About Walmart Incorporated

Walmart’s full business name is Walmart Incorporated, with the ticker WMT. It trades on the New York Stock Exchange with a fiscal year ending January 31 each year (Morningstar, 2018). It had 2,952,000,000 outstanding shares. The market capitalization is $314,683,200,000, calculated by multiplying shares outstanding and price per share (2,952,000,000*106.6). The total debt is $33,783,000,000.

According to D&B Business Browser, as the world’s largest retailer, Walmart generates about 64.2% of its revenue by selling groceries, home goods, office supplies, apparel, and many other types of goods. Sales through Walmart International, which includes e-commerce channels like Jet.com and Flipkart, generates about 23.8% of its total revenue. The Sam’s Club aspect of Walmart–which provides groceries and fuel–brings in about 11.9% of Walmart’s sales. According to the financial data presented by Morningstar, less than 1% of its total revenue originates from interest income and investment. The 64.2% of the revenue from selling goods are from 5300 Walmart stores all across the country. This sales revenue also includes revenue from the companies Walmart Inc. has bought out in the past such as Bonobos, ModCloth, ShoeBuy, Moosejaw, and many others (ProQuest). Walmart International sales are either from chain stores in other countries under the international division of Walmart or from e-commerce on channels like Jet.com and Flipkart, which rounds up to about 5% of total revenue. Sam’s Club’s largest merchandises are grocery and fuel, which brings about 60% and 20% of Sam’s Club’s revenue (ProQuest). The revenue from companies acquired through acquisition and e-commerce revenue would only appear on the consolidated income statement since they are separate companies that are owned and operated by the overarching brand of Walmart. All but investment and interest income would be considered operating incomes as they are from the sale of goods, which is Walmart’s industry.

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NAICS code 452210

SIC Code Other retail stores (6599) Variety Stores (5331)

ISIC- Other retail sales in non-specialized stores (4719)

Three major competitors to Walmart are Target, Costco’s, and Dollar General. Target is the biggest competitor to Walmart due to their constant competition over the same customers in the discount store industry. Among discount stores, Target has the second highest Net Income at 3.1 billion dollars, behind only Walmart (5.2 billion dollars), according to Morningstar. Walmart belongs in the discount store industry, due to its wide variety of goods sold. As stated above, 64.2% of Walmart’s revenue comes from the selling of goods ranging from apparel to groceries, to sporting goods, and much more. Walmart’s goal is to be a store people can visit to any necessary and desired goods at a fair and inexpensive price. Thus, Walmart is classified as being in the discount store industry.

The article that we chose was called The Pace of Innovation Accelerates at Walmart, and it was published on a page of the Mass Market Retailers global newspaper. Its main focus is to convey the importance of the company’s ongoing transition to become more technology oriented, with online sales being the focal point. Walmart’s President and CEO, Doug McMillon is quoted throughout the article and gives potential investors a credible report on the company’s fourth quarter and full-year financial performance as of January 31, 2018. He goes on to explain the importance of Walmart’s technological transition by citing the substantial increase in e-commerce sales that has led to a steady growth in revenue. The article then provides a detailed outlook on the company’s status moving into the next year based on the internal information provided by McMillon and the company’s financial records from the current year. McMillon’s presence within the article allows investors to gain a better understanding of where the company stands and where he intends to take it. This article does a great overall job of providing a wide range of relevant and valuable information about Walmart’s past, present, and future that can be very useful to potential investors.

Two trends developing within Walmart’s industry include increased spending and the movement of shoppers to online. Spending across the industry has been increasing due to the increase in disposable income across many American homes. Online shopping has been increasing due to the convenience of it. This creates more competition within the industry and makes Walmart potentially lose business.

Two regulations impacting the industry are minimum wage and safe practice. Minimum wage is federally set at $7.25 with many states having a higher rate. They continue to rise, which increase Walmart’s expenses drastically. OSHA, or Occupational Safety and Health Administration, sets safety regulations for employees. This requires Walmart to comply and sometimes make changes to the way they run the business.

A typical customer within our industry could be described with certain characteristics. They are often times lower income, looking for the best deal. Also, families shop within the industry to make it easy to buy things all at one store, instead of shopping at many different stores. Also, pantry stocking is common at Walmart (Numerator, 2018), this could mean people who are preparing for storms or just always feel comfortable with more food in the house. From research, it is also shown that women are more often shoppers here.

