Wal-Mart 2002

Forest David: Mississippi State University

A.

Case Abstract
Wal-Mart is a comprehensive business policy and strategic management case that includes the company's year-end 2001 financial statements, organizational chart, competitor information and more. The case time setting is the year 2002. Sufficient internal and external data are provided to enable students to evaluate current strategies and recommend a three-year strategic plan for the company. Specific areas of concern that students should address include what new geographic countries or areas Wal-Mart should expand into and with what segments of its operations Sams, Supercenters, or Wal-Marts. Also, a major competitor, K-Mart is on the brink of bankruptcy and Wal-Mart may could capitalize on this situation by acquiring K-Mart in parts or in totality. With 1.38 million employees, Wal-Mart Stores, Inc. operates discount department stores, warehouse membership clubs and superstores. For the 3 months ended 4/30/02, revenues rose 14% to $55.42 billion while net income rose 20% to $1.65 billion. Revenues reflect domestic and international expansion and an increase in same store sales. Wal-Mart is led by CEO Lee Scott.

B.

Vision Statement (proposed)

To become the worldwide leader in retailing.

C.

Mission Statement (proposed) (corresponding components listed below)

Our first responsibility is to provide all consumers (1) the best products and services with guaranteed satisfaction under one roof. Wal-Mart provides a wide array of products like toys; electronics; groceries; jewelry; ladies; men; and childrens apparel; and hard goods (2) at reasonable prices. We will continue to offer scholarships to deserving high-school graduates (8) in hopes of providing students with a well-deserved education. Consumers have been conveniently provided not only with the use of online shopping (4) to show without ever leaving home, but also with the concept of one-stop shopping. The Wal-Mart team is devoted to everything that Wal-Mart has accomplished as a universal competitor (3). We are dedicated in recruiting, rewarding, and retaining employees of good moral standing (9) providing benefits for excellent performance, providing clean environments to work in, and providing equal

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opportunity for all individuals (7). We will continue to offer the highest quality products at the lowest price (6) to strive to be the best in the retail industry (5). 1. 2. 3. 4. 5. 6. 7. 8. 9. Customer Product or services Markets Technology Concern for survival, growth, profitability Philosophy Self-concept Concern for public image Concern for employees

D.

Class Discussion Questions and Issues

1. How can Wal-Mart best take advantage of K-Mart which is faltering badly nationwide? Should Wal-Mart try to acquire K-Mart? 2. Develop an Internet strategy for Wal-Mart. Visit the companys web site and recommend improvements. 3. How aggressively should Wal-Mart expand internationally and where? 4. Which of Wal-Mart segments should the company seek to expand most aggressively? Why? 5. Women are rare in Wal-Marts top management. Why is this and what would recommend be done about this problem? 6. Develop an EPS-EBIT analysis to determine whether Wal-Mart should use stock or debt to obtain $5 billion to expand globally.

E.

External Audit
Opportunities 1. 2. 3. 4. 5. 6. 7. 8. 9. Consumers want ease of shopping. Internet shopping growing. K-mart and other stores struggling. Similar shopping patterns worldwide. Retail sales expected to increase. Environment conscious consumers. Elderly population growing. Asian market virtually untapped by retail. European market untapped by retail.

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Threats 1. 2. 3. 4. 5. Regulation of Wal-Mart pharmacies. Small towns do not want entry of Wal-Mart. Bad media exposure for Kathie Lee brand. Variety of competition nationally, regionally, and locally. Substitute products more easily because of intense competition.

Competitive Profile Matrix

Critical Success Factors Market share Price Competitiveness Financial position Product quality Consumer loyalty Total Weight 0.20 0.30 0.10 0.20 0.20 1.00 Wal-Mart Rating Weighted Score 3 0.60 4 1.20 4 2 2 0.40 0.40 0.40 3.00 K-Mart Rating Weighted Score 2 0.40 2 0.60 2 2 2 0.20 0.40 0.40 2.00 JC Penney Rating Weighted Score 2 0.40 1 0.30 2 3 2 0.20 0.60 0.40 1.90

EFE Matrix
Key External Factors Opportunities Consumers want ease of shopping Internet shopping growing K-mart and other stores struggling Similar shopping patterns worldwide Retail sales expected to increase Environment conscious consumers Elderly population growing Asian market virtually untapped by retail European market untapped by retail Threats Regulation of Wal-Mart pharmacies Small towns do not want entry of Wal-Mart Bad media exposure for Kathie Lee brand Variety of competition nationally, regionally, and locally Substitute products more easily because of intense competition TOTAL Weight 0.08 0.10 0.20 0.05 0.05 0.04 0.04 0.06 0.07 0.10 0.02 0.04 0.05 0.10 1.00 Rating 4 3 4 3 3 1 3 3 3 3 3 3 3 2 Weighted Score 0.32 0.30 0.80 0.15 0.15 0.04 0.12 0.18 0.21 0.30 0.06 0.12 0.15 0.20 3.10

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F.

