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Analysis Of Wal-Mart'S 2004 Financial Statements

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Autor:  anton  05 January 2011
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An Analysis of Wal-Mart’s 2004 Financial Statements

LeTourneau University

I. Executive Summary

A. Objective of paper

My objective is to analyze financial statements from the 2004 Wal-Mart Annual Report. Based on my findings and any relevant supplementary information provided about Wal-Mart and its operating environment, I will identify areas in which the company is performing well and advise management of any problem areas.

B. Summary of findings

Based on the information that I found on the financial statements, Wal-Mart Stores, Inc. is currently on the rise. They have increased their cash flow while decreasing their long-term debt. Their investing activities have decreased, but can be remedied with a good solid investment.

II. Firm, Industry, and Environment

A. Description of firm and its management

Wal-Mart Stores, Inc. (Wal-Mart), incorporated in October 1969, operates retail stores in various formats around the world. The Company operates through three segments: Wal-Mart Stores segment, which includes Supercenters, Discount Stores and Neighborhood Markets, Sam's Club segment and International segment. The Wal-Mart Stores segment segment consists of three different traditional retail formats, all of which operate in the United States, and Wal-Mart's online retail format, The Sam's Club segment consists of membership warehouse clubs, which operate in the United States, and the segment's online retail format, At January 31, 2007, its International segment consisted of retail operations in 12 countries and Puerto Rico. In October 2006, the Company disposed of its South Korean and German operations (Reuters, 2007).

At January 31, 2007, the Company operated 1,075 discount stores, 2,256 supercenters, 579 Sam's Clubs and 112 Neighborhood Markets in the United States. Internationally, at January 31, 2007, the Company operated units in Argentina (13), Brazil (299), Canada (289), Costa Rica (137), El Salvador (63), Guatemala (132), Honduras (41), Japan (392), Mexico (889), Nicaragua (40), Puerto Rico (54), and the United Kingdom (335). It also operated 73 stores through joint ventures in China at January 31, 2007 (Reuters, 2007).

Wal-Mart’s executive team consists of:

*President, CEO, Director Scott H. Lee

*Chairman of the Board S. Robson Walton

*Vice Chairman John B. Menzer

*Vice Chairman Michael T. Duke

*CFO, Executive VP Thomas M. Schoewe

*President and CEO of Raul Vazquez

*Executive VP, CMO Stephen Quinn

*Executive VP and Corporate Secretary Thomas D. Hyde

*Executive VP; President and CEO,

Sam’s Club C. Douglas McMillon

*Executive VP; President and CEO,

Wal-Mart Stores Division Eduardo Castro-Wright

*Executive VP-People Division M. Susan Chambers

*Executive VP-Corporate Affairs

and Government Relations Leslie A. Dach

*Senior VP, Controller Steven P. Whaley

*Senior VP, Global Procurement Jeff Mach

The following are Directors:

David D. Glass

Roland Hernandez

Jack C. Shewmaker

James W. Breyer

M. Michele Burns

Christopher J. Williams

Douglas Daft

Jim C. Walton

Linda S. Wolf

Aida M. Alvarez

James I. Cash

Roger C. Corbett

Allen I. Questrom (Reuters, 2007)

The store management team consists of:

Divisional VP

Regional VP

Operations Coordinator

District Manager

Store Manager


Assistant Manager

Assistant Manager Trainee

Department Manager/CSM

Associate/Cashier (Wal-Mart, 2007)

B. Discussion of competitive environment

In North America Wal-Mart's primary competition includes department stores like Kmart, Target, Meijer, or Canada's Zellers, Winners, or Giant Tiger. Wal-Mart's move into the grocery business in the late 1990s has also positioned it against major supermarket chains in both the United States and Canada. Several smaller retailers, primarily dollar stores, such as Family Dollar and Dollar General, have been able to find a small niche market and compete successfully against Wal-Mart for home consumer sales. In 2004, Wal-Mart responded by testing their own dollar store concept, a subsection of some stores known as "Pennies-n-Cents."

