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Wednesday, June 16, 2010

Why Wal-Mart Is Still a Growth Company

Wal-Mart Stores Inc. (WMT) has perhaps the largest “army” in the world when it comes down to people in uniform. With 2.1 million employees, 700,000 of which are employed internationally, Wal-Mart no doubt represents a centerpiece of the global economy. However, this giant is still growing and to no surprise, quite successfully.

The discount retail business only allotted Wal-Mart a 3.5% profit margin for the fiscal year ended Jan 31, 2010; however, the company returned 21% to shareowners’ equity. This indicates that Wal-Mart effectively leverages its cost-efficient structure and distribution capability to achieve very high asset and inventory turnovers. In fact, management even measures its performance by Wal-Mart’s cost structure, as the most recent Form 10-K states,

We believe growing operating income at a faster rate than net sales growth is a meaningful measure because it indicates how effectively we manage costs and leverage operating expenses. Our objective is to grow operating expenses at a slower rate than net sales.

From 2001 to 2010, net sales increased an average of approximately 11% annually while operating income grew an average of 15% annually. From this metric alone, it seems that Wal-Mart’s management is meeting its operational goals.

Moreover, the Wal-Mart growth story has yet begun. Currently, Wal-Mart is harnessing growth by expanding its geographic reach through its Asda discount chain subsidiary in the United Kingdom. In addition, Wal-Mart continues to move into grocery retail. The company derives 51% of all net sales from grocery already, while continuing to convert more discount stores to supercenters in order to widen its grocery reach. Wal-Mart’s Neighborhood Market, which began in 1998, also already has 158 stores and only a few closures in the twelve year period.

Wal-Mart is one of the world’s most powerful and largest retailers. However, there is more room to grow as they only operate 434 stores in Brazil and 279 in China. Perhaps India, where Wal-Mart operates just one store, will be the next focus for even more expansive growth.

Disclosure I am long WMT shares.

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