
Total liabilities and shareholders equity

3,013
1,053
49,105

$53,171

53,171

$138,169

$145,576

Adjusted
2006

209,911
39,798
62,719

209,911
39,798
62,719

312,428
3,152

312,428
3,152

$315,580

240,391
56,660
$18,529

$315,580

240,391
56,500
$18,689

Interest:
Debt
Capital leases
Interest income

1,172
249
(248)

1,172
551
(248)

Interest, net

1,173

1,475

17,356

17,214

0
0

0
0

5,804

5,853

Income from continuing operations before

minority interest
Minority interest

11,552

11,361

(323)

(323)

Income from continuing operations

Income from discontinued operation, net of tax

11,229

11,038

$11,229

$11,038

Income from continuing operations before

income taxes and minority interest
Provision for income taxes:
Current
Deferred
Total Provision for Taxes

Net income
Basic net income per common share:
Income from continuing operations
Income from discontinued operation
Basic net income per common share

3,013
1,053
49,105

2006

Diluted net income per common share:

Income from continuing operations
Income from discontinued operation
Diluted net income per common share
Weighted-average number of common shares:
Basic
Diluted
Dividend Per Share

0.86

2.65

2.68

2.65

0.86

2.65

2.68

2.65

4,166
4,170

4,166
4,170

0.60

0.60

*Adjustments for capitalizing operating leases affected the line items highlighted in yellow.

35

VII: WACC and Cost of Equity Calculation

WACC Calculation
Cost of Equity
Average Cost of Debt
D/D+E
E/D+E
Tax Rate
WACC

Cost of Equity Calculation

9.65%
4.08%
41.17%

Re =
9.65%

Rf +
4.55%

Beta *
0.85

Market Risk Premium

6%

58.83%
34%
6.8%

VIII: Financial Ratios

ROE
Profitability
ROE
Net Margin
Asset Turnover
Leverage Ratio
Check:
ROA
Net Income Growth (YOY)
Efficiency
Gross Margin
Operating Margin
Wal-Mart Store Operating Margin
Sam's Club Margin
International Margin
Other
Total
Liquidity
Interest Coverage Ratio
Current Ratio
Quick Ratio
Liquidity
Leverage Ratio
Debt/Equity
Debt/Total Capital

2001

2002

2003

2004

2005

2006

Adjusted
2006

20.1%
3.3%
2.4
2.5
20.1%

20.1%
3.1%
2.7
2.4
20.1%

21.4%
3.5%
2.6
2.4
21.4%

21.8%
3.5%
2.6
2.4
21.8%

22.1%
3.6%
2.5
2.4
22.1%

21.9%
3.6%
2.4
2.5
21.9%

21.5%
3.5%
2.3
2.7
21.5%

8.1%

8.3%
6.0%

8.9%
19.2%

9.0%
13.8%

9.1%
13.4%

8.7%
9.4%

2001
22.4%

2002
22.1%

2003
23.2%

2004
23.4%

2005
23.9%

8.1%
7.5%
Adjusted
2006
2006
24.1%
24.1%

7.9%
3.5%
3.0%
-0.1%
5.9%

7.3%
3.5%
3.7%
-0.3%
5.4%

7.5%
3.2%
4.9%
-0.6%
5.7%

7.4%
3.3%
5.0%
-0.5%
5.8%

7.4%
3.4%
5.3%
-0.5%
6.0%

7.3%
3.5%
5.3%
-0.5%
5.9%

2001
15.3
0.92
0.13

2002
15.7
1.02
0.15

2003
24.8
0.93
0.15

2004
31.7
0.91
0.17

2005
28.7
0.90
0.17

2006
28.0
0.90
0.19

2001
2.5
49.9%
28.5%

2002
2.4
53.4%
30.9%

2003
2.4
49.8%
29.7%

2004
2.4
46.1%
28.2%

2005
2.4
47.9%
28.9%

2006
2.5
56.7%
33.2%

6.0%
Adjusted
2006
22.2
0.89
0.18
Adjusted
2006
2.7
70.0%
41.2%

36

Relative P/CF

0
0

2/23/2001

2/23/2000

2/23/2006

2/23/2006

2/23/2005

0.5

2/23/2005

0.5
2/23/2004

1.5

2/23/2004

1.5
2/23/2003

2.5

2/23/2003

2
2/23/2002

Relative P/BV

2/23/2002

2.5

2/23/2001

3
2/23/1999

Relative P/E (1-Yr Forward)

2/23/2000

2/23/1999

0
2/23/1998

2/23/1998

0.5

2/23/1997

1.5

2/23/1997

2/23/1996

2/23/2006

2/23/2005

2/23/2004

2/23/2003

2/23/2002

2/23/2001

2/23/2000

2/23/1999

2/23/1998

2/23/1997

2/23/1996

2.5

2/23/1996

2/23/2006

2/23/2005

2/23/2004

2/23/2003

2/23/2002

2/23/2001

2/23/2000

2/23/1999

2/23/1998

2/23/1997

2/23/1996

Exhibit IX: WMTs Relative Valuation Ratios (to S&P 500- SP5A)

1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0

Relative P/S

37