A COMPARATIVE ANALYSIS OF

WALMART AND TARGET’S

2010 FINANCIAL STATEMENTS

Heather Head
Todd Hagen
 BUSN 6550
October 27th, 2010

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I. INTRODUCTION

Walmart Stores, Inc. (WMT) and Target Corporation (TGT) are the largest

general merchandising companies in the highly competitive U.S. retail industry. WMT

consists of three segments: U.S., International, and Sam’s Club. TGT operates in two

domestic segments: retail and credit card. With the already slim gross profit margins

representative of their industry, both firms struggled to decrease their financial risk while

increasing profits throughout the recession that has strangled the U.S. economy for the

last four years. With the dramatic stock market decline and volatility, major rise in

unemployment, the housing market crash and credit crisis, consumers are spending less

and not as able to pay their debts.

This paper uses the financial statements from the firm’s 2010 10-K Reports to

analyze how each firm managed to continue to pay dividends to shareholders and expand

their companies despite the recession. WMT was able to offset some of the repercussions

of the recession through their international segment and restructuring of their U.S.

operations. However, TGT’s credit card segment’s decline negatively affected their

shareholders’ equity, financial leveraging, net income and subsequent performance in

terms of profitability. WMT’s superior ability to keep sales up and decrease costs and

make higher returns on their investments is why WMT remains the U.S.’s most profitable

company year after year.

II. MACROECONOMIC FACTORS AND SHAREHOLDERS’ RISKS

As illustrated in the vertical analysis of their balance sheets (Appendix A), both

WMT and TGT lowered their inventories, short-term liabilities and accounts payable and

increased their long-term debt, taking advantage of the four percent drop in the prime

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rate1, while maintaining their investments in property, plant and equipment (PPE) at

roughly 57% of total assets. However, where WMT was able to increase their retained

earnings as a percent of total assets by 6.3%, TGT’s retained earning per total assets

decreased almost 7.0% primarily due to their long-term credit card debt. The changes in

retained earnings affected their financial leveraging debt ratio measurement of

shareholders’ risk and their profitability metrics.

During the credit crisis of 2007 and 2008, companies that were highly leveraged

couldn’t borrow more or refinance maturing short and long-term debt were forced into

bankruptcy.2 WMT decreased their debt ratio by increasing shareholders’ equity by 15%

compared to their total liabilities increase of 8.6%. TGT’s debt ratio increased 7.4 % due

to a same rate of increase in liabilities and decrease in shareholder’s equity. This increase

in TGT’s debt ratio would be a cause for concern to investors if the firm also had

decreasing liquidity ratios and/or consistent negative cash flow from operations.

Fortunately, they do not. TGT has been able to increase their liquidity ratios, with a 2.0%

increase in their quick ratio and a 0.3 increase in their current ratio for an overall good

current ratio average of 1.6 throughout the recession.

WMT decreased their current assets as a percent of total assets to under 30%

while TGT’s current assets increased for an average of 40% of total assets, allowing

WMT to better utilize cash for investments that have a higher return. However, this is

what keeps WMT’s liquidity measures uncomfortably low, with a disconcertingly low

quick ratio at 0.2 and current ratio decreasing 3.0% to an average of 0.9. If it weren’t for

WMT’s remarkable long-term growth, this would dramatically decrease investor’s

1
Federal Reserve Board, (2010).

2
Spaulding, William (2010).
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confidence. However, WMT’s management excels at balancing the trade-off between

increased risk with increased profitability.

III. PROFIT AND PERFORMANCE

The horizontal (Appendix B) and vertical (Appendix C) analysis of the income

statements and performance ratios of both firms illustrates how WMT’s management was

more capable at keeping sales higher than expenses, getting higher returns from their

investments, and therefore better at increasing net earnings and gross profits. WMT

increased net sales by 8.4%, kept their cost of sales at roughly 7.0% for a total increase in

their gross profit by 12%. TGT was only able to increase net sales by 3.2% and maintain

their cost of sales at 3.0% for a gross profit increase of only a third of WMT’s at 4.2%.

Neither company was able to leverage their increased operating expenses in the form of

increased operating income and sales. However, Target’s near 24% increase in interest

expense and subsequent three point drop in their times interest earned ratio and near 13%

drop in net earnings did not help to increase their shareholders’ confidence.

The Dupont method is used to calculate whether changes in earnings are due to

changes in sales (margin) or management’s efficiency at turning assets into income

(turnover). WMT’s margin has increased slightly for an average of 8.6%, while TGT’s

average margin of 4.0% is less than half of WMT’s. WMT is also doing much better at

turning assets into profits, tripling TGT’s efforts with a fairly steady average turnover of

2.4 compared to TGT’s declining 1.5 turnover ratio. WMT’s return on investments (ROI)

has slightly increased from 8.5% to 8.7% due to their slight increase in turnover where

TGT’s ROI has decreased 1.3% for an average of 5.85%. WMT’s return on equity (ROE)

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has remained relatively stable at 20.6% and far exceeds the industry average3 while

TGT’s ROE has seen a decline due to their decline in shareholder’s equity.

Neither WMT nor TGT were able to maintain a positive cash flow throughout the

last three years of the recession primarily due to their maintaining their investments in

PPE. Since the cash flows did not remain negative, this does not represent a problem

necessarily, but management’s decision to use their cash for investing for future growth.

The quicker a company can turn their accounts receivables, inventory and PPE

into sales the quicker they’ll be able to utilize the cash to invest in assets with higher

returns According to WMT and TGT’s activity analysis (Appendix D), WMT’s days’

sales in accounts receivables is extremely low at a 3.6 average compared to TGT’s 44.9.

WMT’s days’ sales in inventory is also relatively low with an average of 42.1 compared

to TGT’s 57.5. WMT’s PPE turnover averaged 4.3 while TGT does a better job of

turning their fixed assets into cash with an average of 2.5.

IV. CONCLUSION

WMT's ability to keep sales up and costs due to inventory, operating and interest

expenses low while turning assets quickly into cash which is then invested in assets that

make higher returns is the reason for their continued success. TGT, due to its credit card

segment’s decline and increased costs, has seen higher financial leveraging ratios and

lower earnings which, when added together, has taken a toll on their shareholder’s

confidence.

3
Marshall (2010) Page 81.
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