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Summary

  • Wal-Mart's financial metrics are compared over the years.
  • Wal-Mart's financial metrics are also compared with its closest competitors.
  • Wal-Mart has good financial discipline which will help in implementing its Savings Catcher online tool.

There is a comprehensive article on investing in retail outlined on Investopedia. After taking a look through the article, I wondered how Wal-Mart (NYSE:WMT) might do if I put it through the four Rs of retail. I have also compared its numbers with its nearest rivals. In all four cases, the higher the number the better.

1. Return on Revenue

Return on revenue is calculated by dividing net income by revenue.

12 months ended

Jan 31, 2010

Jan 31, 2011

Jan 31, 2012

Jan 31, 2013

Jan 31, 2014

Wal-Mart

3.51%

3.89%

3.51%

3.62%

3.36%

Costco

1.52%

1.67%

1.64%

1.72%

1.94%

Target

3.81%

4.33%

4.19%

4.09%

2.72%

PriceSmart

3.35%

3.51%

3.62%

3.32%

3.65%

A corporation's return on revenue (ROR) is useful in comparing profitability from year-to-year and evaluating its profitability performance by comparing net income and revenue. When ROR decreases, it may indicate that expenses are rising. Conversely, when ROR increases, it may provide an indication that expenses are being handled efficiently. By reviewing ROR and changes to ROR values over time, a company's management can implement expense control measures where necessary.

Wal-Mart has over 11,000 stores in 27 countries, under 55 different names. Costco (NASDAQ:COST) has a total of 635 locations in the United Kingdom (25), Australia (5), Canada (87), Mexico (33), Taiwan (9), South Korea (9), Japan (15), Spain (1) and the United States (451). As of July 2012, it is the second largest retailer in the United States. When taking into account that Wal-Mart is much bigger than Costco, it is quite impressive that Wal-Mart has much better ROR figures than Costco.

Wal-Mart's figures are almost as good as Target's (NYSE:TGT). Target is the second-largest discount retailer in the U.S., with 1,789 stores in the U.S. and 127 locations in Canada. Wal-Mart's customers tend to be in the lower-income bracket and it's nice to see the retailer have ROR figures better than that of PriceSmart (NASDAQ:PSMT) for the most part over the last five years. Since return on revenue does not take into consideration a company's assets and liabilities, it should be used in conjunction with other metrics when evaluating a company's financial performance and position.

2. Return on Invested Capital

The general equation for ROIC is as follows:

Here total capital is long-term debt plus total stockholders' equity. Both these figures are found on the balance sheet. In the table below, we listed the ROIC figures for Wal-Mart and its closest competitors over the past five years. The company seems to be doing pretty good going by this metric as well.

12 months ended

Jan 31, 2010

Jan 31, 2011

Jan 31, 2012

Jan 31, 2013

Jan 31, 2014

Wal-Mart

9.73%

10.94%

9.23%

10.14%

7.76%

Costco

6.46%

7.44%

8.10%

9.19%

-9.61%

Target

6.54%

7.43%

7.44%

6.82%

3.34%

PriceSmart

6.45%

8.65%

10.09%

10.20%

12.20%

Wal-Mart seems to be using its money well to generate returns. One concerning thing for investors is the drop off we see in the 12 months ended January 31, 2014. It does appear to have been a tough year for these retailers as Costco even reported a negative ROIC figure. But that was mostly because of a big jump in dividends paid.

PriceSmart does emerge the victor in this avenue, but I still prefer Wal-Mart as a stock overall.

One downside of ROIC is that it tells nothing about where the return is being generated. For example, it does not specify whether it is from continuing operations or from a one-time event, such as a gain from foreign currency transactions.

3. Return on Total Assets

This is a ratio that measures a company's earnings before interest and taxes (EBIT) against its total net assets. The ratio is considered an indicator of how effectively a company is using its assets to generate earnings before contractual obligations must be paid.

The ratio is calculated by dividing EBIT by the total net assets. Here EBIT is net income plus interest expense and taxes.

12 months ended

Jan 31, 2010

Jan 31, 2011

Jan 31, 2012

Jan 31, 2013

Jan 31, 2014

Wal-Mart

14.39%

15.13%

14.01%

13.99%

13.51%

Costco

8.57%

9.32%

9.65%

10.70%

10.66%

Target

11.00%

12.63%

11.97%

11.67%

9.99%

PriceSmart

12.05%

13.44%

14.46%

15.31%

15.84%

Wal-Mart seems to have the superior business when looking at the retailer's return on total assets (ROTA) compared to its competitors. It's generating a return on total assets of between 14%-15% over the past five years and this exceeds that of Costco and Target by a few hundred basis points. As for PriceSmart, it has started to generate a better ROTA figure than Wal-Mart over the past three years. But this is only by a little bit. Still, taking into consideration Wal-Mart's size an investor would prefer to have his or her money in WMT stock.

All of these numbers so far indicate that Wal-Mart is operating very efficiently. Let's now take a look at the Return on Capital Employed (ROCE).

4. Return on Capital Employed

A financial ratio that measures a company's profitability and the efficiency with which its capital is employed. Return on Capital Employed (ROCE) is calculated as:
ROCE = Earnings Before Interest and Tax (EBIT) / Capital Employed
"Capital Employed" as shown in the denominator is the sum of shareholders' equity and debt liabilities - it can be simplified as (Total Assets - Current Liabilities).

12 months ended

Jan 31, 2010

Jan 31, 2011

Jan 31, 2012

Jan 31, 2013

Jan 31, 2014

Wal-Mart

20.44%

21.42%

19.80%

20.74%

19.54%

Costco

14.35%

15.60%

16.44%

18.84%

18.37%

Target

14.08%

15.62%

16.46%

15.74%

13.31%

PriceSmart

16.52%

18.84%

20.85%

21.76%

23.05%

Wal-Mart has come out on top again. The company definitely has an edge and shareholders will benefit from this. The retailer has been profitable over the years and these profits appear to be sustainable going forward. But it must be stated here that financial metrics are just one side of the story. Nonetheless, when there is financial discipline a retailer can enjoy some good profits and hope to keep expanding.

Conclusion: Be bullish on Wal-Mart shares

Wal-Mart is looking good when it comes to the four Rs in retail. The world's largest retailer recently announced that it is going to up its price-matches. In doing so, the company looks to expand its online tool that compares prices on thousands of items with those of rivals such as Target and Costco to more cities over the next few months, after rolling it out in 7 cities in March. Furthermore, the retail king wants to add thousands of more products, from clothes to groceries, to its Savings Catcher online tool. This tool will also be available for smartphone and tablet users in the form of a mobile app.

It does appear that Wal-Mart's financial discipline should allow it to win in this venture as well.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Wal-Mart: The Four Rs Of Retail