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This post describes our model of Wal-Mart's (NYSE: WMT) Income Statement for fiscal 2011's fourth quarter, which will end on 31 January 2011.

The purpose of the model is to establish a baseline for identifying surprises, positive or negative, in the quarterly results the company will report. Estimates for each line of the Income Statement are derived from management's guidance, the company's historical financial results, and other publicly available data.
We begin by reviewing background information about Wal-Mart and the business environment in which it is currently operating.

Retailing behemoth Wal-Mart Stores, Inc., operates 4404 stores in the U.S. (including Sam's Club) and 8838 worldwide, at last count.

In fiscal 2010, which concluded in January 2010, Wal-Mart earned over $14 billion on net sales of $405 billion. Although net sales rose only 1.0 percent, income continuing operations increased 8.8 percent.

These financial results enabled Walmart to regain the top position from Exxon Mobil (NYSE: XOM) on the Fortune 500 list of America's largest corporations. A drop in energy prices in 2009 cut into the oil giant's revenue.

Economies of scale and ruthless efficiencies allow Wal-Mart to sell many products for prices lower than competitors, which include Target (NYSE: TGT), Kohl's (NYSE: KSS), and Sears Holdings (NASDAQ: SHLD). Wal-Mart also purchases goods directly from manufacturers to reduce its costs.

Critics of Wal-Mart abound.
With a market value of nearly $200 billion, Wal-Mart is one of the most valuable companies in the U.S. The market value has been relatively steady for a number of years.

Wal-Mart's annual dividend in fiscal 2011, $1.21 per share, was 11 percent greater than in the previous year. The company has also been repurchasing its common shares. Wal-Mart spent $11 billion to buy its shares in the first nine months of the current fiscal year.

For financial data reporting, Wal-Mart has three business segments: Wal-Mart U.S., International and Sam’s Club. Wal-Mart U.S. had net sales of $258 billion in fiscal 2010, or nearly 64 percent of the overall amount. The International segment had sales of $100 billion (24.7 percent of the total), and sales at Sam's Club amounted to nearly $47 billion.

Net sales by Wal-Mart U.S. grew 1.1 percent last year, but comparable store sales declined 0.7 percent. Concerned about slow sales at home, Walmart replaced the leader of Walmart U.S.

Walmart International has various subsidiaries or joint ventures in Brazil, Canada, China, India, Japan, Mexico, the United Kingdom, and several other countries. Changes in currency exchange rates had a $9.8 billion unfavorable impact (almost 10 percent) on the International unit's net sales in fiscal 2010.

In November 2010, Walmart offered to acquire a controlling interest in South African retailer Massmart (JNB: MSM). An entry into the Russian market now appears less likely, at least in the short term.

Retail sales have been rising in the U.S., but continue to be pressured by high unemployment and the fragility of the housing market. Consumer sentiment in the U.S. recently dipped and remains a concern for retailers.

In the October-ending third quarter of fiscal 2011, Wal-Mart earned $0.95 per diluted share on a GAAP basis, up 16 percent from $0.81 in the same three months of last year. A special tax benefit added $0.05 per share to reported earnings in the most recent quarter.

Readers wanting to take another look at Wal-Mart's October 2010 quarter might wish to review our Income Statement and Financial Gauge analyses.

We are now ready to look specifically at the January 2011 quarter.

When Walmart reported third-quarter results on 16 November 2010, it updated its following guidance for the November-December-January period:


Earnings Guidance


“Based on our expectations for the U.S. sales environment in the fourth quarter, we expect diluted earnings per share from continuing operations attributable to Walmart to range from $1.29 to $1.33,” said Schoewe.

This compares to an adjusted $1.264 per share last year, which included a net benefit of approximately six cents per share related to certain tax matters and restructuring charges.

“Our updated fiscal year 2011 guidance of $4.08 to $4.12 earnings per share is an increase from the previous range of $3.95 to $4.05 per share,” Schoewe said. “The full-year increase in our EPS guidance reflects the tax benefit from the third quarter, and our expectations for solid underlying operational performance by our segments in the fourth quarter.”

This new full year guidance assumes that currency exchange rates remain at current levels. The adjusted EPS for fiscal year 2010 was $3.734, which included the same six cents benefit mentioned above.

Unfortunately, the guidance is silent on sales expectations, and Wal-Mart no longer issues monthly sales reports. To estimate the company's quarterly Revenue, we have looked at government reports, competitor news, and seasonal patterns.

U.S Census Bureau data covering retail sales and food services, but excluding motor vehicle and parts, indicate sales in late 2010 were about 6.5 percent greater than in the same months of 2009. The sale growth pace quickened when compared to the summer months, and December 2010 was the sixth consecutive month of increasing sales.

Less optimistically, Target (NYSE: TGT) reported net sales in November and December increased 3.0 percent compared to the equivalent period in 2009. Comparable-store sales rose 2.6 percent.One benchmark is that Wal-Mart's holiday-fueled fourth-quarter sales are typically 15 to 20 percent more than sales in the preceding third quarter.

Balancing these various items, we have come up with an estimate of $119 billion for Wal-Mart's Revenue in the January quarter. This value translates into a forecast for 4.7 percent Revenue growth.

For the Gross Margin estimate, we are estimating 25.2 percent of Revenue, a small degradation compared to the first three quarters of the year. Combining the Revenue and Gross Margin estimates yields a predicted Cost of Goods Sold of (1 - 0.252) * $119 billion = $89 billion.

We expect, based on historical results, that Sales, General, and Administrative expenses will be 18.5 percent of Revenue. Therefore, we expect this item to be 0.185 * $119 billion = $22.0 billion.

Subtracting the estimated costs from the Revenue target, and assuming no special operating charges, yields a $8.1 billion projection for Operating Income. This figure is 8.5 percent more than Operating Income of $7.5 billion in the January 2010 quarter.

A $525 million estimate for the net interest expense seems reasonable given past results.

If we project a tax rate of 34.5 percent, the provision for income taxes would be $2.6 billion. We also need to make an adjustment, estimated at $160 million, for the portion of net income attributable to non-controlling interests.

The bottom-line estimate for Net Income is $4.80 billion ($1.31 per share). In the year-earlier quarter Wal-Mart earned $4.76 billion ($1.25 per share).

Please click here to see a normalized depiction of the projected results next to Wal-Mart's quarterly Income Statements for the last couple of years. Please note that our organization of revenues, expenses, gains, and losses, which we use for all analyses, can and often does differ in material respects from company-used formats. The standardization facilitates cross-company comparisons.

Full disclosure: Long WMT at time of writing. No position in any other company mentioned.

Source: Wal-Mart: Looking Ahead to January 2011 Quarterly Results