Analyst Report Initiating Coverage Wall-Mart Stores Inc. Wall-Mart operates over 10,000 discount department stores, supermarkets, hypermarkets and wholesale centers under 69 different banners. The company has a presence in 27 countries across the globe. Overview of Recommendation Investment Thesis Opportunities 0 Track record of excellent management and continued cost cutting to Improve margins. Q History of returning wealth to Investors through aggressive buybacks and dividends. 0 IDLE strategy and aggressive pricing attracts customers regardless of economic condition.

High growth potential in emerging markets, including significant China presence. Risks to Recommendation ; Continued uncertainty regarding tax policy. Slowing economic growth in China. 0 Erosion of market share due to success of certain competitors (Amazon, Target). C] unfavorable exchange rates. I am initiating coverage with a rating of “BALL and a month price target of $86. 00. This target represents potential capital gain of 14. 01%, and potential return of 16. 51% including dividend income. Wall-Mart is well positioned in its industry, with significant market share among hypermarkets and superstores.

Continued cost cutting efforts have led to increases in margins and improving global economic conditions should lead to international sales growth. Uncertainty over tax policy in the U. S. Could lead to cautious consumer spending narrated, but this should be countered by low priced “staples” offerings, the compass IDLE (Every Day Low Price) marketing strategy, and growth In foreign markets. April 9, 2013 Contents Company Overview -? 3 Wall-Mart Stores Inc. Analysis . 4 Segment Overview and 5 Walter US. -? 5 wall-Mart International 7 Cam’s Club -? 9 Competition and Sustained Competitive

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Advantage 11 Competitors 11 Competitive 12 Recent News 12 Macroeconomic Outlook 13 Financial Projections 14 Key Income Statement Assumptions -? 15 Analyst Consensus . 16 Valuation 16 Discounted Cash Flow 16 Sensitivity . 17 Multiple 18 pence Triangulation 18 Conclusion -? Cited -? 20 Student Investment Management: Initiating Coverage Company Overview Wall-Mart Stores Inc. (Hereafter Wall-Mart or “the company’) is a discount retailer which operates retail stores in a variety of different formats across the globe.

The company relies heavily on their Every Day Low Price (IDLE) strategy which seeks to revive consumers with the lowest prices on many common goods. Wall-Mart operates primarily in three segments: Wall-Mart U. S, Wall-Mart International, and Cam’s Club. Wall-Mart U. S. Is the largest segment, accounting for 58. 89% of total sales in FYI 2013. The company operates in twenty-six foreign countries through the Wall- Mart International segment, and sales from this segment accounted for 29% of the total in FYI 2013. Cam’s Club operates as a membership-based discount wholesaler which operates in 47 states and Puerco Rice.

Cam’s Club accounted for 12. 11% of total sales FYI 2013. 1 Market Profile Wall-Mart is a titan in the Hypermarkets and Superstores industry. The Wall-Mart U. S. Segment has FYI 2013 supermarket-related sales (groceries and pharmacy) of $180 billion. This performance gives the company a 35% share of the U. S. Supermarket industry, making it the largest provider of these goods domestically. Wall-Mart is a large presence in several other product categories, particularly entertainment, home goods, apparel and hardliner (hardware, automotive, etc). Cam’s Club operates as the second largest warehouse club in the U. S. Behind Cost) with FYI 2013 sales of around $56 billion. Cam’s Club’s sales come primarily through the food, beverage, health and wellness categories (-?60% of sales). Corporate Strategy The company’s strategy centers on the Every Day Low Price philosophy. Wall-Mart seeks to provide value for its customers by providing every day staple goods (grocery, pharmacy, etc) as well as more discretionary purchases (entertainment) at the lowest possible prices. Wall-Mart is able to provide goods at steep discounts through aggressive cost cutting efforts and improvements in operating efficiency and supply chain management.

An area of focus for the company recently has been commerce, ND management believes it can continue domestic growth through this channel. As of the most recent earnings release, the company believes it has grown commerce share in all key markets. This will continue to be an area of focus going forward. International focus will be on expansion and improvement in operating efficiency. Management has made it a goal to improve net and operating margins through aggressive cost cutting and increases in operating efficiency.