Internal Audit
Strengths 1. 2. 3. 4. 5. 6. 7. 8. 9. Customer oriented. SAMS Club customers able to buy in bulk. Supercenters offer one-stop shopping. Satisfaction guaranteed programs promoting customer goodwill. Buy from local merchants when possible. Stock ownership and profit sharing with employees. Leads industry in information technology. Ongoing development of its employees. Strong community involvement.

Weaknesses 1. 2. 3. 4. 5. No formal mission statement. Membership only for SAMS Club. Keep poor-performing employees on hand. Old-fashioned store policies. Few women and minorities in top management.

Financial Ratio Analysis (July 2002)

Company Valuation Ratios P/E Ratio (TTM) P/E High - Last 5 Yrs P/E Low - Last 5 Yrs Beta Price to Sales (TTM) Price to Book (MRQ) Price to Tangible Book (MRQ) Price to Cash Flow (TTM) Price to Free Cash Flow (TTM) % Owned Institutions Dividends Dividend Yield Dividend Yield - 5 Yr Avg Dividend 5 Yr Growth Rate Payout Ratio (TTM) Growth Rates % Sales (MRQ) vs Qtr 1 Yr Ago Sales (TTM) vs TTM 1 Yr Ago Sales - 5 Yr Growth Rate EPS (MRQ) vs Qtr 1 Yr Ago EPS (TTM) vs TTM 1 Yr Ago 30.55 59.13 24.82 0.93 0.94 5.88 7.71 20.29 91.53 36.05 0.63 0.50 21.67 18.30 14.11 14.24 15.66 20.13 9.61 Industry 29.06 54.62 23.22 0.94 0.99 5.33 6.67 18.74 81.82 50.40 0.83 0.66 16.64 17.06 13.41 12.23 14.32 28.90 9.23 Sector 26.46 49.38 17.59 0.91 2.22 3.59 5.20 15.66 42.80 46.78 2.35 1.38 4.98 16.11 8.81 9.37 19.41 13.55 6.38 S&P 500 26.91 49.97 17.42 1.00 2.92 4.32 7.12 18.16 33.51 60.76 2.17 1.32 7.93 29.70 0.03 1.59 12.16 9.46 -1.57

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EPS - 5 Yr Growth Rate Capital Spending - 5 Yr Growth Rate Financial Strength Quick Ratio (MRQ) Current Ratio (MRQ) LT Debt to Equity (MRQ) Total Debt to Equity (MRQ) Interest Coverage (TTM) Profitability Ratios % Gross Margin (TTM) Gross Margin - 5 Yr Avg EBITD Margin (TTM) EBITD - 5 Yr Avg Operating Margin (TTM) Operating Margin - 5 Yr Avg Pre-Tax Margin (TTM) Pre-Tax Margin - 5 Yr Avg Net Profit Margin (TTM) Net Profit Margin - 5 Yr Avg Effective Tax Rate (TTM) Effective Tax Rate - 5 Yr Avg Management Effectiveness % Return on Assets (TTM) Return on Assets - 5 Yr Avg Return on Investment (TTM) Return on Investment - 5 Yr Avg Return on Equity (TTM) Return on Equity - 5 Yr Avg Efficiency Revenue/Employee (TTM) Net Income/Employee (TTM) Receivable Turnover (TTM) Inventory Turnover (TTM) Asset Turnover (TTM) www.investor.stockpoint.com July 2002

17.46 25.97 0.14 1.01 0.51 0.63 9.89 21.33 21.18 6.94 7.18 4.92 5.13 4.92 5.13 3.15 3.24 36.02 36.78 8.54 8.96 13.07 13.58 20.39 21.60 163,894 5,161 127.92 7.40 2.71

