Company Valuation PDF

Preview

Summary

Company Valuation Report...

Description

Walmart Market Company Valuation Project

Table of Contents I. Executive Summary II. Industry/ Firm Description Industry Overview Nordstrom and Competitors Overview Key-Value Drivers SWOT Analysis III. Financial Statement and Trend Analysis Industry Benchmark Trend Analysis IV. Analysis of Firm Riskiness Analysis Beta and Industry V. Firm Valuation VI. Conclusion and Recommendations VII. Appendix & Work Cited

I. Executive Summary Walmart is a very well-known retailer store with more than 11,500 stores worldwide, and It started with a small store in Rogers, Arkansas. Sam Walton opened in 1962. Walmart went public in 1970, and the first stock traded at $16.50 per share (Walmart). As it is today, Walmart stock is traded at $132.49 per share (Yahoo Finance, 2021). Walmart's primary goal is to "create opportunities and bring value to customers and communities around the globe" (Walmart). This company operates in three different market segments, Walmart U.S, Walmart U.S eCommerce, Walmart International, and Sam's Club. Walmart has now converted into one of the most important retail stores worldwide. They have expanded their business to other markets, and they have been exploring the eCommerce market to compete against Amazon. This new eCommerce opportunity gives users the ability to shop anytime, from anywhere their favorite products from their mobile device. Walmart offers all products that you can find in supermarkets, electronics, apparel for everyone, and outdoor living and furniture. All Walmart stores focus on three main areas. First, is the opportunity, which is to increase an economic opportunity by promoting the growth of suppliers, local manufacturing, and small businesses. Second, Sustainability, which enhances the sustainability of global supply chains by reducing the energy intensity emissions in their operations and supply chain. Finally, community, which they focus on strengthening local communities’ thorough engagement of associates, customers, and the company itself. After analyzing their financial statements and doing ratio analysis, we came up with significant results: Walmart is doing better in their industry, the department store industry (NAICS Code: 452210). Among some of their stronger competitors are Target and Costco.

Analyzing all the ratios, we have determined that Walmart has more advantage than their industry in their return on equity and in their inventory turnover, which means that Walmart is doing a great job selling their inventory quickly. They are converting their sales into revenues. Walmart also faces a lot of risks because the consumption trends are constantly changing. Many more consumers are switching to a healthy lifestyle. Customers changing to a healthy lifestyle will affect Walmart in the long run because Walmart is more concentrated on providing low prices to their high-quality products; Walmart is not focused on providing organic, healthful, or natural food. It will become a considerable challenge for Walmart to keep up with this healthy lifestyle trend. We also used the beta and industry analysis to determine how volatile the Walmart stock was. According to Yahoo Finance, the beta for Walmart is below 1.0, which means that Walmart stock has a lower risk. Hence it provides lower returns. We used the Dividend Discount Model to calculate Walmart's current stock price, and our findings were Walmart has a rate of return of 2.26% and an average growth rate of 1.92%. After doing all our calculations and using the price models to earnings model and the DDM model, we concluded that the weighted average of these two methods gave us the stock price of $92.29. In conclusion, even though Walmart is doing slightly better than more of its competitors and its industry, Walmart's primary value comes from its lower-price and highquality products. However, we believe that investing in Walmart is not that risky, and its stock gives such lower returns that we have determined that their stock is overvalued.

II. Industry/ Firm Description Retail Industry Overview Walmart Inc is the largest multinational retail corporation of discount department stores and grocery stores in the world from the United States. The retail industry focuses on transactions between retailers and end consumers. Retailers provide end consumers with easily accessible products and services. These retailers do not produce tangible products, they purchase merchandise from manufacturers in large quantities for resale to consumers at a profit. The domestic Retail Store industry is mature and highly competitive. The retail industry forecast for the year 2020 is between 3.5 percent and 4.1 percent as sales continue to grow which are expected to raise $3.9 trillion. The growth forecast for the National Retail Federation in 2019 was 3.8 percent which was only 0.1 percent over the actual growth for that year. Walmart and Competitors Overview Walmart's main competitors are Costco Wholesale Corp and Target Corp. The company is leading the retail industry with the criterion focused on helping purchasers save money and live better by offering "always low prices" (their famous slogan) products. Target took over Walmart’s retail share thanks to their better quality merchandise and customer service. Nonetheless, Walmart has been improving by offering better quality merchandise and giving training academies about customer services for its employees which take place both online and in-store. Walmart is new to eCommerce online retail, but they are well adapted compared to other brick and mortar retailers due to provide competitive pricing for products online and offer multiple shipping options such as delivery to the client’s house or free delivery in store. The store pick-up option helps consumers save time since they could easily