Wal-Mart has struggled in other foreign markets. For example, in Germany, it had captured just 2% of German food sales following its entry into the market in 1997 and had remained "a secondary player" compared to competitor Aldi which boasts 19% share of the German market. In July 2006, Wal-Mart announced its withdrawal of operations from Germany because of sustained losses. Its stores are to be sold to German company METRO AG. In China, Wal-Mart is "a small fish" as its strategy of "everyday low prices" has not been successful against "Chinese mom-and-pop shops that are used to cutthroat pricing." In May 2006, Wal-Mart withdrew from the South Korean market when it agreed to sell all 16 of its South Korean outlets to Shinsegae, a local retailer, for $882 million who are as of late 2006 re-branding the country's Wal-Marts as E-mart. Wal-Mart had originally entered the South Korea market in 1998. In the UK, Wal- Mart's ASDA subsidiary is the second largest chain after Tesco. Specifically, ASDA is a distant second to Tesco in the UK grocery market, and as of 2006 the gap is widening, based on market share figures published by TNS Worldpanel (Wikipedia).

C. Economic climate and outlook

Wal-Mart Chief Executive Lee Scott warned earnings in the current quarter could fall short of Wall Street expectations and said Tuesday that the company will focus on prices this summer in a bid to rekindle sales in U.S. stores (Kabel).

The tepid outlook from Wal-Mart -- considered a barometer for the retail industry -- could serve as a warning bell that rising gasoline prices and a weakening housing market will continue to erode consumer spending in the coming months (Kabel).

D. Other factors, such as government regulations, labor relations, litigation

Governmental Regulations

In 1994, the U.S., Mexico and Canada signed the most far-reaching multilateral trade and investment agreement of its time. NAFTA investment and market access rules eliminated many of the existing government restrictions on how and where Wal-Mart could operate, clearing the way for Wal-Mart to become the largest retailer in all three NAFTA countries. Today, Wal-Mart is the largest private employer in Mexico. It has nearly 700 stores and does more business than the entire tourism industry. It sells six billion dollars worth of food a year, more than any other Mexican retailer (Juhasz).

NAFTA eliminated tariffs and other import controls on goods moving between the three countries. This meant that Wal-Mart's suppliers could send products to be assembled in Mexico, where labor is cheap, environmental protections weak, taxes low and protections from further regulation and government oversight even greater than in the U.S., and then send the finished products back home to sell at prices far cheaper than if the goods were produced in the United States. These factories, called maquiladoras, more than doubled in number between 1990 and 2001, from 1700 to 3600 plants (Juhasz).

According to the U.S. Congressional Research Service, U.S. imports from Mexico increased by 229 percent between 1993 and 2001. While U.S. exports to Mexico increased 144 percent, 60 percent of these were components being shipped to the maquiladora factories for processing, meaning little or no benefit was derived by the Mexican economy or consumer. Laws that would have addressed this problem, such as requiring a certain amount of domestic content in production, a certain amount of local investment, or a transfer of new technologies, etc., were stripped away by the NAFTA: good for the companies, bad for the country. The dramatic rise of the maquiladoras coincided with the near collapse of the Mexican farming sector due to NAFTA's elimination on agricultural tariffs and quotas. One and a half million Mexican farmers and their families were forced from their land and subsequently found themselves in search of work. The more unemployed workers there were, the more the maquiladoras could demand stiff sacrifices in return for jobs (Juhasz).

The result: average real wages in Mexican manufacturing are lower today than they were before NAFTA, the minimum wage has declined by 20 percent and hovers at around $4/day, and half of the nation now lives in poverty. As unemployment, low wages and poverty grow in Mexico, Wal-Mart's low prices look more and more attractive and its stores continue to swallow-up the competition (Juhasz) .

Free trade allows corporations to be fickle in choosing their partners. If they no longer enjoy the benefits of one nation, they can pick up and move on to the next without any thought to commitment. Wal-Mart has mastered this skill. It was aided in doing so by China's WTO membership (Juhasz).

