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Summary

  • Wal-Mart has a market capitalization of $249 billion and a dividend yield of 2.5%.
  • Wal-Mart's cash conversion cycle worsened year over year.
  • For Wal-Mart, inventories have grown by 36% in the past five years, but operating income is up 13% over five years.
  • The International segment for Wal-Mart saw sales growth of 1.3% in FYE 1/31/14. In prior years, this segment was growing at about 10% per year.

I recently explored Amazon.com (NASDAQ:AMZN) and a financial ratio known as the Cash Conversion Cycle.

I concluded that AMZN gets to hold on to more of its supplier's cash, effectively borrowing it from suppliers. By sitting on a supplier invoice for an additional three weeks, AMZN has an incredible source of cash when multiplied over $74 billion in annual sales. For AMZN, Accounts Payable is an unencumbered source of value, and it comes without any interest costs. AMZN can dictate terms to suppliers, and then invest the float in other projects. However, for many investors and analysts, it is unclear whether AMZN is reinvesting the float into profitable projects!

The scope of this article will look at arguably the largest competitor for AMZN, which I feel is Wal-Mart (NYSE:WMT).

First, let's look at Wal-Mart and see how the shareholders' capital is working.

Wal-Mart at a Glance

Five Year Financial Summary

(Amounts in Billions)

FYE 1/31/14

FYE 1/31/13

FYE 1/31/12

FYE 1/31/11

FYE 1/31/10

Net sales

$473

$466

$443

$419

$405

% Change in net sales from prior year

1.6%

5.0%

6.0%

3.4%

0.9%

Gross profit margin

24.3%

24.3%

24.5%

24.8%

24.9%

Operating income

$27

$28

$26

$26

$24

Inventories

$45

$44

$41

$36

$33

Eagle eyed readers will note that inventories have grown by 36% in the past five years, but operating income is up 13% over five years. The significant cash that has been tied up in inventory has evidently not caused profits to increase as dramatically.

Unit Counts

Total number of stores

FYE 1/31/14

FYE 1/31/13

FYE 1/31/12

FYE 1/31/11

FYE 1/31/10

Wal-Mart U.S. segment

4,203

4,005

3,868

3,804

3,755

Wal-Mart International segment

6,107

5,783

5,287

4,191

3,739

Sam's Club segment

632

620

611

609

605

Total units

10,942

10,408

9,766

8,604

8,099

Has the AMZN Competitive Pressure Hurt Wal-Mart?

Amounts in Millions of $

FYE 1/31/14

FYE 1/31/13

$473,076

$465,604

Sales (excludes membership income tied to Sam's Club)

$6,677

$6,768

A/R

5.2

5.3

(A) Days receivables {(Receivables/Sales)*365}

FYE 1/31/14

FYE 1/31/13

$358,069

$352,297

Cost of Sales

$44,858

$43,803

Inventory

45.7

45.4

(B) Days inventory {(Inventory/Cost of Sales)*365}

FYE 1/31/14

FYE 1/31/13

$358,069

$352,297

Cost of Sales

$37,415

$38,080

Accounts Payable

38.1

39.5

(C) Payable Days {(Acct. payable/Cost of Sales)*365}

12.8

11.2

Cash conversion cycle {a+b-c}

The cash conversion cycle is the amount of time between a company spending cash and receiving cash per each sale. It is a measure of efficiency and how long cash is tied up in working capital.

Remember, in this article, I show the Cash Conversion Cycle for AMZN as negative. The above chart shows that WMT has tied up more cash in inventory in FYE 1/31/14, which resulted in a worse cash conversion cycle when compared to FYE 1/31/13.

Where is the Pain Showing Up for Wal-Mart?

Wal-Mart International at a Glance

(Amounts in Billions, except unit counts)

FYE 1/31/14

FYE 1/31/13

FYE 1/31/12

Net sales

$136.5

$134.7

$125.4

Percentage change from previous fiscal year

1.3%

7.4%

15.3%

Operating income

$5.4

$6.6

$6.1

Operating income as a percentage of net sales

4.0%

4.9%

4.9%

Unit counts at period end

6,107

5,783

5,287

Retail square feet at period end

358

346

326

How Will Wal-Mart Turn this Ship Around?

Wal-Mart is invested heavily in e-commerce initiatives and the International business, primarily the United Kingdom, China and Brazil.

Some of WMT's fiscal 2014 e-commerce accomplishments included developing a new recommendation engine to further personalize search, improving the mobile shopping experience, and increasing the assortment offered on company websites.

WMT's fiscal 2015 global expansion plans include continuing to grow retail square feet, which will include a significant increase in the number of Neighborhood Markets and other small stores.

Fiscal 2015 Projected Capital Expenditures (in billions)

Wal-Mart U.S.

$6.4 to $6.9

Wal-Mart International

$4.0 to $4.5

Sam's Club

$1.0

Corporate and support

$1.0

Total

$12.4 to $13.4

Allocation of Capital Expenditures

FYE 1/31/14

FYE 1/31/13

Capital Expenditures

New stores and clubs, including expansions and relocations

5,083

4,340

Information systems, distribution, e-commerce and other

2,539

2,922

Remodels

1,030

995

Total U.S.

8,652

8,257

Wal-Mart International

4,463

4,641

Total capital expenditures

$13,115

$12,898

Conclusion

Despite the challenges mentioned above, I continue to find shares of WMT attractive. I shop there regularly and find the selection adequate for my needs.

WMT sells at a discount to the stock market in terms of P/E and dividend yield. Currently, WMT trades at a below market P/E Ratio (Trailing Twelve Month ratio of 15.9x). The company has a strong dividend of 2.5%, compared to S&P 500 current yield of 1.70%. The stock represents a Hold at these levels.

WMT faces multiple risks in its business including intense competition from other websites and retailers that were not within the scope of this article. This article is the opinion of the author and does not represent investment advice.

Source: Amazon Is Eating The Lunch Of Wal-Mart's International Operations