16.77 22.06 0.39 1.35 0.70 0.87 8.86 25.11 24.92 8.02 8.22 5.45 5.67 5.34 5.56 3.38 3.47 36.54 37.42 7.84 8.33 11.59 12.31 19.03 20.46 182,920 6,981 12.08 6.48 2.35

11.31 16.26 0.82 1.39 0.77 0.96 5.86 40.29 40.12 22.49 22.48 11.29 12.18 8.99 12.49 6.16 8.01 36.58 39.45 5.04 6.74 6.96 9.27 11.29 15.83 803,839 69,051 16.26 16.25 1.20

8.38 10.33 1.15 1.68 0.67 1.04 8.54 46.81 47.69 20.65 22.14 17.29 18.39 14.34 17.37 9.27 11.39 33.51 35.77 5.74 7.97 9.42 12.81 16.83 21.63 555,950 78,474 9.42 10.26 0.97

Net Worth Analysis (year-end 2001)

1. Stockholders Equity + Goodwill 2. Net income x 5 = $6,671 x 5 3. Share price = $56 /EPS = $1.55 x Net Income ($6,671) 4. Number of Shares Outstanding X Share Price = 4,450 x $56 Method Average $ 35,697 $ 33,355 $ 241,016 $ 249,200 $ 139,817

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IFE Matrix
Key Internal Factors Strengths Customer oriented SAMS Club customers able to buy in bulk Supercenters offer one-stop shopping Satisfaction guaranteed programs promoting customer goodwill Buy from local merchants when possible Stock ownership and profit sharing with employees Leads industry in information technology Ongoing development of its employees Strong community involvement Weaknesses No formal mission statement Membership only for SAMS Club Keep poor-performing employees on hand Old-fashioned store policies Few women and minorities in top management TOTAL Weight Rating Weighted Score 1.00 0.40 0.40 0.08 0.08 0.10 0.10 0.40 0.08 0.02 0.20 0.10 0.03 0.10 3.19

0.250 0.100 0.100 0.025 0.025 0.025 0.025 0.100 0.025 0.012 0.100 0.100 0.013 0.100 1.00

4 4 4 3 3 4 4 4 3 2 2 1 2 1

G.

TOWS Matrix
Strengths 1. Customer oriented 2. SAMs Club consumers able to buy in bulk 3. Supercenters offer one-stop shopping 4. Satisfaction guaranteed programs promoting customer goodwill 5. Buy from local merchants when possible 6. Stock ownership and profit sharing with employees 7. Leads industry in information technology 8. Ongoing development of its employees 9. Strong community involvement S-O Strategies 1. Advertise more for shopping online (S8, O2) 2. Expand internationally because of similar shopping patterns (S3, O4, O8) Weaknesses 1. No formal mission statement 2. Membership only for SAMS Club 3. Keep poor-performing employees on hand 4. Old-fashioned store policies 5. Few women and minorities in top management

Opportunities 1. Consumers want ease of shopping 2. Internet shopping growing 3. K-mart and other stores struggling 4. Similar shopping patterns worldwide

W-O Strategies 1. Improve employment techniques to hire and keep the bestperforming employees (W3, W5, O6)

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5. 6.

Retail sales expected to increase Environment conscious consumers 7. Elderly population growing 8. Asian market virtually untapped by retail 9. European market untapped by retail Threats 1. Regulation of Wal-Mart pharmacies 2. Small towns do not want entry of Wal-Mart 3. Bad media exposure for Kathie Lee brand 4. Variety of competition nationally, regionally, and locally 5. Substitute products more easily because of intense competition

S-T Strategies 1. Buy from local merchants to promote unity in the community (S5, T4) 2. Build more Supercenters for the increased demand for one-stop shopping (S3, T4)

W-T Strategies 1. Allow consumers to buy in smaller bulk without having membership to SAMS Club (W2, T5)

H.

SPACE Matrix
+5 -2 5 -2 Conservative +1 worst to + 6 best -1 best to 6 worst 1 worst to 6 best -1 best to -6 worst FS Y axis: 5 + (-2) = 3

Y axis Financial strength Environmental stability X axis Industry strength Competitive advantage

X axis: 5 + (-2) = 3 Aggressive

CA

IS

Defensive

ES

Competitive

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I.

Grand Strategy Matrix

RAPID MARKET GROWTH Quadrant II Quadrant I Wal-Mart STRONG COMPETITIVE POSITION

WEAK COMPETITIVE POSITION

Quadrant III SLOW MARKET GROWTH 1. Market development 2. Market penetration 3. Product development 4. Forward integration 5. Backward integration 6. Horizontal integration 7. Concentric diversification

Quadrant IV

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J.