Until 2000, the U.S. applied uniquely high tariffs on goods imported from China in opposition to the human rights abuses inflicted on the Chinese by their government. U.S. corporations looked to China and saw 1.2 billion potential workers in a country where unionization is illegal, workers are cheap and disciplined, unemployment is rampant and environmental protections are nil. Others saw the elimination of these tariffs and China's potential WTO membership as moves that would increase the powerlessness of China's workers, not only at the hands of the Chinese government but at the hands of U.S. corporations as well. In 2000, the corporations won, the tariffs were removed, and one year later, China became a full member of the WTO (Juhasz).

The result has been nothing short of phenomenal. The U.S. trade deficit with China more than doubled from $70 billion in 1999, to $162 billion today. This means that the U.S. is buying $162 billion more from China than we are selling to it. A large percentage of these purchases are made by U.S. companies that build products in China and then ship them to the United States, like Wal- Mart's suppliers (Juhasz).

Because the NAFTA makes it illegal for the Mexican government to require any sort of commitment on the part of U.S. producers to Mexico, when things started looking good in China, U.S. producers picked up and moved out. A full third of the 800,000 manufacturing jobs initially created under NAFTA have since disappeared. Due to the WTO's elimination of tariffs and quotas on products entering and leaving China, and elimination of many of the restrictions on which companies can operate in China and where, in the last five years, Wal- Mart alone has doubled its imports from China. It opened a global procurement center in Shenzhen, China. In 2002, it bought approximately $12 billion in merchandise from China, 20 percent more than in 2001, which represented nearly 10 percent of all Chinese exports to the United States. It is the single largest U.S. importer of Chinese consumer goods, surpassing the trade volume of entire countries, such as Germany and Russia(Juhasz) .

In 2004, the Los Angeles Times interviewed 20-year-old Ping Quixia. Quixia makes women's underwear and other garments for Wal-Mart at the Gladpeer Garment Factory in the southern Chinese city of Dongguan. She is one of 1,200 workers, mostly young women, paid about $55 a month, living eight to a room in cramped dormitories(Juhasz) .

"In southern China," the paper reports, "Wal-Mart has found all the ingredients it needs to keep its 'every day low prices' among the lowest in the world. Although labor costs more here than it does in Bangladesh, China offers other advantages: low-cost raw materials; modern factories, highways and ports; and helpful government officials." Wal-Mart has more than 3,000 supplier factories in China, and the number is expected to rise. But that doesn't mean workers in China are secure(Juhasz) .

The managing director of the Gladpeer Garment Factory said that he is likely to reduce employment in Dongguan and open a new factory in Guangxi province, where labor, electricity, housing and taxes are even cheaper. "Competition is intense, and our biggest single issue is cost ... That's why we're going to Guangxi (Juhasz) ."

Lee's complaint is just as readily heard across the United States, as Wal-Mart suppliers are forced by the company to cut costs annually. In order to do so, many have closed shop in the U.S. and moved to China (Juhasz).

Labor Relations

Wal-Mart has been criticized with regard to many of its policies and/or business practices, primarily by community groups, grassroots organizations, labor unions, religious organizations, and environmental groups. In particular, several labor unions have specific concerns regarding the company's anti-union stance, as well as several employee relations issues. Other areas of concern include the corporation's extensive foreign product sourcing, treatment of employees and product suppliers, environmental practices, the use of public subsidies, and the impact of stores on the local economies of towns in which they operate (Wikipedia 2).

In 2005, labor unions created several organizations to confront these issues, including Wake Up Wal-Mart (United Food and Commercial Workers) and Wal-Mart Watch (Service Employees International Union). By the end of 2005, Wal-Mart launched Working Families for Wal-Mart, an astroturf operation, to counter the criticisms of the other two groups. Additional efforts to counter criticism include launching a public relations campaign in 2005 through their public relations website, as well as several television commercials. The company retained the public relations firm Edelman to respond to negative media attention, and has started interacting directly with bloggers by sending them news, suggesting topics for postings, and even inviting them to visit their corporate headquarters (Wikipedia 2).

