Comparison Walmart And Target

The annual reports of Wal-Mart and Target are provided free of charge via walmart.com and target.com. Upon inspection, the Wal-Mart and target reports include meaningful financial statements, including the Statement of Owners Equity, Income Statement, and Balance Sheet. These statements were obtained through 10-K statements available on walmart.com and target.com.

In comparing the statements of these companies, Wal-Mart and Target both provide multi-step Statements of Operations, which include the current and previous 2 years financial information.

Selected Data from Statement of Operations

(Dollars in Millions)

Wal-Mart (2002) Wal-Mart (2001) Wal-Mart (2002) Wal-Mart (2001)

Sales$5,269.3$4,870.3$3,486.1$3,387.9

Gross Margin1,413.41,310.5960.9938.6

Income from Operations264.1245.7193.9157.0

Net Income99.963.9111.787.4

A review of core operating data shows that annual sales improved by 399 million and 98.2 million for Wal-Mart and Target, respectively. This resulted in Wal-Mart improving net income by 36.1%, and Target producing a 21.8% gain over the previous year. While Wal-Mart would appear to have improved dramatically, further review reveals that this improvement is due to a large reduction in income taxes, caused by a corresponding loss in business segment walmart.com. Because this segment is expected to reduce its losses in 2003, look for Wal-Mart to have a more modest improvement in net income.

Consistent with GAAP, both organizations have balanced consolidated balance sheets as follows:

Selected Data from Consolidated Balance Sheets

(Dollars in millions)

Wal-Mart (2002) Target (2001) Wal-Mart (2002) Target (2001)

A=Assets$2,995.4$2,623.2$2,268.2$2,179.3

L+Liabilities 1,967.71,735.1 $1237.61,229.4

SEStockholder’s Equity 1,027.7888.1 $1030.6949.9

Total Liabilities and Shareholder Equity$2995.4$2623.2$2,268.2$2,179.3

According to the Statement of Cash Flows, Wal-Mart and Target have produced significantly larger net cash flows from Operations than net income. Target has improved cash flows from operations through effective reduction of A/P, while Wal-Mart utilized impairment and the loss on walmart.com to improve net cash flows. In 2001, Target appears to have expanded, and in 2002 the bills became payable. This explains the difference in cash from operations over the previous years. Wal-Mart also has continued to expand, but has spent considerable funds on acquisitions and capital investments. With regards to financing, Target used the IPO of GameStop to dramatically improve cash flows from a negative balance. Countering this gain was an increase in credit, used to fund expansion. The net result was a gain of 144% in cash and cash equivalents over the previous year.

Wal-Mart also managed to improve its negative cash position from financing, having paid down creditors in 2001. This enabled the company to borrow additional funds for 2002, and this inflow of cash provided some of the needed resources to repurchase common stock. The result of this was a positive balance in financing and a corresponding improvement in cash and cash equivalents of nearly 42%.

Due to both organizations holding numerous subsidiaries, all statements are consolidated in order to reflect the accounts of the company and it’s majority owned subsidiaries.

At Wal-Mart, all inventories are valued on a FIFO basis using the retail inventory method; some distribution and other expenses are recorded as inventory costs. Depreciation of property and equipment is recorded using the straight-line basis for financial statements and on an accelerated basis for tax purposes. All revenues are stated as net of estimated returns, at the point-of-sale for all of the company’s segments, while cash and cash equivalents include all short-term investments with maturity dates of 90 days or less. Pre-opening costs are recorded as incurred. Additional notes to the financial statements include disclosures regarding subscription service revenue recognition, advertising costs, equity based compensation, discontinued operations, and weighted average shares outstanding, asset impairments, goodwill. Legal settlements, property and equipment, income tax and commitments are also noted.

Wal-Mart notes to financial statements state that merchandise inventories are stated at lower cost or market using the retail inventory method on the FIFO basis for 82% of the company’s inventory. GameStop inventory (or remaining %) is recorded at average cost, and valued on the LIFO method. Target states that if all inventories valued at LIFO costs were valued at current costs, inventories would remain unchanged. Depreciation is calculated using the straight-line method over the useful life of the asset, while different methods are used for tax purposes. Wal-Mart records all short-term instruments with original maturity dates of 3 months or less as cash equivalents. Revenues are recognized at the time of sale, and sales returns are recognized at the time of return. Additional notes to financial statements are numerous, and include a disclosure of stock option plans, pension and retirement plans, acquisitions, and leasing agreements. Advertising, legal and subscription service revenues are also discussed.

To provide a detailed comparison of Wal-Mart and Target, ratios were calculated in the following areas: Liquidity, Profitability, Long-Term Solvency, Cash Flow Adequacy, and Market Strength. The results of these calculations are shown on the following page.