A) The financial statement notes provide further information on how the company records and calculates things like revenue and inventory, which cannot be shown on the actual financial statements themselves. It allows the company to give additional information regarding their procedures, which helps explain how the accountants got the numbers they did that are recorded on the financial statements.
b) Walmart recognizes sales revenue, which is total revenue less sales taxes and allowance for returns, at the time when revenue is earned (when the goods are actually sold to customers). The allowance for returns–which they call estimated sales returns–is calculated using the historical percentage of returns. E-commerce sales include shipping revenue and are recognized when the goods are delivered. Since not every customer uses up the total value of the gift card, only the amount that the customer has used is recognized as revenue, which is estimated for the purpose of financial statements. The management is always analyzing the records and updating the estimates for gift card redemptions. Walmart only provides limited information regarding their accounts receivable and uncollectible accounts. Receivables are written down as their net value, which is total accounts receivable less allowance for doubtful accounts. Walmart utilizes the LCM (lower of cost or market) method when calculating the value of their inventory along with the LIFO (last-in, first-out) method. Walmart International, on the other hand, mainly uses FIFO (first-in, first-out) method when it comes to inventory accounting. Sam’s Club uses the inventory accounting method of weighted-average cost LIFO method. Both property and equipment are at first recorded at cost. Any depreciation is recognized as it is incurred. Repairs and maintenance costs are recorded as expenses when they are incurred. Walmart uses the estimated useful lives of property and equipment to depreciate its assets on a straight-line basis. Leasehold improvements are depreciated over the estimated useful life or the remaining term of the lease. Intangible assets and goodwill, which are indefinitely lived, are not depreciated or amortized. However, if an instance occurs that changes the value of the asset, then the value of the asset may be evaluated for an adjustment. Definite-lived intangible assets are treated as long-lived assets and are depreciated on a straight-line basis over the course of time the asset will be beneficial to Walmart.

In Management’s Report to Our Shareholders, the corporate managers of Walmart are taking responsibility for the consolidated financial statements. The report specifically details how the Audit Committee of the Board of Directors has overseen management consolidation of the financial statements and ensured that no policies or procedures were being violated. Management is taking responsibility for the hiring of Ernst and Young to review all financial records as well as certified financial statements with the SEC and for providing certification of Walmart’s Chief Executive Officer to the New York Stock Exchange.

According to Walmarts 10-K, the company’s auditors have been Ernst and Young since 1969. These independent auditors issued an unmodified audit opinion for the company. This type of opinion suggests that Ernst and Young believes that all of Walmart’s financial statements accurately represent the company’s financial position as of the specified period. They are also confident that the results of operations and cash flows comply and conform to the U.S. GAAP principles. Ernst and Young also provides an unmodified audit opinion for Walmart’s internal control over financial reporting. This type of opinion suggests that the auditors concluded that Walmart maintained a strong and effective system of internal controls that complied with the criteria given by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

The responsibilities that Ernst and Young assumed regarding the company’s financial statements and the internal controls over financial reporting include:

Providing a thorough opinion on the validity of the financial statements and internal controls.

Confirming that they comply with national standards.

Providing a basis and reasoning for their opinion.

Conducting audit according to PCAOB standards.

Conducting an unbiased and independent audit.

A) Walmart’s Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses operating income as a whole for Walmart and for Walmart US, Walmart International, and Sam’s Club. The section also discusses risks involved with the retail industry as well as total sales and areas that impair their total earnings. Walmart also shares their performance metrics while also stating their goals and business models. Walmart has committed to everyday low prices and everyday low costs. Walmart’s performance goals stated in the section are strong efficient growth, operating discipline, and strategic capital allocation.

B) Two factors that impact the profitability of Walmart are natural disasters, and income tax. Walmart states that Income tax has a significant effect on our net earnings and that this requires significant judgment in evaluating our tax positions. Walmart must strategically control the amounts of tax-free and taxed items as income tax plays such a major role in their net earnings. By law, Walmart has to pay income tax and as net earnings increase income tax can as well. Being a retail industry, everyday events can impact the profit of Walmart, such as catastrophic events, weather, changing oil prices, inflation, and much more. In the events of a storm, Walmart’s earnings can increase as many customers will look to stock up so that they have supplies they need during the storm. However, some natural events can cause Walmart to become inaccessible, for example, snowstorms, flooding, or other occurrences. This will decrease earnings as customers cannot get to stores. Also, these occurrences can lead to an increase in prices which hurts Walmart drastically as their customers seek every day low prices. These effects, because they are unpredictable vary year to year just as taxes do.

(in millions)

~1/31/2016

~1/31/2017

~1/31/2018

Net Sales

$478,614

$481,317

$495,761

Operating Income

$24,105

$22,764

$20,437

Net Income

$15,080

$14,293

$10,523

Operating income is a company’s gross profit minus the cost of their day to day operations.

Net income is a company’s earnings after all expenses and costs are subtracted from all earnings, while operating income strictly focuses on operating activities.

