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Key facts about Wal-Mart Inc.
The history of one of the largest corporation in the world –Wal-Mart – began in 1962 from the opening of the first store in Rogers, Arkansas. Now there are 11 thousand stores in 27 countries and the company keeps growing. Success story of Wal-Mart is definitely worth exploring, as at the present moment this company is the largest corporation in the USA and the second largest in the world according to Global Fortune 500 rating.
Motto of the company: “Save money. Live better.” expresses its values and strategies in the very best way. Sam Walton, founder of Wal-Mart, grounded his business on such principles: he tried to keep the prices as low as possible, sell the wide range of products and keep stores opened longer than anybody else. His primary goal at the beginning was to keep payroll expenses on the lowest level possible in order to generate profit and sell products at the lowest price. Low payroll expenses helped the company to beat its competitors and to become the world’s largest retail corporation at the end (Corporate.walmart.com, 2014).
In 2000 Wal-Mart discovered a new way of selling goods and launched the website – walmart.com. This allowed them to increase their sales and coverage greatly without spending a lot of funds on opening of new stores (Corporate.walmart.com, 2014).
Nowadays, Wal-Mart is not only largest and most recognized in the world retailer, but also socially responsible organization which cares about its 2.2 millions of employees, protects the environment and helps to eliminate the consequences of natural disasters.
History of Target Corp.
Target Corporation was founded in 1902 and is the second largest retailer in the USA. In 1960 Target’s management have made a decision to transform the family-operated chain of stores into the large discount-chain retail company. In 1980 more than 70 stores in 11 states have been opened and the company continued growing. In 2001, Target passed its major milestone and opened 1000 stores in 47 states. It is important to note that Target have always been socially responsible and active organization. Starting from 1918 company was participating in various charity projects, gave away some part of its profits on a yearly basis, and launched various environmental campaigns. Also, Target Corporation finances various educational projects and local communities’ initiatives (Corporate.target.com, 2014). Target Corporation is rather innovative and progressive as it is constantly looking for ways of how to improve its services, expand the range of products available in stores and increase quality along with the coverage.
Retail industry overview
Retail industry is one of the largest industries in the world, as all companies that sell goods belong to it. In some parts of the world, this industry is dominated by small family-owned businesses, but lately huge corporations tend to overtake the market and force out smaller competitors (Plunkett, 2008). Mainly there are 3 types of retailers:
Discounters;
Demographic;
For analysis, I have selected the largest retailers in the USA: Wal-Mart Inc. and Target Corp. Those companies belong to discounters as they offer great variety of goods and their main competitive advantage is the price for these goods.
Financial analysis
- Liquidity
Analysis of company’s liquidity is a primary task for both: company owners and investors, as various liquidity ratios show us the ability of a company to meet its current obligations (Megginson & Smart, 2009). Liquidity analysis also allows us to understand if the working capital management is effective or not. Working capital equals to value of current assets minus current liabilities and demonstrates the company’s liquidity in the long run. From the table above we can see that value of working capital of Wal-Mart is negative and has negative tendency. While, Target Corporation has much better results. Current ratio shows us how much of current liabilities can be covered with current assets. Current ratio of Wal-Mart is 0.88 points or 88%, which is not very good as it means that company cannot cover its short-term obligations with current assets for 100%. However, it is important to note that retailers tend to have lower current ratio due to the fact that they mostly deal with cash and do not have a lot for receivables (Maynard, 2013). On the other side, Target Corporation can easily meet its short-term obligations as the indicator is above 1point. However, we can see that its current ratio value decreased for 0.56 points over the past year. Quick ratio basically shows us the company’s ability to cover its short-term liabilities with the most liquid assets. Taking into account that quick ratio of Wal-Mart is 0.20 points we can say that the company has not enough of liquid assets that can be used to cover liabilities. Target Corporation again has better results, but the indicator deteriorated greatly over the past year.
Inventory turnover ratio shows how many times the company sells its inventories and replaces them with new goods during one period (Maynard, 2013). Retailers are interested in increasing of inventory turnover rates as it means that goods are not stored in warehouses for a long time and are sold faster. Wal-Mart’s inventory turnover indicator is better than Target’s. It takes approximately 33 days for Wal-Mart and 41 days for Target to sell its inventories and replace them with new ones.