Information obtained through Scattered company description and Analyst Ian Cordon’s report (S&P) dated 3/30/13. 3 Wall-Mart Stores Inc. Analysis Global economic conditions will continue to be a key factor for the success of the company going forward. Growth has slowed in the U. S. , and the company will look towards international markets to continue expansion. Comps (comparable same- store sales) in the U. S. Were positive and contributed to sales growth, though for FYI 2013 they came in lighter than expected. The growth driver in the future will be primarily from expansion and comps growth internationally.

I anticipate an improving global economy which will lead to favorable comps growth internationally. This, peopled with a favorable environment to open new locations, should lead to strong sales growth in FYI 2014. The company should be able to continue growth through new initiatives, primarily a strong focus on commerce both domestically and internationally. The company believes that commerce will add close to $. 10 PEPS in FYI 2014, and continued growth will look to improve this figure. Customers are increasing the amount of products they purchase online and I look for this trend to continue going forward.

Wall-Mart was late to the game, and has Just recently begun to put such a heavy focus on commerce. However, I am impressed with the company’s ability to gain market share and solid Cyber Monday results. Competitors pose a significant threat to the company going forward. Discount retailers such as Dollar Tree (NASDAQ:DOLT) pose a threat to the company’s market share. Target (NYSE:TXT) has begun expanding grocery offerings and is looking to compete with Wall-Mart in the Hypermarkets and Superstores category.

While these competitors should be taken seriously, I do not believe the pressure from these competitors to be very severe. Wall-Mart is a well-established company that has been roving the widest variety of goods at the cheapest prices for longer than any comparable company. Competitors in commerce such as Amazon (NASDAQ:AMAZON) pose a much more significant threat. Although there is difficulty competing with Wall- previously stated, Wall-Mart is making great strides in commerce, but is far behind Amazon in the space. This competition should be watched very closely going forward.

Segment Overview and Analysis Walter U. S. Wall-Mart U. S. Is the segment of the greater company which operates retail stores exclusively in the United States. As of the FYI 2013 earnings release, the segment operated 4,017 locations in all 50 states and Puerco Ricer. The focus of this segment has shifted in recent years, with fewer stores being built than in the past. The company is turning attention to improving current stores and experimenting with new formats. In FYI 2013 the company opened 76 new “small format stores,” which include many neighborhood market locations.

The neighborhood markets are meant to be the opposite of the typical Wall-Mart store, and look to attract customers with the small store format, easier parking and less crowded aisles (typical complaints from customers regarding the typical “superstructure” format)3. In FYI 2013, the Wall-Mart U. S. Segment accounted for 58. 89% of sales but 71. 29% of operating income. This difference can be attributed to increases in operating efficiency and cost cutting efforts (including cutting labor hours). These actions have resulted in improving margins in this segment, which would explain the significant portion of operating income from this segment. Http://corporate. Walter. Com/our-story/locations http://corporate. Walter. Com/our-story/our-stores/united-states-stores For this segment, the average receipt (ticket) amount was up 1 . 1% during SQ (which in the stores. A decrease in traffic is likely attributed to the high and volatile gasoline prices during this time period. Overall, holiday sales came in relatively in-line with company and street expectations. Traffic in the stores was soft during the first three weeks of December, but the stores saw significant traffic in the final week. As mentioned, the increase in average ticket also helped to improve holiday sales numbers.

The segment saw a 10% increase in layaway volume, driven by a recent expansion of the layaway program. Top items in layaway during the holiday season included pads and televisions with screens greater than 50″. Correspondingly, the company reported an increase in market share in the entertainment category. The segment continues to improve share in commerce domestically. On Cyber Monday, the company reported the highest one-day sales performance in company history. In addition to commerce, management continues to explore new channels to increase growth domestically.

The company continues to test a Scan and Go system which would allow customers to check out as they shop in order to save the hassle of standing in line. This program is still in a testing phase, but early feedback has been overwhelmingly positive. The segment has a strong track record of improving operating efficiency, and this should continue to be the case moving forward. Operating margins from this segment should continue to increase, as operating income will grow at a faster rate than sales. The segment continues to add share in many key categories such as consumables, grocery, health and wellness and entertainment.