Liquidity Ratios

(2002-2001)Target

(2002-2001) Wal-Mart

Working Capital ($ millions) 655,420453,700

Current Ratio (times) 1.21.8

Receivable Turnover (times) 89.143

Average Days’ Sales Uncollected4.18.5

Inventory Turnover (times) 2.92.2

Average Days’ Inventory

on Hand125.9165.9

Despite a smaller ratio of current assets, Wal-Mart holds a larger amount of working capital. This could be due to the amount of A/R turnover that it enjoys. However, the major differences in Receivable Turnover and Average Days’ Sales uncollected categories are where Wal-Mart holds distinct advantages. Given that Inventory Turnover between these organizations is similar, I would recommend that Target investigate its credit and receivables policies to improve A/R and consequently improve liquidity.

Profitability Ratios

(2002-2001)Target

(2002-2001) Wal-Mart

Profit Margin (%) 1.93.2

Asset Turnover (times) 1.91.6

Return on Assets (%) 3.65

Return on Equity (%) 10.411.3

Long-Term Solvency Ratios

(2002-2001)Target

(2002-2001) Wal-Mart

Debt to Equity (times) 1.91.2

Interest Coverage (times) 11.316.2

With regard to long-term solvency, Wal-Mart has a distinct advantage in its debt coverage. Increasing its total liabilities due to aggressive expansion of its superstores, Target would be well advised to limit its borrowing and look to cash flows from operations to fund further expansion in the short-term. This will keep the interest coverage ratio from becoming a problem for Target, while Wal-Mart should consider reducing its interest expense, if possible, through deferment of selected payments.

Cash Flow Adequacy Ratios

Cash flows provided by operating activities of continuing operations provide us with a significant source of liquidity. Our cash flows from operating activities were $15.9 billion in fiscal 2004, up from $12.9 billion in fiscal 2003. Operating cash flows from continuing operations increased during fiscal 2004 compared with fiscal 2003 primarily due to an increase in net income, improved inventory management, accounts payable growing at a faster rate than inventories, and a decrease in accounts receivable of $373 million compared to an increase in fiscal 2003 of $159 million due to the collection of foreign taxes receivable. Accrued liabilities increased by $1.8 billion compared with an increase of $1.1 billion in fiscal 2003 due to increases in accruals for self-insurance, salaries, interest and taxes. In fiscal 2004, we paid dividends of $1.6 billion, made $10.3 billion in capital expenditures, paid $5 billion to repurchase shares of our stock on the open market, received $4.1 billion from the issuance of long-term debt and paid $3.5 billion of long-term debt. In addition, we received $1.5 billion from the sale of McLane.

(2002-2001)Target

(2002-2001)Wal-Mart

Cash Flow Yield (times)3.31.8

Cash Flows to Sales (%)6.25.4

Cash Flows to Assets (%)11.78.5

Free Cash Flow ($ millions)149,45467,000

Continuing the previous discussion of Target expansion funding, we can see that cash flow adequacy ratios indicate that Target may have already tapped into operating funds, while Wal-Mart appears to have completed a round of expansion in the previous year. This would explain the interest coverage ratio of Wal-Mart, as expansion has likely been financed through credit borrowing, while Target utilized a portion of operating cash flows.

After adjustments, both organizations have produced improved cash flows to assets through depreciation and amortization. In fact, Wal-Mart has 50% more expense in this area than net income, while Target has depreciation and amortization expenses totaling 87% of net income values. It seems that Wal-Mart has dramatically improved its position on paper through these adjustments.

Lastly, free cash flows for these organizations show large differences that may be explained by Target utilization of operating cash to fund expansion. Due to reduced expansion for 2002, Wal-Mart has improved its ending free cash. This excess cash could be used to pay a dividend to shareholders, something the company has never done.

Market Strength Ratios

(2002-2001)Target

(2002-2001)Wal-Mart

Price/Earnings per Share*1*1

Dividends Yield*2*2

*1) Price/Share at end of fiscal year not given. Wal-Mart EPS were $1.51 and $0.96

Target EPS were $1.39 and $1.08 in 2002 and 2001, respectively.

*2) Dividends have never been declared.

Due to the above reasons, price/earnings per share cannot be determined, and a dividend has never been declared by either organization. Investors may expect their share value to be realized in the form of increasing share prices. However, this could harm the stock value if share prices were to rise and a large amount of shareholders were to sell. Because of this, these organizations may wish to reconsider their dividend policies in the future.

In conclusion,Wal-Mart and Target are currently liquid and profitable. These two corporations are sound and will continue to be profitable in the future.