look for merchandise and place orders on smartphone applications before coming to the store to pick up, it also helps the business save the cost related to freight. Furthermore, Walmart is extremely successful in grocery retail with full-sized grocery stores with impressive selections. Walmart has developed and deployed smaller grocery stores to compete against rival grocery stores such as Kroger and Safeway.

Walmart Inc

Costco Wholesale

Target Corp

Corp 2.00%

12.50%

4.5%

Beta

0.48

0.56

0.98

Debt ratio (Jan 2021)

78%

66%

105%

5-year dividend growth rate

According to financial data collected of 5-year dividend growth rate, beta, and debt ratio of Walmart Inc, Costco Wholesale Corp, and Target Corp on GuruFocus shows that Walmart is not doing well on dividend growth rate compared to the other two opponents. However, it is leading the market cap with $377,398.45 claiming that the company is worth on the open market, as well as the market's perception of its prospects. Furthermore, Walmart has the lowest beta, which helps the company insignificantly better than them by holding the less risky stock for investors. Key-Value Drives Sales volume, the scope of operation and wide customer base: Through selling almost all and being almost everywhere, Walmart has been able to gain a significant market share. It has attempted to meet the needs of different consumer segments by offering a wide variety of purchase opportunities in a single venue. It has a multi-store format that allows it to reach a wider market, and it sells merchandise through four different types of stores: discount stores,

Walmart Supercenters, Sam's Club warehouses (which offer bulk items), and neighborhood markets. Supply chain management based on electronic product information, vendor role in distribution, and layout of warehouses: Walmart's supply chain is widely regarded as one of the most technologically advanced and effective in the world. Walmart was a pioneer in getting accurate product information electronically attached to items, whether by barcodes or RFID tags (radio frequency identification technology) so that the information could be relayed to its database and used to inform its inventory management system. One commentator claimed that the goal was to master the art of knowing exactly what it needed, how much it needed, and what it needed it. Walmart announced a 16 percent decline in outof-stock merchandise at its RFID-equipped stores during the first eight months of 2005. Minimization of overhead and operational costs: Walmart maintains its low overhead by following Walton's model for a low-cost service. Its executives, according to reports, travel by coach and share hotel rooms with coworkers. Its low-income and low-benefit healthcare programs for rank-and-file employees have been widely publicized and protested, but it should be noted that the company announced in January 2018 that it would increase the starting wage to $11 an hour for its employees. The corporation has also been accused of requiring hourly employees to perform unpaid overtime. Walmart employees are also required to keep costs down, even when it comes to heating and cooling the buildings, according to reports. Leveraging of Its bargaining power to force suppliers to lower prices: Walmart aims for more than 20% of the sales of many well-known businesses. Walmart, as the largest supplier-retailer of most of our consumer products, has significant control over their bottom line and, in reality, almost all of the consumer goods industries in the United States. Walmart