I look for Wall-Mart to continue to gain significant share in the entertainment category. Certain entertainment products, namely televisions, have stagnated in terms of new and exciting technological development. With a lack of new and exciting products, consumers are beginning to focus more on price when making a purchasing decision. This trend works in Wall-Mart’s favor as the company is able to price many items below competitors. I anticipate Wall-Mart to maintain current share in the grocery and consumables categories, as increased pressure from the new offerings of competitors (Target, for example) will impact the segment.

In the near term, the segment will suffer from recent increases in payroll tax and the delay of tax refunds. The company expects comps to be flat IQ of FYI 2014, and I believe this will be the case. These factors, coupled with high gas price, will work to decrease both traffic and average ticket in U. S. Stores, and could likely lead to negative comps in IQ . I would not expect this continue for all of FYI 2014, and the segment will likely see solid comps in SQ as tax refunds are received and the initial shock of payroll tax increases begins to wear off.

Overall, the segment should see a healthy PAYOFF with success driven by increases in share in key categories and continued margin improvements. The NYPD Group survey Wall-Mart International Wall-Mart International is responsible for the operation of all discount retail stores outside of the U. S. The segment currently operates 6,1 55 stores in 26 different countries under a variety of different names. The focus from this segment continues to be a mix of growth and improvements to operating efficiency. Margins have declined over the last few years, and margins from this segment lag the greater company by a significant amount.

Improvements in this area are being made through cost cutting efforts in the stores and also through improvements in logistics and supply chain management. For FYI 2013, Wall-Mart International accounted for 29% of total sales and only 22. 2% of operating income. The disparity is due to the poor margin performance from this segment. It is important to mention that foreign exchange rate fluctuations contributed slightly to the increases in operating income and sales. Favorable exchange rates improved operating income by $78 million and sales by roughly $300 million.

The negative comps are a troubling sign for the company, and management has cited several reasons for this trend: 0 Fewer trips to the store and smaller basket sizes from the convenience shopper. This has been especially prevalent in Brazil, Mexico and Canada. 0 Increase in traffic from customers with bigger baskets. Change in consumer shopping patterns from daily to weekly shopping trips. Especially noticeable in Chinese market. 0 Increase in traffic for food and consumable offerings, but decreasing where general merchandise is the primary offering. This has been noticed particularly in Canada.

The company is making changes to adjust to these trends. Space allocation is shifting in some markets to appeal more to the convenience shopper. Holiday sales came in weaker than expected internationally, and contributed to the soft sales growth. Poor economic conditions in many markets led to sluggish sales growth. The highlight of all markets was in Latin America, mainly Brazil and Chile. High sales growth in these markets helped to drive the 7. 4% increase that was seen this year. The company continues to experiment with new channels to improve 5 6 http://corporate. Lamar. Com/our-story/our-stores/united-states-stores FYI 2013 Earnings Call Transcript traffic and ticket. commerce continues to present excellent opportunities in many of the international markets. For example, despite negative comps in the U. K. , Total online sales increased 18. 8% from last year. This channel continues to provide many opportunities to improve sales while working to improve margins. In terms of inventory, the company noted that it is improving inventory management and control in Latin America and China, but is still struggling in emerging markets.

Continued inventory improvements should translate to improved efficiency and higher margins in the future. In addition to commerce, the company is expanding offerings in many ways. In the U. K. , the company continues to expand the “Click and Collect” program. This program allows consumers to make purchases online and then drive to the store to pick up their items. U. K. Stores branded “SAD” reported that more than half of their customers were shopping through this program. The success of this initiative in the U. K. Is a positive sign, and the program will likely be expanded in to new global markets in the coming fiscal year.

Looking forward, strong performance from Wall-Mart International is crucial to the continued growth and success of the greater company. Growth opportunities are scarce domestically, and the company is looking to opportunities in new markets moving forward. Overall, this segment should perform well in the coming years. Wall- Mart Stores has demonstrated the ability to consistently improve efficiency and increase margins, and there’s no reason to believe this will not continue in global markets. Wall-Mart has discovered there is a steep learning curve when conducting business in international markets, particularly on such a large scale.

