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Wal*Mart Stores ? 15 February 2000
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Vital Signs: ROBUST
Strength In Supercenters Continues To Contribute To Wal*Mart?s Overall Health
Wal*Mart continues to expand its dominance in supercenters,
the fastest growing major sector in the retailing industry.
Wal*Mart opened 157 in 1999 on a base of 564 (up 28%) and
plans to open 165 in 2000 (up 23%). We estimate that in 1999,
all supercenters (domestic and international excluding Asda)
accounted for 54% of Wal*Mart?s incremental sales growth
and roughly 55% of its incremental profit growth.
Furthermore, supercenter operating margins continue to
improve and are now nearing the level of the discount stores.
We estimate that supercenters alone (domestically and
internationally) can drive above average square footage, sales,
and earnings growth for at least the next ten years.
Healthy Vital Signs
? Same Store Sales Should Remain At Top Of
Industry Even If Consumer Spending Slows
Wal*Mart consistently generates among the leading comp
store sales in the general merchandise industry, exceeding
the Merrill Lynch General Merchandise Index in 22 of the
past 24 months. With 7.6% comps over the last twelve
months, Wal*Mart trails only Costco in our general
merchandise group. This strong performance has been
helped by supercenter comps, which continue to
outdistance discount store comps. Strong supercenter
comps were driven by double-digit food comp gains. The
comp gains have been generated by a strong rise in
average ticket price. While the robust comp store sales
numbers could decline as consumer spending slows from
its torrid pace, Wal*Mart should continue to generate
industry leading same store sales.
? Gross Margin Continues To Improve
Despite the competitiveness of the discounting industry,
Wal*Mart has managed to consistently improve its gross
margin since the end of 1996 while still remaining the
industry pricing leader. The gross margin improvement
comes from two types of mix changes: (1) higher margin
discount, supercenter and international stores are growing
more rapidly than the lower margin Sam?s Clubs and
McLane?s Wholesale divisions and (2) more sales of
higher margin products placed on highly visible ?price
roll-backs.? Roll-backs accounted for $10 billion in sales,
or 9% of Wal*Mart store sales (discount and supercenter)
in 1999, up from $8 billion in 1998 and $6.8 billion in
1997. Furthermore, gross continues to improve at
supercenters, where it is now nearing levels of the discount
stores. Gross has also benefited from sales of higher
margin apparel, and continued improvement in markdowns
and shrink. We expect the rising gross margin trend to
continue over the next four quarters, but at a slower rate.
? SG&A Up In Fourth Quarter, But Steady
After five years of increasing expense ratio as a result of a
shift in mix toward higher expense discount stores and
supercenters, SG&A ratio has stabilized at 16.3% over the last
four quarters and still remains well below the discount store
industry average. SG&A was pressured in the fourth quarter
by increasing labor costs and an uneven pattern of sales,
which made scheduling labor efficiently extremely difficult.
We expect the continued mix shift and the higher expense at
Asda to be partially offset by strong sales leveraging expenses
and company-wide focus on cost-cutting, leaving expense
ratio roughly 10 basis points higher in 2000.
? EBITDA Continues To Improve
The EBITDA margin improvement has been partially offset
by a shift in mix to supercenters, which have slightly lower
EBITDA margin. The results are slightly skewed by a change
in accounting method that allocated a larger percentage of
corporate expenses to each division. Sam?s EBITDA margin
should continue to make slow but steady improvement as
sales remain strong and operating earnings improve. |