is actively pressuring its suppliers to lower costs in order to adhere to a price-cutting plan (experts estimate that Walmart saves customers at least 15% on a standard cart of groceries). Author Charles Fishman explains how the price of a four-pack of GE light bulbs dropped from $2.19 to 88 cents over a five-year period in his book The Walmart Effect. The pressure on suppliers to reduce costs has resulted in factory closures, improvements in manufacturing materials and procedures, and even the outsourcing of manufacturing processes to low-wage countries like China. Swot Analysis Strengths Walmart's brand name is one of its biggest strengths. The business is known all over the world as the world's largest retail store. The company's brand image has drawn the majority of customers to their store on a daily basis. Walmart employs the economies of scale approach, which allows customers to purchase products at a lower cost. As a result, competitors would find it difficult to overcome this technique. Walmart is well-known for its extensive product range. As a result, when customers shop at Walmart, they have a wide variety of choices to choose from. Walmart has a technical advantage over its competitors, making their jobs much easier. They keep track of their inventory, sales, and other technical information. Walmart is a well-known brand around the world. Walmart's prices are higher in other parts of the world than in the United States. As a result, Walmart's presence in various countries is a strength. Weaknesses Walmart's most glaring weakness is how they handle their workers. There are instances of unequal pay, social inequity, and excessive workload among workers. Walmart's

image has suffered as a result of these types of complaints, and the company has suffered as well. Only a few Walmart items are of low quality, which is a huge deal for a company like theirs. It harmed their reputation with customers, and they suffered losses as a result. Walmart does not set a good example for the customer's experience. Other Walmart competitors provide a fine ambiance and wonderful experience for their customers during the shopping journey; however, Walmart lags behind in that region. Opportunities Walmart has a unique advantage in the retail industry because it can market Western products to developing countries. These countries are developing economically, and they would be pleased if Walmart can provide them with some low-cost products. In the long run, Walmart will use its food items to compete with other grocery stores. It will ultimately raise the value of their brand. Consumption of gluten-free and organic goods is on the rise right now, and Walmart has a lot of space to expand in that market. Threats Other retailers can pose a threat to Walmart because they provide an enjoyable shopping experience for their customers, which Walmart currently does not provide. Walmart faces a challenge to its company during a recession because customers do not want to spend a lot of money during this period, so they consider Walmart to be a shopping destination for themselves. Walmart is not welcome in places where people want to keep their local markets alive and well. As a result, Walmart faces a lot of social problems when it comes to establishing its company in this type of area. III. Financial Statement and Trend Analysis Industry Benchmark

Walmart has always maintained a focus on delivering great-priced items at the best prices to its consumers. That being said, one of Walmart's most famous industry Benchmarks is their price matching program which they offer to their customers. The price matching program allows customers to bring an identical item that is listed at a lower price from a competitor to Walmart, and Walmart will then match that price. On Walmart's website they state that the product must be identical (size, color, quantity, model) and also be in stock at both their own site and the competitors’ site at the time of the price match request to be eligible for the program. This is a program that builds strong customer loyalty for their business because essentially if Walmart will match any competitor’s price, there is never a need to shop with a competitor. Walmart even specifies their list of top competitors that they will price match. This is a strong benchmark for Walmart to stand by and is a pretty tough program to compete against as a competitor. Another industry benchmark Walmart currently offers is 24-hour superstores. Surprisingly almost no other competitor in Walmart's industry seems to offer this. Target closes at 10 pm, Best Buy at 7 pm, Kmart closes at 8 pm etc. This gives Walmart a major advantage over their competitors because any customer who is looking to purchase an item anytime after around 10 pm, is forced to go to Walmart as they are the only company who is able to cater to their needs at that time.

The following table shows the ratio analysis from the three most recent years of Walmart and their industry (NAICS Code: 452210).

Trend analysis Liquidity Ratios: First, the current ratio of Walmart is pretty consistent in the .80 ranges. In 2018 the current ratio was .76, in 2019 was .80 and finally, in 2020 was .79, which can be inferred that Walmart struggled a little to cover their liabilities with their assets. Now, when we examine the quick ratio, it is drastically different from the current ratio. However, the quick ratio remains constant in the .20 range. This means that Walmart doesn't use its inventory to cover its liabilities. Asset Management Ratios:

In the inventory turnover, we can see that it has been improving since 2018. it started at 8.6, then in 2019 it was at 8.8, and last year it was 8.9. Having a higher ratio means that Walmart is efficient in turning their inventory into their sales. In 2018, Walmart reported a 4.2 in days sales outstanding. For the following two years, they had an average of 4.4-day sales outstanding, which means Walmart collects their account receivables relatively fast. We can conclude that Walmart does a great job collecting their money from their sales in a few days. The fixed assets turnover for Walmart remains constantly constant over the years 2018-2020. In 2018 was 4.4, in 2019 was 4.5, and finally, in 2020 was 4.4. It appears that Walmart does a good job converting its fixed assets into revenues. However, it is very constant over the years. We can conclude that Walmart has not yet improved. They remain constant. The total assets turnover also remains constant over the years, with a range of 2.3-2.5. Walmart does a great job converting its assets into sales. Debt Management Ratios: Walmart had a meager debt ratio in 2018 with 46%. It did increase by 17% in 2019 when it reached 63%. However, by 2020 it decreased by 4% when it reached 59%. These numbers are very regular and mean that Walmart has a meager debt ratio; therefore, it has a low risk, and its assets cover its debt well. For the time's interest earned, Walmart reported 7.49 in 2018. In 2019 it decreased two points to 5.46. While in 2020, it significantly increased three points to 8.74. Walmart has done an excellent job covering its debt over the years. However, in 2019 they struggled more than

usual because the ratio fell two points from 2018 to 2019, but in 2020 they recovered by increasing three points. Profitability Ratios: In 2018 Walmart reported a 1.97% of profit margin. In 2019 it decreased slightly to 1.30%, but in 2020 it increased to 2.84%. Over the years, Walmart has been able to keep its profit margin stable. In 2019 it decreased, but the following year it recovered. However, its profit margin it's a little low, but it can convert its sales into profits. When looking at the return on equity in 2018 was 13%. The following year it decreased to 8.9%, which is significantly lower than in 2018. In 2020 it increased considerably by 10%. In 2020 the return on equity was 18.9% which was higher than the two previous years. The return on assets for Walmart in 2018 was 6.5% which was also the same for 2019. In 2020 it decreased by 6%. In 2020 the return on assets was 5.9%. Walmart has been doing a good job converting its assets into profit. Market Value Ratios: The price per earnings ratio for Walmart in 2018 was 32.4. In 2019 the ratio increased 10 points to 42, but in 2020 it decreased drastically to 21.9. After reviewing the ratios, we can conclude that investors are willing to pay around 21 dollars per one dollar of reported profits. The market book ratio remains constant for the three years. In 2018 the ratio was 4.04. In 2019 the ratio decreased was 3.8, but in 2020 the ratio increased to 4.34. After analyzing the ratios, we can conclude that the market value of Walmart has been constant over the years. Benchmark analysis

Liquidity Ratios: When comparing the department store industry with Walmart, we can conclude that the industry doses slightly better than Walmart. The current ratio in 2018 was 1.4 and in 2019 was 1.3. We can figure that the industry does a better job cover its liabilities with its assets. When looking at the quick ratio and comparing it to Walmart, we can see that they are doing the same. The quick ratio for the industry was .30 in 2018 and .20 in 2019. We can conclude that both Walmart and their competitors struggle to cover their liabilities with their inventory. Asset Management Ratios: When you compare the Walmart inventory turnover with the industry inventory turnover, you can see that Walmart is doing a much better job than their competitors converting their inventory into sales. The inventory turnover for the department store industry was 3.3 in 2018 and 3.4 in 2019. The day's sales outstanding for the industry was 3.2 days in 2018 and 3.4 in 2019. After comparing it to Walmart days sales outstanding, we can conclude that Walmart is doing slightly worse than its competitors, collecting their profit in more days. However, it is nothing to worry about because it is only a difference of 1 day. The fixed asset turnover maintains very stably over the years. In 2018 it was 3.3, while in 2019, it was 2.8. When comparing it to Walmart, we can conclude that Walmart does a slightly better job than their competitors converting their fixed assets into revenues.

The total asset turnover is the same over the years we analyzed. In 2018 it was 1.5 and 11.4 for 2019. After comparing it to Walmart, we can conclude that they are still constant over the years, and they are doing a good job generating revenue from their assets. Debt Management Ratios: The debt ratio in 2018 was 82%, and in 2019 was 135%. When comparing it to Walmart, we can find that ...