Operating income allows investors to strictly see how effective a company’s operations are, as it does not include interest or taxes.
Net income allows investors to see how much money is being put back into the business. This can be used to pay dividends, pay off debts, or to invest.

No, we would not buy the stock. The past three years we have noticed an increase in net sales; however, there is a continuous decrease in both operating income and net income. This is due to a higher cost of goods sold in comparison with price sold, and increased selling and general expenses. The article’s main objective is to provide a positive outlook on Walmart’s stock. It extensively displays the company’s continued growth in sales, and reveals Doug McMillion’s (CEO and President of Walmart) ambitions to create more efficient and faster methods to further grow sales by expanding the company’s website and online presence. However, the article negates to mention Walmart’s operating income and net income for more than a few brief sentences. The omission of this key financial information immediately raises a red flag for investors. The article reveals that net income for the year ended January 31, 2018 was $9.86 billion(-27.7%). The company has also slightly decreased the number of domestic and international stores it owns since the previous fiscal year. In addition, Walmart has been losing revenue due to increased competition. In recent years it seems that online shopping has been increasing for numerous reasons. Specifically, it is much easier and younger people find it more appealing. Due to this, there is much more competition for Walmart and other retailers. Because of this, there has been less opportunity for profits. Growing online retail outlets have not only taken business directly from Walmart, but have also lowered Walmart’s prices and profit margins. This causes their revenue and net income to lower. Although Walmart has been the gold standard to many in regard to the discount store industry because of their model and continued success, some problems arise in their Management’s Discussion and Analysis of Financial Condition and Results of Operations section. Their net income and earnings can be affected by a multitude of unpredictable things. Natural disasters, the economy, inflation, and deflation, are just a few areas that affect Walmart’s earnings that they cannot control. For a company and industry where low prices and low costs are so important, too many unpredictable, and uncontrollable variables apply when it comes to Walmart’s earnings. Also Walmarts obligation to taxes is extremely high because of their business and results in a massive income tax expense. Although net sales has been increasing over the past three years, the operating income and net income have been abating over the past three years, from about $15,000 to about $10,500. This is due to the rising cost of operating expenses, such as the cost of goods sold and operating, selling, general, and administrative expenses. The decline cannot be explained through inflation since the inflation rate over the past three years has been fairly moderate (around 2% which is within the target range of 1-3%).

References

  1. Boyte-White, C. (2018, June 21). How do operating income and net income differ? Retrieved November 13, 2018, from https://www.investopedia.com/ask/answers/122414/what-difference-between-operating-income-and-net-income.asp
  2. Dun & Bradstreet Inc. (2018). Corporate Overview for Walmart Inc.. Retrieved November 13, 2018 from https://globalbb.onesource.com/web/Reports/ReportMain.aspx?ftrId=UNIFIEDOVERVIEW&Process=CP&KeyID=30257&Expand=BusDesc#BusDesc30257
  3. IBIS World US. (2018). Industry, Company and Business Research Reports and Information. Retrieved November 13, 2018, from https://clients1.ibisworld.com/reports/us/industry/industryoutlook.aspx?entid=1000#IO
  4. MMR. (2018). Pace of Innovation Accelerates at Walmart. MMR, 35(7), 59. Retrieved from https://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=129819676&site=bsi-live
  5. Morningstar Investment Research Center. (2018). Income Statement for Walmart Inc (WMT). Retrieved November 13, 2018, from https://library.morningstar.com/stock/financials/income-statement?t=WMT?®ion=USA&culture=USA
  6. Numerator. (n.d.). Walmart Demographics and Shopper Insight. Retrieved November 13, 2018, from https://snapshot.numerator.com/retailer/walmart
  7. SEC. (2018). WALMART INC. FORM 10-K. Retrieved November 13, 2018, from https://www.sec.gov/Archives/edgar/data/104169/000010416918000028/wmtform10-kx1312018.htm
  8. Sosene, F. (2016, April 29). What are the 3 main uses of net profit? Retrieved November 13, 2018, from https://www.bellinghamwallace.co.nz/blog/what-are-the-3-main-uses-of-net-profit
  9. U.S. Bureau of Labor Statistics. (2018). Bureau of Labor Statistics Data. Retrieved November 13, 2018, from https://data.bls.gov/timeseries/CUUR0000SA0L1E?output_view=pct_12mths
  10. Walmart Inc. Fort Mill: Mergent, 2018. ProQuest. Web. 25 Oct. 2018.
  11. White, L. H. (n.d.). Inflation. Retrieved November 13, 2018, from https://www.econlib.org/library/Enc/Inflation.html
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