Overall, we can say that Target’s liquidity is higher, and it gives more competitive advantages to this company. Wal-Mart’s management must improve the company’s liquidity in order to make sure it can meet its obligations.
- Solvency
Debt ratio shows us part of assets that was financed by creditors. Higher meaning of this indicator means that the company relies greatly on borrowed money for conducting its activity (Megginson & Smart, 2009). Wal-Mart debt ratio equals to 0.61 points, and it means that 61% of assets are financed by debt. Debt ratio of Target Corporation is higher and equals to 0.66 points.
Equity ratio shows us the proportion of assets financed by shareholders (Gitman & Mcdaniel, 2009). From the table above we can see that share of stakeholders in financing Wal-Mart assets equals to 39% while in Target Corporation, this indicator equals to 34%. Equity ratio shows us part of assets shareholders will receive in case of liquidation of the company. Both companies are interested in increasing the amount of assets financed by shareholders and decreasing the part financed by debt.
- Profitability
Profitability ratios help us to define how well company generates profits and how effective it is being managed. Net profit margin or return on sales ratio indicates the percentage of each dollar of sales that remain after all the expenses have been subtracted (Megginson & Smart, 2009). Basically, Wal-Mart earns 4 cents out of each dollar of sales while Target’s indicator is slightly higher. Return on Equity ratio indicates the return shareholders get on their investments. High returns on equity attract more investors as they guarantee more profits to the company and to investors. Wal-Mart’s return on investment indicator equals to 22% which is high enough and the company keeps being attractive for investors. Target’s ROE equals to 18% and it is lower than Wal-Mart’s results. Nevertheless, both companies’ return on equity is above average industry level and companies remain attractive for investors. Return on assets ratio shows us how effective company uses its assets to generate profits. In other words, the indicator shows how much income each dollar of invested assets generated. Wal-Mart generates approximately 8 cents out of each dollar of invested assets while Target generates 6 cents. Overall, we can say that both companies are profitable; however, all of the analyzed profitability indicators slightly deteriorated over the 2011-2012 year.
Forecast
Wal-Mart Inc., the world’s largest retailer is currently going through downfall due to continuous tough economic situation in the country. High unemployment rate effect the purchasing power of Wal-Mart’s and Target’s customers. Both competitors are struggling due to economic uncertainty and try to expand their coverage and increase sales. Target Corporation is fighting for market share in Canada while Wal-Mart is opening new stores in China and Brazil. After conducting the financial analysis we can see that profitability indicators deteriorated greatly over the year 2011-2012 and most likely the company will not recover shortly, and profitability will decline in 2014 as well. However, we should not expect critical decline as world’s economy is recovering and is expected to grow. Both companies have to improve their liquidity and solvency in order to make sure they can meet its obligations. However, it is most likely that liquidity and solvency indicators will deteriorate during the next few years. Taking into account peculiarities of retail industry, we can say that their sales will not increase until economically challenged customers get back to their normal profits and spending habits.
References
CNNMoney. (2014). Fortune global 500 - fortune. [online] Retrieved from: http://money.cnn.com/magazines/fortune/global500/index.html [Accessed: 10 Feb 2014].
Corporate.target.com. (2014). Target corporate: social responsibility, careers, press, investors. [online] Retrieved from: https://corporate.target.com/ [Accessed: 12 Feb 2014].
Corporate.walmart.com. (2014). Walmart corporate - walmart corporate - we save people money so they can live better.. [online] Retrieved from: http://corporate.walmart.com/ [Accessed: 12 Feb 2014].
Gitman, L. J. & Mcdaniel, C. D. (2009). The future of business. Mason, OH: South-Western Cenage Learning.
Maynard, J. (2013). Financial accounting, reporting, and analysis. Oxford: Oxford University Press.
Megginson, W. L. & Smart, S. B. (2009). Introduction to corporate finance. Mason, Ohio: South-Western Cengage Learning.
Plunkett, J. W. (2008). Plunkett's retail industry almanac. Houston, Tex.: Plunkett Research.
Target Corp. (2012). Annual report. Retrieved from https://corporate.target.com/_media/TargetCorp/annualreports/content/download/pdf/Annual-Report.pdf?ext=.pdf
Wal-Mart Stores Inc. (2012). Annual report. Retrieved from http://www.walmartstores.com/sites/annual-report/2012/WalMart_Financials.pdf