The Internal-External (IE) Matrix

The IFE Total Weighted Score Strong 3.0 to 4.0 I Wal-Mart Average 2.0 to 2.99 II Weak 1.0 to 1.99 III

High 3.0 to 3.99

Medium The EFE Total 2.0 to 2.99 Weighted Score

IV

VI

Low 1.0 to 1.99

VII

VIII

IX

Grow and Build

K.

Matrix Analysis and TOWS Summary

Alternative Strategies Forward Integration Backward Integration Horizontal Integration Market Penetration Market Development Product Development Concentric Diversification Conglomerate Diversification Horizontal Diversification Joint Venture Retrenchment Divestiture Liquidation IE X X X X X X SPACE X X X X X X X X X GRAND X X X X X X X COUNT 3 3 3 3 3 3 2 1 1

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L.

QSPM
Strategic Alternatives Build additional Improve Supercenters SAMS Club nationwide and operations worldwide AS TAS AS TAS --------1.00 0.10 4.00 0.40 4.00 0.40 1.00 0.10 ------------------------2.00 0.05 3.00 0.08 2.00 0.20 1.00 0.10 ----------1.00 1.00 1.00 1.00 --0.10 0.10 0.01 0.10 1.06 0.32 0.30 0.80 0.20 0.15 ----0.24 0.28 0.20 0.06 --0.15 --2.70 3.76 --2.00 2.00 2.00 2.00 --0.20 0.20 0.02 0.20 1.30 0.24 0.40 0.60 0.15 0.10 ----0.18 0.21 0.10 0.04 --0.10 --2.12 3.42

Key Internal Factors Weight Strengths Customer oriented SAMS club consumers able to buy in bulk Supercenters offer one-stop shopping Customer goodwill Buy from local merchants when possible Stock ownership and profit sharing with employees Leads industry in information technology Ongoing development of its employees Strong community involvement Weaknesses No formal mission statement Membership only for SAMS Club Keep poor-performing employees on hand Old-fashioned store policies Few women and minorities in top management SUBTOTAL Opportunities Consumers want ease of shopping Internet shopping growing K-mart and other stores struggling Similar shopping patterns worldwide Retail sales expected to increase Environment conscious consumers Elderly population growing Asian market virtually untapped by retail European market untapped by retail Threats Regulation of Wal-Mart pharmacies Small towns do not want entry of Wal-Mart Bad media exposure for Kathie Lee brand Variety of competition nationally, regionally, and locally Substitute products more easily because of intense competition SUBTOTAL SUM TOTAL ATTRACTIVENESS SCORE

0.25 0.10 0.10 0.03 0.03 0.03 0.03 0.10 0.03 0.01 0.10 0.10 0.01 0.10 1.00 0.08 0.10 0.20 0.05 0.05 0.04 0.04 0.06 0.07 0.10 0.02 0.04 0.05 0.10 1.00

4.00 3.00 4.00 4.00 3.00 ----4.00 4.00 2.00 3.00 --3.00 ---

3.00 4.00 3.00 3.00 2.00 ----3.00 3.00 1.00 2.00 --2.00 ---

M.

EBIT/EPS Analysis (assume $500 million needed; in millions)

EPS-EBIT Analysis for Wal-Mart (in $millions at 12-31-01) $Amount Needed: $5,000 Stock Price $56
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EBIT Range $10,000 to $15,000 Tax Rate 3,897/10,751 = 36% Interest Rate 5% #Shares Outstanding 4,450
Common Stock Financing High Low $15,000 $10,000 0 0 15,000 10,000 5,400 3,600 9,600 6,400 4,539 4,539 2.115 1.41 Debt Financing High Low $15,000 $10,000 250 250 14,750 9,750 5,310 3,510 9,440 6,240 4,450 4,450 2.121 1.40

EBIT ($10,751 in 2001) Interest (5%) EBT Taxes 36% EAT # of Shares Outstanding EPS

Conclusion: Wal-Mart should use debt to raise the $5,000 million on the Low EBIT estimate but should use stock on the High EBIT.

N.