Once management becomes more familiar with these new markets, improvements in efficiency should quickly follow. Relationship building will continue to improve supply chain efficiency, and this should all translate to more attractive margins in this segment. The area of commerce has grown significantly and the company is looking o expand the commerce business in to several new markets this year. In terms of comps, I anticipate slow improvements in most markets. Improving economic conditions, coupled with management becoming more familiar with the core customer, should drive higher tickets and more traffic in the stores.

Increases in discretionary income in emerging markets should translate to increases in discretionary categories such as entertainment and apparel. Overall, I anticipate seeing solid sales growth in PAYOFF. I anticipate comps to be positive in more markets than FYI 2013 and expect improvements in efficiency leading to higher margins. New channels, recovering economies and a focus on “disciplined growth” when opening 8 Cam’s Club Cam’s Club is a membership-based discount warehouse store. The stores offer a variety of goods in bulk sized packaging designed to give the consumer the highest possible value for their dollar.

Through simple store designs and bulk packaging, the segment is able to cut costs and pass the savings to the customer. The company operates over 700 clubs, many in the United States but with over 100 internationally. Members pay a membership fee every year which grants them access to the products within the store. Much like the Wall-Mart stores, the Cam’s Club stores offer a variety of specialty services, including a pharmacy, optical center, tire center and more. In FYI 2013, the Cam’s Club segment provided 12. 1% of sales and 6. 5% of operating income.

Cam’s Club has had the lowest margins of all segments for the last five years, and this explains the difference in contributions to sales and operating income. Thanks to a strong holiday-driven November and late December, the segment was able to report excellent results for FYI 2013. A very aggressive approach to holiday shopping led to a solid performance for the season. The segment began many campaigns to target shoppers early in the season, including holding “Holiday Taste of Cam’s” events, a cyber-week special and a special VII event for business customers and “Plus” members.

Holding events early in the holiday season led to strong November sales, which likely explains the lack of sales in early December. Cam’s Club made significant comps gains in many categories, led by strong performance in apparel and home goods. For the year ended December 31, 2012, it was estimated that Cam’s Club gained a 20 basis point share in wireless. As a standalone category, airless comps were up double-digits and are an area of excitement going forward. The segment is offering many popular phones, including the phone 5 and Samsung Galaxy SO.

Many other areas of electronics were very strong. Sales of pads saw double digit growth, and there were also significant gains in televisions with screens in excess of 70″. The popularity of these products lines, coupled with the low cost offerings through this segment will continue to present an excellent growth opportunity. 7 Survey 9 Cam’s Club has had success with the offering of fuel to consumers, and this continues to be a growing business. The lower prices offered to members has attracted many customers in a period when gas prices are running very high.

Cam’s Club derives a majority of sales through the food, beverage, and health and wellness categories, and all three categories recorded positive comps for the most recent year. Business membership declined slightly during the year and there has been a noticeable decrease in traffic from the business customer. Macroeconomic issues have put pressure on business, particularly on businesses of small to medium size. The spending patterns of this type of customer are highly correlated to the greater economy, and sluggish performance has contributed to the decrease in traffic.

Although it currently makes up a small percentage of total revenue and income compared to other segments, Cam’s Club performance is very important to the company going forward. There is significant room for this segment to grow, both domestically and internationally. Pressure is being applied to the segment by Cost, the largest company in the membership-based wholesale store category. Despite this, I am optimistic on this business moving forward. In an improving economy, I anticipate the business customer to pick up spending and sake a strong comeback in FYI 2014.

Payroll tax increases will likely hurt many core customers, but with an emphasis on low prices and stretching the consumer’s dollar, I expect the impact to be minimal. The product offerings from the segment are strong and gains in electronics and wireless in particular look exceptionally promising. Many electronics categories are experiencing solid growth, and core offerings (food, beverage, health and wellness) continue to produce healthy gains. The company has succeeded in growing operating margins over the last four year, and I look for this trend to continue in the near-term.

Growth in sales will come from increased comps in addition to the opening of new locations. The segment plans to add 15 to 20 new stores in FYI 2014, which will help continue expansion of the brands. The company has had great success with commerce and looks to continue to build upon this success. Cyber Monday brought substantial traffic to the site, as consumers are increasingly looking to the internet to make purchases. Cam’s Club was late to the commerce game but has been able to steadily increase share in the space. I look for this to help contribute to sales growth going forward.


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