Wal-Mart also faces several significant issues with regards to its employee and workforce relations. These issues involve low wages, poor working conditions, inadequate health care as well as issues involving the company's strong anti-union policies. One of Wal- Mart's biggest issues is their high turnover rate – approximately 70% of its employees leave within the first year, primarily due to lack of recognition and inadequate pay. However, Managers and executives of Wal-Mart are paid very well and are part of a generous bonus program. (Wikipedia 2).


The Company is involved in a number of legal proceedings, which include consumer, employment, tort and other litigation. The lawsuits discussed below, if decided adversely to or settled by the Company, may result in liability material to the Company’s financial condition or results of operations. The Company may enter into discussions regarding settlement of these and other lawsuits, and may enter into settlement agreements, if it believes settlement is in the best interests of the Company’s Shareholders. In accordance with FASB Statement No. 5, “Accounting for Contingencies,” the Company has made accruals with respect to these lawsuits, where appropriate, which are reflected in the Company’s consolidated financial statements (Annual Report, 2004).

The Company is a defendant in numerous cases containing class-action allegations in which the plaintiffs have brought claims under the Fair Labor Standards Act (“FLSA”), corresponding state statutes or other laws. The plaintiffs in these lawsuits are hourly Associates who allege, among other things, that the Company forced them to work “off the clock” and failed to provide work breaks. The complaints generally seek unspecified monetary damages, injunctive relief or both. In North Carolina, Georgia, Texas, Ohio, Louisiana, Wisconsin, West Virginia, Florida and Michigan, the trial or appellate courts have denied class certification as to all state-law claims (Annual Report, 2004).

In Louisiana and Texas, the plaintiffs then amended their pleadings to assert collective actions under the FLSA. A statewide class was certified in Colorado, but the Order was vacated after settlement. Statewide class actions were certified in Indiana, Massachusetts and Minnesota, and the rulings have been appealed. In California, the court denied certification of off-the-clock and rest-period damages claims, but certified a class for meal period claims, as well as certain other classes for injunctive relief only. Class certification claims are yet to be addressed in a majority of the cases. In Oregon, a federal court denied statewide certification as to state contract off-the-clock claims but allowed a limited class of opt-in plaintiffs to go to trial on FLSA and state statutory claims. The damages trial was completed on February 17, 2004. The court will now determine the amount of damages, based on the jury’s findings. The Company does not expect

the amount of damages in Oregon to have a material impact on the Company’s financial condition or results of operations (Annual Report, 2004).

The California Department of Labor Standards Enforcement has initiated an investigation of Wal-Mart and SAM’S CLUB for alleged failures to comply with California wage-and- hour laws. In addition, two putative class actions have been filed in California challenging the methodology of payments made under various Associate incentive and bonus plans (Annual Report, 2004).

The Company is currently a defendant in two putative class actions brought on behalf of assistant store managers who challenge their exempt status under the FLSA, both of which are pending in federal court in Michigan. Two similar putative class actions challenging the exempt status of Wal-Mart assistant store managers and photo-center managers under California law have been filed in Los Angeles County Superior Court. No determination has been made as to class certification in any of these cases (Annual Report, 2004).

The Company is a defendant in Dukes v. Wal-Mart Stores, Inc., a putative class-action lawsuit commenced in June 2001 and pending in the United States District Court for the Northern District of California. The case was brought on behalf of all past and present female employees in all of the Company’s retail stores and wholesale Clubs in the United States. The complaint alleges that the Company has engaged in a pattern and practice of discriminating against women in promotions, pay, training and job assignments. The complaint seeks, among other things, injunctive relief, compensatory damages including front pay and back pay, punitive damages, and attorneys’ fees. A hearing on class certification was held on September 24, 2003, but the court has not yet issued a ruling. There can be no assurance as to whether a class will be certified or, if a class is certified, as to the geographic or other scope of such a class. If the Court certifies a class in this action and there is an adverse verdict on the merits, or in the event of a negotiated settlement of the action, the resulting liability could be material to the Company, as could employment-related injunctive measures, which would result in increased costs of operations on an ongoing basis (Annual Report, 2004).

