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Using The Value Line Page: Retail Metrics and Wal-Mart - November 5, 2010
As the Business Description on the Value Line report points out, Wal-Mart Stores (WMT – Free Analyst Report) is the largest retailer in the world. It grew to this size by keenly focusing on its operations and the value proposition it offers its customers. (A free copy of the Value Line report of Wal-Mart can be found here for use with this article.)
On the operating front, Wal-Mart is known as much for its focus on squeezing suppliers as it is for what some view as overly stingy employee benefits. It also works hard to control as much of its business as it can, such as the recent move to buy more products directly from suppliers that is highlighted in the Analyst Commentary of the most recent Value Line report.
Unlike retailers like Home Depot (HD – Free Analyst Report) that specialize in a particular niche, Wal-Mart tries to be all things to all people. Instead of a deep selection of products in a limited number of categories, it offers a broad overall category selection, with limited individual offerings within each category. That limitation, however, is offset by low prices made possible by the keen focus on operations and massive sales volume. Clearly Wal-Mart isn’t the store for everyone, but it is, in many people’s eyes, the store to go to for low prices and “good enough” products across almost every product category.
Its size and broad product offerings result in another interesting feature; it’s a bellwether company for the broader retail industry. This makes the company’s metrics useful as comparisons to those of other retail companies. So what are these metrics?
The first thing to note about Wal-Mart’s Value Line report is that it is in the “retail” format. That means that the Statistical Array is slightly different than that of a traditional industrial company report. The important difference is the inclusion of the gross margin and the number of stores.
The gross margin percentage is calculated by subtracting cost of goods sold (excluding depreciation and amortization) from total sales and dividing by total sales. This metric is important for a retailer because it gives a sense of the profit it is making off of the products it sells before taking into account the costs of selling. The gross margin also gives clues into the level of discounting a retailer is using, as declining gross margins often indicate increased markdowns. Clearly, the actual percentages vary from product to product, so specifics are obscured by the broader percentage, but gross margin is a valuable “rough guide”. There are several things to examine here, including gross margin over time, which can be viewed by looking at the historical data in the Statistical Array and in comparison to other companies. With regard to the former, a stable-to-rising gross margin is clearly preferable to one that is declining at any given company. With regard to the latter, it’s obviously preferable when a company makes more on the products that it sells than do its peers. In addition to markdowns, gross margin can be hurt by sourcing costs, supply-chain efficiency, shrinkage (i.e., theft), and freight costs. Comparisons, however, have to be made with care, as certain product categories have much higher gross margins than others.
Wal-Mart’s gross margins have been growing over the long term, rising from 23.0% in 2000 to 26.6% in 2009 (these metrics can be found in the Statistical Array). Value Line analyst Kevin Downing expects that level to hold over the next few years. Note that about half of Wal-Mart’s sales are in the very low margin grocery space (a fact noted in the Business Description), which likely depresses the company’s overall number. This same fact, however, makes the company’s results an interesting benchmark for the overall retail industry, which includes both specialized retailers along with broader retailers.
The number of stores, the second unique feature of the Statistical Array, provides a direct clue about the company’s growth. From this number, store count growth can be gleaned with simple math. For example, between 2008 and 2009, Wal-Mart opened 696 stores, which represents a growth rate of about 9% in the store count (subtract the 2008 store count from the 2009 store count and divide by the 2008 store count). This same math can be extended back through the historical data in the Statistical Array to get a sense of a retailer’s growth.
The number of stores can also be used to calculate the revenue and profit per store. This can be calculated by taking either the sales or net profit figures from the Statistical Array and dividing them by the store count. For example, in 2009 Wal-Mart sold $47.5 million of goods per store. This compares to 2000’s sales per store figure of $45.7 million. Again, stable-to-increasing numbers are preferable, as higher sales per store are an indication of increasing efficiency, which often translates into greater fixed-cost leverage and increased profitability. The same math substituting net profits provides a picture of earnings per store. This can help when considering growth prospects for a company with a stated store count expansion plan.
Looking at other information on the Value Line report can provide even more insight. For example, the inventory turnover ratio can be calculated by taking the inventory figure from the Current Position box and dividing it into the sales figure from the Statistical Array. This metric shows how many times a company’s inventory is sold or replaced over a given period of time. In this case, taking the 2009 inventory figure of $33.16 billion from the Current Position box and dividing it into the 2009 sales figure of $405.05 billion results in a figure just over 12. This means that Wal-Mart turned over its inventory about 12 times in 2009, or every 30 days (365 divided by 12), up from about 11.5 times in 2008. The more a company turns over its inventory the better, since old products on store shelves are not desirable in the retail space and often lead to future rounds of discounting. A downward trend can also be cause for concern, as it suggests that a company’s purchasing choices may have been misguided.
Wal-Mart is just one company, but its size and broad product offerings make it a key comparison point for the entire industry. As a stand-alone company, it is at the top of its game on most metrics. This, in and of itself, is an impressive achievement, as most companies lose efficiency as they grow. Wal-Mart has used its scale to continue to drive down costs, often in industry disrupting ways. This is the attitude more often found at a scrappy startup than an industry Goliath. If you are considering almost any retailer, it makes sense to ask both how their business is different from and similar to Wal-Mart’s before making a final purchase decision.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.