Walmart vs. Costco. Financial Analysis Example.

2021-07-02 20:34:24
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Middlebury College
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Research paper
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Background and industry

Walmart is the largest multinational retailer in the world originating from the United States, according to Fortune Global 500. It has stores all in the main cities globally, employing a combined workforce of more than two million. The company has headquarters in Bentonville, Arkansas. In 2009 it recorded a 51 percent of its $258 billion sales from the United States grocery segment, indicating the importance of this dominant area. Walmart is a home of shopping to millions of people globally, who visit their retail stores, utilize their mobile service and even purchase online through their e-commerce sites. The company records over 260million customers in its various platforms, making it one of the most visited business in the world.

Analysis of the Most Significant Financial Performance Results

Walmarts revenue have been the key aspect of the firms financial performance, same to net profit. There are several others, which accompany these core financial figures. Revenue is the income generated from the sale of goods and services whereas net income is the income less all expenses included tax, wages, depreciation, interests among others.

Working capital = Current asset Current liabilities

Fiscal year February-January 2015 2016 2017

Revenue 485.65 482.13 485.14

Net Income 16.18 14.69 13.64

Working Capital 2.3 2.12 6.19

Share Value (EPS diluted) 5.05 4.57 4.38

Gross profit(million US dollars) 120,565 121,546 124,617

From the above table, in the year 2015/2016, there was a decline in the revenue by 3.52B and this represents a 0.724% decline in revenue. During the fiscal year ending January 31st, 2017, there was an increase in revenue by 3.01B. These represent a definite increase of 0.624%.The net income decreased by 1.49 in the financial year 2015/2016 which a decline of 9.2% of the total revenue received during that period. In the fiscal year ending in 2017, there was a drastic change in the net income by 1.05B which represents a decline of 7.14%.

During the three years, the value of the share (earning per share, diluted) has been falling sharply. It decreased by 0.48 in the fiscal year 2015/2016 which represents a decrease of 9.5%. Alternatively, it dropped from 0.19 in the financial year 2016/2017 which also accounts for a decline of 4.16%.The three years, Walmart had an increase in the gross profit which was attributed to the many sales made during those periods. The gross profit increased by 981 million US dollars in the 2015/2016 financial year and these shows a positive growth of Walmart regarding profit by 0.814%. It also rose by $3071 million in the fiscal year 2016/2017 which also represents a 2.527% in gross profit.

Costco Wholesale Corporation is one of the major competitors of Walmart.

Costco Wholesale Corporation Financial Performance results for the last three years

Fiscal year 2015 2016 2017

Revenue (Millions) $116,199 $118,719 123,285

Net Income (Millions) $2377 $2350 $2539

Working Capital (Millions) 759 (357) -

Share Value(Earning Per Share, Diluted) 5.37 5.33 5.76

Gross profit $15134 15,818 16,451

From the Costco Corporation table above, in the fiscal year January 31st, 2016 there was an increase in revenue for Costco Corporation by $2520 million which is a 2.169% rise in revenue. On the other hand, revenue increased by $4566 million which represents an increase of 3.846%. The net income slightly decreased in the fiscal period 2015/2016 by $27 million which is a fall of 1.136% of revenue. The price of the share rose slightly during the two financial years, and there was also a positive increase in profit during the three years at Costco Wholesale Corporation.

Financial Ratio Analysis

The financial ratios help in comparing the relationships between the financial statements accounts of a company to identify its strengths and weakness. The financial ratios assist the management for planning purposes and to help see whether the business is a going concern or not. Ratio analysis helps in determining what steps should be undertaken to ensure smooth business in a company.

Walmarts financial year ends in January of each year and in doing the analysis we focus on the financial information from February to January in the next year.

Walmarts Asset Growth

Assets (millions) January 31,2017 January 31,2016 January 31,2015

Cash and Cash Equivalents 6867 8705 9135

Receivable 5835 5624 6778

Inventories 43046 44,467 45141

The cash and cash equivalents on January 31, 2015, recorded a $9135 million. The cash equivalents dropped to $8705 million in January 2016. This was a drop of $430 million, and it is a 4.71% decrease in the cash and cash equivalents. In January 2017, the cash and equivalents were $6867million, a significant drop by $1838 in comparing to the 2016 cash and cash equivalents. In the fiscal year 2015/2017, the inventories decreased by $672 million which is a fall of 1.49%. It also dropped by $1423 in the financial year 2016/2017 which is a decline of 3.2%.

Comparison with Costco Corporation

8/28/2016 8/30/2015 8/31/2014

Cash and Cash equivalents $3.379M $4.801 $5.738M

Inventory $8.969M $8.908M $8.456M

Receivable $1.252 $1.224 $1.817M

From the above data, it is seen that Costco Corporation, the cash, and cash equivalents decreased during each fiscal year making the comparison between Walmart and Costco Corporation, from Walmart analysis, Walmart has the highest cash and cash equivalents in each year.

