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THE ANNUAL REPORT PROJECT

Azin Zomorodian
ACCT PO1
Professor Naismith
Nov. 19 2012

Introduction
According to the Stores magazine, Walmart is the largest retail store in U.S1. Mike
Duke has served as the vice chairman of the company from 2005 to February 2009, and then as
the CEO of the company since 20092. Walmarts home office is located at 702 S. W. 8th Street
Bentonville, Arkansas. It operates through three segments: the Walmart U.S. segment, the
Walmart international segment, and the Sams Club segment. They operate through 3942, 5873
and 618 retail units, respectively 3. Therefore, Walmarts primary area of activity is in the
United States, but it has more units in total in other part of the world. The ending date of the
latest fiscal year for U.S. and Canada was January 31, 2012 and for other operations was
December 31,
20124. Walmart provides broad assortments in affordable cost to the middle and lower class
through different departments such as grocery, electronics, furniture, auto, sports, toy,
pharmacy, apparel, photo, and many more. According to the Managements Report to
Shareholders, the financial statements are the responsibility of the companys management.
They provide the financial statement in accordance with GAAP through adequate internal
control5. Ernst & Young LLP is the independent registered public accounting firm that audits
Walmarts financial statements. Its responsibility is to express an opinion based on the provided
information. Ernst & Young LLP has reported an unqualified opinion on the financial
statements on March 27, 20126, indicating the financial statements are fairly presented, free of
material misstatement, and in
accordance with GAAP. The current market price of the companys stock is $68.05, and its

http://www.stores.org/2012/Top-100-Retailers
http://corporate.walmart.com/our-story/leadership/executive-management/mikeduke
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http://corporate.walmart.com/our-story/locations
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Annual Report pg 18 http://www.walmartstores.com/sites/annualreport/2012/WalMart_AR.pdf
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Annual Report pg 56 http://www.walmartstores.com/sites/annual-

report/2012/WalMart_AR.pdf
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Annual Report pg 54 http://www.walmartstores.com/sites/annualreport/2012/WalMart_AR.pdf

dividend per share is $1.46. It is traded on the New York Stock Exchange, with ticker symbol
WMT. Walmarts web address is www.walmart.com.
Industry Situation
The first Walmart discount store was opened in Rogers, Ark. in 1962. After 50 years, it
became one of the three largest retailers in the world with more than 10,000 retail units
operating in 27 countries. 7 The companys history demonstrates that it has used a perfect
strategy to
expand throughout its life. Its e-commerce is growing in U.S., U.K., Brazil, China, Japan, and
Canada. Also, its online grocery in the U.K., ASDA, and its e-commerce website in China,
Yihaodian, have been growing rapidly8. Walmart competes with its competitors by providing
broad assortments in Every Day Low Price (EDLP) at one shopping place. Its practice is backed
up with ad match policy. To accomplish EDLP, it reduces its expenses, increases its
productivity, and uses the technological improvement 9.That is how it has been able to provide
lower price goods than its competitors. If Walmart keeps on managing its price cuts at the same
rate, it will remain successful in the market.
According to Charles M. Holley, the Executive Vice President and Chief Financial
Officer, Walmarts foremost objective is to deliver shareholder value, and Walmarts
financial priorities are growth, leverage, and returns10. So, Walmart takes into consideration the
benefit of both its shareholders and customers. The companys management has many
strategies to obtain its financial goal. It focuses on sales through its stores and growing its
expenses at a slower rate than the growth of its net sale. In addition, to improve its returns, it
focuses on employing the
assets efficiency through returns on investment, and managing working capital through cash
Annual report pg3 http://www.walmartstores.com/sites/annualreport/2012/WalMart_AR.pdf
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Annual report pg7&11 http://www.walmartstores.com/sites/annualreport/2012/WalMart_AR.pdf
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Annual report pg7 http://www.walmartstores.com/sites/annual -

report/2012/WalMart_AR.pdf
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Annual report pg16 http://www.walmartstores.com/sites/annualreport/2012/WalMart_AR.pdf

flows11. The economic condition nationally and internationally affecting the financial
performance is the biggest risk factor of the industry12. Employment condition, credit availability
to consumers, spending pattern, and cost of fuel and labor are just some of the financial risk
factors. Also, failure to attract and retain qualified associates and labor issues could adversely
affect its financial performance.13 According to Walmart executives, the companys financial
situation is also exposed to interest rate change and currency exchange rate of the market.14 In
addition, Walmart Face[s] competition from other discount stores, department stores, dollar
stores, drugstores, specialty stores, warehouses club and supermarkets15. Obviously, the risk is
growing with the growing of larger competitive segments such as Target and Costco. To be able
to stay competitive, Walmart employs the following strategies: appreciating and listening to
front-line associates, making sure
they take care of the customers; making sure to understand the need of its customers
demographically; improving the global e-commerce which is a must in the fast-growing
technological industry; increasing its productivity, and considering the social and
environmental issues such as reducing greenhouse16. One of Walmarts plan is to use renewable
clean energy and make it affordable to its customers. Rahul Raj, director of sustainability and
merchandising innovation in Walmart estimates that roughly 22% of Walmarts electricity
needs globally are supplied by clean energy sources. 17 Using greener energy is definitely
going to make a
difference in Walmarts popularity. According to the Chief Executive Officer Duke, in 2012 the
companys Net sales increased by 5.9 percent to $443.9 billion, and consolidated operating

