30 years public, and thriving - Wal-Mart

Discount Store News, Oct, 1999

Wal-Mart is entering the new century at the Lop of its game. The latter part of the 1990's provided Wal-Mart with the longest expansion period in the company's history. The retailer finished its most recently completed fiscal year with a 106% increase in its stock price and in March declared a two-for-one stock split, the eleventh in the company's history.

Wal-Mart once again outperformed the overall retail industry, reduced inventories, and set itself on the path toward achieving $200 billion in sales within the next decade. If the retailer can maintain the kinds of increases in sales and earnings it posted in the first half of this current fiscal year, it is a goal within reach.

Total sales for the company for the six months ending July 31, 1999, jumped 16% to $73.2 billion from $63.3 billion for the same period a year ago. Net income rose 27% to $2.5 billion or $0.53 per share from $1.5 billion or $0.42 per share the prior year. It was Wal-Mart's fifth consecutive quarter with net income of more than $1 billion.

In the past five years, WalMart's earnings growth was approximately 14%, compared to 6.9% for the rest of the retail discount industry. WalMart even outperformed the S&P 500, which grew 10.3% since 1995.

But Wal-Mart has grown so large that its financial performance can no longer be fairly measured against other U.S. retail companies. It now ranks as the third largest U.S. company on the Fortune 500 list after General Motors and Ford, with revenues of $161.3 billion and $144.4 billion respectively.

But Wal-Mart had a higher total return for investors in the past year with 107.7% compared to Ford's 86.8% and GM'S 21.4%. And the retailer's annual rate of return for 1988 to 1998 also beat the top two at 27.1% compared to Ford's 18.6% and 10.2% for GM.

Not bad, considering the slump Wal-Mart stock fell into during the mid-90s, when analysts doubted it could continue generating such high returns on investment.

In 1996, 1997 and 1998, sales growth slowed from its previous high double-digit rates to 13%, 12% and 12% for each of the fiscal years ending Jan. 31. And for the fiscal year ended in January 1996, earnings were a mere 2%, representing a huge drop from the 15% earnings gain the previous fiscal year ended Jan. 31, 1995.

From 1993 to 1996, Wal-Mart stock languished in the $20s and $30s, hitting a low of $20 on Jan. 31, 1996. Then management began to focus on leveraging its balance sheet. A main area of emphasis was inventory reduction. For the past three years, sales growth has exceeded inventory growth while in-stock positions have been improved. Investments made overseas and domestically in supercenters has began to pay off.

The past decade saw the retailer's profits rise 300% and sales grow by $111.8 billion. It added $20 billion in sales during the last fiscal year alone.

The chain continues to invest in technology to further take the cost out of operations. In 1998, inventory levels increased just 3.5% relative to a 17% sales increase. Management's goal is to continue growing sales faster than inventories even as it evolves into a truly global entity and continues to push for experimentation through its stores.

International sales in 1998 accounted for approximately 8.9% of the company's total sales, compared to 6.4% the prior year, thanks to the addition of 114 international units. For the fist six months of the current fiscal year ending July 31, 2000, sales in Wal-Mart's international division jumped 26% to $6.98 billion from $5.55 billion the same period the year before.

Comp-store sales continue to show strong increases. The chain posted a 9.3% comp-store gain for the first quarter ending April 30, 1999, comps of 8% for the following quarter, in spite of management's caution that comps would come in at a more conservative 5% to 7% increase.

Once again, management has been cautious when discussing increases for the second half of this year, given the comparison's they are up against. During the fourth quarter ended Jan. 31, 1999, Wal-Mart reported record earnings and sales. Net income for the quarter was $1.56 billion compared to $1.29 billion for the previous year. Earnings per share rose $0.70, up 23% from the $0.57 per share reported in the same prior year quarter.

For the most part analysts remain bullish on Wal-Mart's ability to continue this performance, especially as it aggressively moves forward with its supercenter format. The chain plans to add 150 units this year and has allocated $4.9 billion in capital expenditures. It's the most aggressive opening schedule to date, and the company will end the year with approximately 714 supercenters.

Supercenters have generated a compound annual growth rate of 82% since 1992; significantly faster than the overall supercenter industry's average annual growth rate, according to Merrill Lynch analyst Daniel Barry. In fact, Barry estimates that Wal-Mart supercenters could generate as much as 74%, or $80 billion in incremental sales through 2003.

International acquisitions have helped Wal-Mart to become the largest retailer in the world. The chain now operates 953 units in nine different countries. Analysts expect earnings and profits to benefit as it works to incorporate certain operational efficiencies into the international units.