Epilogue
A major competitor to Wal-Mart, K-mart filed Chapter 11 protection on January. 22, 2002. K-mart is now trying to redesign itself, promoting popular brands like Martha Stewart and focusing on the black and Hispanic markets, in an effort to compete with other discounters. During the first half of 2002, K-mart closed 283 stores across the country. Wal-Mart could identify these locations and acquire some of these properties at reasonable prices but has not done so yet. In May, 2002, Wal-Mart disclosed plans to buy Franklin Bank of California in Tustin, Orange County. Wal-Mart officials vowed it was not an attempt to enter the retail banking business. Having the bank, they said, would help Wal-Mart save millions of dollars a year in debit card processing fees. At a cost of pennies for each electronic transaction, the yearly savings would be substantial enough to justify buying the 22-year-old bank. Some bankers remain skeptical worrying that Wal-Mart could monopolize the retail banking industry much like it has the retail industry, possibly muscling smaller banks out of business, they say. "This is just a ruse. They definitely want to get into commercial banking," said D. Linn Wiley, president and chief executive for Citizens Business Bank in Ontario. Bob McAdam, Wal-Mart's vice president of state and local government, countered that the acquisition "has nothing to do with retail banking." An industrial loan bank like Franklin cannot offer checking or savings accounts, McAdam said. Plus, the federal government prohibits mixing of banking and commerce, he said. If Wal-Mart owns Franklin's $2.4 million in assets, Wal-Mart will be able to deduct debit transactions directly from a customer's checking account and avoid paying companies like Visa and
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MasterCard fees for using their processing networks, he said. "We're looking to cut costs," McAdam said. The possible acquisition of Franklin Bank is California is Wal-Mart's third attempt to enter the financial industry. The Office of Thrift Supervision disallowed Wal-Mart from buying Federal BankCentre Savings and Loan in Oklahoma in 1999. More recently, the Office of Thrift Supervision denied WalMart's attempt to partner with TD Bank USA, a division of Toronto Dominion Bank, to offer services in 100 stores. The Office of Thrift Supervision denied the application because plans for the partnership included using Wal-Mart employees as bank tellers. Bankers believe if Wal-Mart eventually operates its own retail banking business, small banks will lose customers. In June 2002, German Metro, the world's third largest retailer after WalMart and Carrefour, invested $17 million in a membership supermarket in Tianjin, a major port city in north China. The store, which takes up more than 30,000 square meters in downtown Tianjin, is scheduled to start operation early 2003. German Metro is a competitor to Wal-Mart in global markets. Tianjin's over 1,700 supermarkets reported total sales of more than 10 billion yuan (1.2 billion U.S. dollars) in 2001 and 6.4 billion yuan (770 million U.S. dollars) in the first five months of 2002. On June 22, 2002, the National Organization for Women named Wal-Mart a Merchant of Shame," said NOW President Kim Gandy. "Wal-Mart faces numerous allegations of sexual discrimination in pay, promotion and compensation; of wage abuses, violation of child labor laws and the Americans with Disabilities Act; exclusion of contraceptive coverage in employee insurance plans and discrimination on the basic of sexual orientation. The list of Wal-Mart's workplace 'don'ts' is far too long." "Wal-Mart is number one on the Fortune 500 list. It's also the number one most sued retailer in the United States," Gandy said. "It doesn't take a genius to see the problem with this picture. The nation's number one company should be a model workplace not the worst of bad examples." "I could say that NOW is dissatisfied with the way Wal-Mart conducts business with their employees, but that would be a huge understatement," Gandy said. "This country's top employers need to get the picture that women-friendly workplaces aren't just good businesses, they're good for business. You'd think that Wal-Mart management would get this." "NOW's Merchants of Shame are an important part of the Women-Friendly Workplace Campaign -- a pro-active project demanding equal rights for women on the job," Gandy said. "NOW's campaign spurred Smith Barney, Mitsubishi Motors and other leading corporations to work toward creating truly women-friendly and family-friendly workplaces." "We're shining a spotlight on Wal-Mart's workplaces abuses," Gandy said. "This is a public pressure campaign against one of the largest employers in the U.S. This is how we effect change. The women and men of Wal-Mart deserve a workplace that respects their rights. Consumers across the country need to be able to spend their dollars with a clear conscience. Wal-Mart doesn't afford us this option." "Wal-

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Mart is NOW's fifth Merchant of Shame," Gandy said. "Perhaps they'll look at this as a grand opportunity to do the right thing." (Source: www.usnewswire.com)

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