Annual report pg19 http://www.walmartstores.com/sites/annualreport/2012/WalMart_AR.pdf

12
http://sec.edgar-online.com/wal-mart-stores-inc/10-k-annualreport/2008/03/31/Section4.aspx
13
http://sec.edgar-online.com/wal-mart-stores-inc/10-k-annualreport/2008/03/31/Section4.aspx
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Annual report pg28 http://www.walmartstores.com/sites/annual report/2012/WalMart_AR.pdf
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Annual report pg18 http://www.walmartstores.com/sites/annual-

report/2012/WalMart_AR.pdf
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Annual report pg4 http://www.walmartstores.com/sites/annualreport/2012/WalMart_AR.pdf
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http://energy.aol.com/2012/06/29/walmart-sees-an-afordable-renewable-energy-future/

income grew by 4 percent to $26.6 billion. Also, its diluted earnings per share from
continuing operations attributable were $4.54 per share, up from $4.18 the previous year. The
operating expenses were leveraged for two consecutive years. It was able to distribute 11.3
billion to shareholders18. From all the facts, we are able to conclude that Walmart is
growing in the challenging economic environment.
Income Statement
Income statement of Walmart is presented in multi-step format because it includes all
the important subtotals such as net sales, cost of sales, operating income, interest expenses,
income from continuing operation, and consolidated operating income. According to Table II,
gross profit has increased 8.17% from 2008 to 2009 because net sale has grown at a faster rate
of
7.29% than cost of sale rate of 7.01%. During the same period, Net income has increased
5.25% which is less than the increase in total revenue. The reason is the dramatic increase of
9.28% in operating expenses. From 2009 to 2010, while the gross profit has increased 4.14%,
the net income has increased 7.24% due to the decrease in interest expense. From 2010 to
2011, net sales has increased at about the same rate as cost of sale resulting in slight growth in
gross profit has grown slightly. Also, operating expenses has grown at much lower rate;
therefore, the net
income has improved 14.05%. From 2011 to 2012, cost of sale has grown at a faster rate than
net sales, so the gross profit has increased slightly. Moreover, operating expenses and interest
expenses have grown 4.8% and 7.78%, respectively resulting an increase of 4.21% in net
income. Overall, from 2008 to 2012 gross profit has improved 21.23 %, and net income has
grown for about the same rate of 21.23%. Based on the trend in variance analysis, increase
in
gross profit and net income could be projected in the future.

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http://www.walmartstores.com/sites/annual-report/2012/CEOletter.aspx

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Balance Sheet
Assets= Liabilities+ Stockholders Equity

Year

Assets

Liabilities

Stockholders Equity

2012

$193406

$117645

$75761

2011

$180782

$109535

$71247

Statement of Cash Flows

Statement of cash flow is prepared to show the sources and uses of cash from operating,
investing, and financing activities of the company. It also reports the sources and uses of cash
net to equal the change in the amount of cash during a period. Since the income statement is
calculated on accrual basis, it does not provide information on expenses not paid and revenues
not collected. Some investors believe the companys cash flow statement is a better tool to
measure the financial health of the company because it is harder to manipulate. Also, without
cash a company would not survive for a long time19. Although many analysts of the
companies are generally too focused on earning per share, investors can avoid a lot of bad
investment mistake if they analyze the companys operating cash flow 20. Based on the
statement of cash flow, Walmarts main investing activity is payment for property and
equipment, and the main source of its financing is long-term debt. According to Table III,
Walmarts cash flow from operating activities has declined 9.93% from 2010 to 2011. The
main reason is the dramatic
increase of inventories which consumed a lot of cash. During the same period, the net cash used

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http://www.investopedia.com/articles/analyst/03/122203.asp#axzz2BbqFVtYk
http://www.investopedia.com/articles/analyst/03/122203.asp#axzz2BbqFVtYk

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in investing activities has improved 4.93%. The increase of 4.23% in payment for property
and equipment was the largest proportion of cash spent in investing activities. In addition,
Walmart has purchased back $14776 million of the companys stock, which resulted in
15.24% decrease in net cash used in financing activities in that period. Although the net
income has increased
14.18%, net cash decreased from $632 million in 2010 to ($512) million in 2011; moreover, the
ending balance of cash and cash equivalents deteriorated from $7907 million in 2010 to $7395
million in 2012. From 2011 to 2012, a small increase in inventories contributed to a slight
increase of 2.59% in net cash provided by operating activities. The net cash used in investing
activities has increased 36.22% due to the large improvement in investment and business
acquisitions from $202 million in 2011 to $3548 million in 2012. On the other hand, the net
cash used in financing activities declined from $12028 million to $8458 million, which is about
29.68%. The main reason was the 47.38% decrease in purchase of companys stock, which
amounted to $6298 million comparing to its prior year amount of $14776 million. Overall, the
net cash declined 65% and the ending balance of cash and cash equivalents decreased 11.43%
from $7395 million in 2011 to $6550 million in 2012, which was mainly due to payment for
property and equipment, and purchase of companys stock. Although, Walmart has spent a
large proportion of cash on property and equipment, the net cash provided by operating
activity was more than the total of cash spending in investing and financing activities. That
indicates that the company was profitable and was able to finance itself through operating
activities. Also, the proceeds from issuance on long-term debts has been larger than payments
of long-term debts for the last 3 years, which is a positive financial indicator for the company.
Finally, the net cash provided by operating activity has been significantly higher than net
income, which shows the success of the business in sale and collecting cash. A company that
has a higher net income than