Asset Structure

Asset Structure Analysis

($ million) January 31,2017 January 31, 2016 January 31, 2015

Current Assets 57,689 60,239 63,278

Property and Equipment 114,178 116,516 116,655

Non- current assets 141,136 139,342 140,428

Walmart had high current assets at the end of the 2017 fiscal years. The current assets fell in the 2016 fiscal year by $3039 which represents a negative drop of 4.80%. The assets also declined further by $2550, a fall of 4.23%. The non- currents assets kept increasing in the last three years in Walmart retailer. On the other hand, property and equipment kept falling steadily during each fiscal year as shown in the table above. The increase in the non- current assets is a result of the sale of other assets and deferred assets. The increase is also attributed to the goodwill money generated for the company.Return on Equity using the DuPont analysis

The DuPont Analysis breaks all the components of restitution on equity into its constituent elements so as to determine which one has the highest impact on the changes to the firms ROE. In the case of Walmart, we are going to look into each of these components to determine each's influenced in the ROE. The part includes the net profit, the asset turnover, and the leverage. The table given below highlights the ROE of the last three years, together with their respective net profit margin, asset turnover, and leverage.

Year ROE NPM Asset Turnover Leverage

2017 17.54% 2.83% 2.42 2.56

2016 18.24% 3.07% 2.40 2.48

2015 20.10% 3.39% 2.37 2.50

The above table highlights the changes to return on equity for the last three financial years ending January 31 of each year. From the financial results announced in 2015, the ROE has been on a constant decline hitting the lowest point on January 31, 2017, results. The same has been expressed in the net profit margin, even though the changes seemed to be occurring at a lower rate than those of the return on equity.

In a contrasting view, the net profit margins have been improving concurrently with the asset turnover, which is a component which measures a companys efficiency in using its resources to generate profits. Companies with lower profit margins often tend to have high asset turnovers, meaning the efficiency of utilizing the assets to make profits is very low. Over the last three years, asset turnover has been declining, an indication that efficiency in using assets has been declining too. Leverage measures the businesss utilization of debt to finance its operations. There is often a recommended debt level, and Walmart from its three financial results seems to have maintained the leverage at the same footing with a minute variance.

Evaluating Areas of Financial Analysis

As one of the leading global retailers, Walmart spends more than $12 billion in capital investments that go mainly to research and development, expansion of other core activities that have continued to retain the firm ahead of the rest. In the financial year ending January 31st, 2015, the company planned to spend over $30 million to add retail square feet in several places around the globe. On the part of research and development, a core component that included increased spending in technology and e-commerce, the company budgeted for over $6 billion, which is half of the total amount of capital investment. That highlights the importance they have attached to technology and e-commerce as the future of the retailer, given the ever growing population of people who no longer visit the brick and mortar stores. That is the highest spending, given the firms focus on research and development since 2009, which has seen it allocate close to two-thirds of its revenue to the department. The company has been growing its sales, and key areas remain those developed out of technology and e-commerce, justifying their heavy spending on the areas.

Year Walmart Beta Costco Beta

2017 0.28 0.95

2016 0.32 0.90

2015 0.30 0.85

The retail store recorded a beta value of 0.28 in the last financial years ending January 31st, 2017. This is a clear indication that the firms stocks are less volatile, which has been the case over the last few years. In fact, the companys shares have been trading at around $75 for the last one year, and there is no potential change in the coming months. Compared to its closest rival Costco Wholesale Corp which had a beta value of 0.95 in the same period. This means the firms share is also less volatile compared to the industry average. However, Costcos stocks are more volatile when compared to Walmarts. A look at the firms beta values shows that Costco share was more risk compared to Walmarts whose stability has been impressive over the past three years.

Stock Performance

Year July Aug Sep Oct Nov Dec Jan Feb March April May June July

Price Walmart 73.9 74.3 72.1 67.3 71.2 71.9 68.1 66.6 70.5 74.5 78.7 80.3 75.6

Price Costco 168.7 157.5 150.5 146.7 142.2 146.7 156.3 165.9 177.8 170.5 175.9 180.7 176.5

To better illustrate this data, let us put it in a graphical representation below.

The companys share value hit the lowest point in February this year when it was trading at $66, but bounced back over the following few months to record the highest value of $80.3 in June. That indicates a range of around 14 dollars over the last one year, a value that justifies its low beta value. Compared to its closest rival regarding market value in the United States, the range was almost dollars, indicating a significant variation over the same period. The firm recorded a minimum of 140.2 and a high of 180, a major determiner of the beta value, indicating Costcos stocks were more volatile, hence riskier.

Capital Asset Pricing Model indicates what should be the expected rate of return on risky assets like Walmarts common stock. Walmart so far a good history of having the most sustainable rate of performance. To effectively utilize this method to get the required rate of return, at least three components must be known. They are the average market return, the rate of return on a risk-free investment, and the beta value. Hence, the formula is given by RRR = B (RM RF) + RF. In our company above, the average market return is 13.45 percent, the rate of return on risk-free investment is 3.00 percent, and the beat value is 0.28. That gives RRR = 0.28(13.45 3.00) + 3.00 = 5.926 percent. This...

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