The Company is a defendant in five putative class-action lawsuits, three of which are pending in Texas, one in New Hampshire, and one in Oklahoma. In each lawsuit, the plaintiffs seek a declaratory judgment that Wal-Mart and the other defendants who purchased Corporate-Owned Life Insurance (“COLI”) policies lacked an insurable interest in the lives of the employees who were the insured under the policies, and seek to recover the proceeds of the policies under theories of unjust enrichment and constructive trust. In some of the suits, the plaintiffs assert other causes of action, and seek punitive damages. Class certification has not been decided in any of these cases. In January 2004, the parties to the first-filed Texas lawsuit signed a settlement agreement, which must be approved by the court in order to become effective. If approved by the court, the settlement will include all Texas COLI claimants who do not opt out of the

settlement class. The amount to be paid by Wal-Mart under the contemplated settlement will not have a material impact on the Company’s financial condition or results of operations. In the Oklahoma litigation, the court has deferred ruling on plaintiffs’ request to add 11 additional states to the litigation, pending a ruling on the Company’s motion for summary judgment. The New Hampshire case was settled in February 2004. The amount of the settlement will not have a material impact on the Company’s financial condition or

results of operations (Annual Report, 2004).


49 The Company is a defendant in Mauldin v. Wal-Mart Stores, Inc., a class-action lawsuit that was filed on October 16, 2001, in the United States District Court for the Northern District of Georgia, Atlanta Division. The class was certified on August 23, 2002.

On September 30, 2003, the court denied the Company’s motion to reconsider that ruling. The class is composed of female Wal-Mart Associates who were participants in the Associates Health and Welfare Plan at any time from March 8, 2001, to the present and who were using prescription contraceptives. The class seeks amendment of the Plan to include coverage for prescription contraceptives, back pay for all members in the form of reimbursement of the cost of prescription contraceptives, pre-judgment interest, and

attorneys’ fees. The complaint alleges that the Company’s Health Plan violates Title VII’s prohibition against gender discrimination in that the Health Plan’s Reproductive Systems provision does not provide coverage for prescription contraceptives (Annual Report, 2004).

The Company is a defendant in a lawsuit that was filed on August 31, 2001, in the United States District Court for the Eastern District of Kentucky. EEOC (Janice Smith) v. Wal- Mart Stores, Inc. is an action brought by the EEOC on behalf of Janice Smith and all other females who made application or transfer requests at the London, Kentucky, Distribution Center from 1995 to the present, and who were not hired or transferred into the warehouse positions for which they applied. The class seeks back pay for those females not selected for hire or transfer during the relevant time period. The class also seeks injunctive and prospective affirmative relief. The complaint alleges that the Company based hiring decisions on gender in violation of Title VII of the 1964 Civil Rights Act as amended. The EEOC can maintain this action as a class without certification (Annual Report, 2004).

The Company was previously a defendant in seven putative class actions that were pending in a Massachusetts state court, in which the plaintiffs alleged that the Company violated a state regulation requiring individual price stickers to be affixed to certain items

offered for retail sale. The parties entered into a settlement agreement in the fall of 2003, which was approved by the court on December 15, 2003. The settlement will not have a material impact on the Company’s financial condition or results of operations (Annual Report, 2004).

III. Evaluation of Financial Statements

A. Overview (include a DuPont Analysis)

(1) (2) (3) (4) (5)


2003 3.44 x 2.44 = 8.39 x 2.40 = 20.14

2004 3.50 x 2.47 = 8.65 x 2.40 = 20.76

Wal-Mart’s return on equity (ROE) has improved from 2003 to 2004. Both the net profit margin (NPM), which are profit sales from its assets and the total asset turnover (TAT), which is the company’s ability to produce sales from its assets, were lower in 2003; thus, making the return on investment (ROI) lower as well. In 2004, the NPM rose 0.06; while the TAT rose 0.03 making the ROI for 2004 increase by 0.26. With that increase, Wal-Mart had an increase of 0.62 on their ROE. Overall, Wal-Mart had a better performance year in 2004 than 2003. The company definitely improved.