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net cash provided by operating activity may have delay in its accounts receivable, or a high
level of inventory, which indicates unsuccessful sale.
Accounting Policies
Walmart uses significant accounting policies to calculate different measures described in
details in the notes located, after the financial statements, in the annual report. Based on the
first note, Walmart uses Last-In-First-Out (LIFO) method for tracking its inventory cost at the
time of sales in US segments, and First-In-First-Out (FIFO) method for international. In order
to
evaluate its inventories, Walmart considers the lower of cost or market value of its inventory.
Revenue is recognized when it sells the product to the customers. Property and equipment are
reported at cost. Major improvement are capitalized, whereas normal repairs are expensed
when they occur. Walmarts investments of three months maturity or less are considered cash
equivalent. Also, all debit, credit, and electronic benefit transfer transactions that process in
less than seven days are considered Cash and Cash equivalent21. Receivables are reported at
their book value minus their doubtful account that is based on historical trends in collection.
Cost of Sales include the actual cost of the product, storage, and transportation. The notes of
the company did not change my opinion about the company. Walmart follows GAAP to
provide its financial statements which is acceptable by all U.S companies, and clearly exhibits
all the
information in the footnotes. Also, Ernst & Young LLP has expressed an unqualified opinion
on all financial statements indicating that they are. Therefore, the footnotes have not altered
my
confidence towards the company.

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Annual report pg36-38 http://www.walmartstores.com/sites/annualreport/2012/WalMart_AR.pdf
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Recommendation
This recommendation is based on comparing the important ratios of Walmart and
Target. During 2012, Walmarts current ratio was 0.88. Comparing this ratio with Targets
current ratio of 1.15 indicates that Walmart was less able to pay its obligations with its current
assets. Similarly, its quick ratio of 0 .20 was less than Targets quick ratio of 0.47. Therefore,
Walmarts liquidity and its ability to pay its current liabilities in short term were below the
industry level. Although, Walmarts current assets has increased from 2011 to 2012, its current
liabilities has increased more; that is why its current ratio has decreased slightly. Gross Profit
percentage
shows what portion of the net sales becomes gross profit. From 2011 to 2012, Walmarts gross
Profit percentage has dropped slightly because its cost of sales has grown more than its net
sale. During the last two years, Walmarts gross profit percentage was about 6% less than
Targets, showing Target had relatively less cost of sales and performed better. During 2012,
debt ratio of Walmart and Target were 0.61 and 0.66, respectively. That indicates Walmart has
financed less of its assets with debt. During the same period, Walmarts and Targets accounts
receivable turnover were 80.51 and 11.57, respectively, indicating Walmart was more
successful in collecting cash from its credit customers. Yet, Walmarts account receivable
turnover has
deteriorated from 2011 to 2012, due to its more sales on credit and longer time to collect its
receivable. Additionally, Walmarts inventory turnover rate was 8.69, while Targets was
11.58. Walmart appears to have low inventory turnover, comparing to Target, indicating that it
had too much inventory sitting in stock. Earning Per Shares (EPS) measures the net income
earned for each share of the company. Obviously, the higher this ratio, the better for stock
holders and investors. Earning per shares of Walmart has improved from $4.49 in 2011 to
$4.53 in 2012, denoting the profitability of the company. Also, Walmarts EPS was higher than
Target for the

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last two years. Price per earning ratio indicates how much investors are willing to pay per dollar
of earning. During 2012, this ratio for Walmart and Target were 16.59 and 14.63, respectively.
Comparing this ratio of the two companies, indicates Targets common stocks were more
affordable, but Walmarts common stocks were valued higher by investors. Walmart has been
generating enough net income to reward its stockholders and it has been producing enough
profit to stay in the business with its competitor. Although Walmart has lower liquidity than
Target, its debt ratio is lower, showing it has financed less of its assets on debt. Also, its asset
management ratios are higher than industry indicating its high operating performances.
Additionally, its earning per share, dividend per share, and price per earning per share are
above the industry, illustrating its high income and benefit to its shareholders, and also its share
value in the market. Finally, statement of cash flow demonstrates the growth of cash from
operating activities during the past years. Therefore, buying Walmarts stock is highly
recommended as it will pay back its shareholders with minimum risk. Walmart is expanding
and it seems to have a brighter future in the industry.