B. Short-term liquidity

The amount of cash and cash equivalents held by Wal-Mart has increased from 2.9% in 2003 to 5.0% in 2004. This is the result of a decrease in other asset accounts like accounts receivable from 1.7% to 1.2%, inventories from 25.7% to 24.9%, and other current assets from 2.1% to 1.3%. The decrease in inventory is due to the fact that the company values inventories at the lower of cost or market using the last-in, first-out (LIFO) method, which assumes that the items bought last, are sold first. And with the prices of products increasing, the LIFO method produces the highest cost of goods sold and the lowest ending valuation of inventory. Wal-Mart does have the ability to produce cash from operations based on their growth percentages from 2003 to 2004 and the decrease of inventory.

C. Capital structure and long-term solvency

According to the data on the Summary Analysis Statement of Cash Flows, Wal-Mart significantly increased its investment in capital assets from $597,000 in 2003 to $2,441,000 in 2004. Even with the increase, the firm manages to make a payment of long-term borrowings for $3,846,000, repurchase of common stock/ treasure stock for $5,046,000 and make a payment of dividends to shareholders for $1,569,000. They also purchased property, plant, and equipment for $10,308,000. This is an indication that Wal-Mart is generating enough cash to make cash payments, debt repayments, and cash dividends.

D. Operating performance and efficiency

The total asset turnover rose in 2004, this is due to the improved management of accounts receivable turnover and inventory turnover. Even though the fix asset turnover declined in 2004, it is expected to improve due to a prediction of a successful expansion in the company.

E. Market measures

Wal-Mart earned $2.08 per share in 2004, compared with $1.80 per share in 2003. The price-to-earnings decreased from $26.56 in 2003 to $25.89 in 2004. The dividend payout increased from 16.67% in 2003 to 17.31% in 2004; while the dividend yield made increase from 0.63% in 2003 to 0.67% in 2004.

IV. Outlook, Summary, and Conclusions

A. Outlook for performance

2004 was overall a better year than 2003. If Wal-Mart continues on the same path as 2004, they will have a great outlook in the future.

B. Credit assessment

Sales on credit or accounts receivable dropped from $1,569,000 in 2003 to $1,254,000 in 2004.

C. Summary and conclusions


1. Due to the expansion of the company with more store openings, Wal-Mart has a favorable economic and industry outlook. They are well-positioned geographically to benefit from expected economic and industry growth.

2. Improvement in management of inventory and cash and cash equivalents

3. Effective control of operating costs

4. Increase in receivables

5. Increased profitability in 2005 and a strong, positive generation of cash flow from operations

6. Increase in growth net margin, cash flow margin, return on equity, and cash return on assets

7. Long term debt decreased in 2004


1. Net flows from investing activities decreased in 2004

V. Bibliography

Annual Report. (2004). Wal-Mart Stores Inc. Retrieved June 6, 2007 from



Juhasz, A. (2005, December 13). Wal-Mart: Reaping profits from WTO & NAFTA.

Organic Consumers Association. Retrieved from

Kabel, M. (2007, May 16). Lukewarm outlook for Wal-Mart strikes warning bell

for retail industry. Herald Tribune. Retrieved from


Reuters. Wal-Mart Stores Inc: Company description. Retrieved June 22, 2007 from



Reuters. Wal-Mart Stores Inc: Officers and directors. Retrieved June 22, 2007 from

Wal-Mart Stores. Operations. Retrieved June 22, 2007, from

Wikipedia. Wal-Mart Stores Inc. Retrieved June 23, 2007 from

Wikipedia. Wal-Mart Stores Inc.: Employee and labor relations. Retrieved June 23, 2007 from

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