2006 winter walmart

LAST UPDATE: February 25, 2006

SECTOR: Consumer StaplesINDUSTRY: RetailCONTACT: 702 Southwest 8th Street

Bentonville, AR 72716 (479) 273-4000 (479) 273-4053

Web: www.walmart.com

BASIC INFORMATIONCurrent Price: $45.45Market Cap (Mil): $189,260.30Shares Outstanding (Mil): 4,163.49 Average Volume: 13,698,60052 Week Low: $42.3152 Week High: $53.49Latest Dividend: $0.1560-Month Beta: 0.85EPS: $2.68P/E: 16.95P/E/G Ratio (5-Yr. Expected): 0.98P/E (1-Yr. Fwd): 13.61P/B: 3.58P/S: 0.61P/CF: 9.62

Wal-Mart Stores, Inc. (WMT) February 25, 2006HoldWMT: Competitive and Financial AnalysisBy: Ryan Hummer

Company Profile

Wal-Mart Stores, Inc. (Wal-Mart) operates retail stores in various formats worldwide. The Company organizes its business into three principal segments: Wal-Mart Stores, SAM'S CLUB and International. The Wal-Mart Stores segment is the largest segment of Wal-Mart's business, accounting for 67.3% sales during the fiscal year ended January 31, 2005 (fiscal 2005). The segment consists of three different retail formats, all of which operate in the United States. The Company's SAM'S CLUB segment consists of membership warehouse clubs that operate in the United States, and accounts for 13% of fiscal 2005 sales. The international segment consists of retail operations in eight countries and Puerto Rico, and generated 19.7% of Wal-Mart's fiscal 2005 sales. In addition, the Company owns an unconsolidated minority interest of approximately 37% of The Seiyu, Ltd., a retailer in Japan.

Summary

I assign WMT a one-year price target of $46.00 based on its competitive position within the retail industry, current industry trends, and strategy to grow both domestic and international sales. The following are key assumptions underlying my valuation:

There is a strong possibility that consumer spending could slow substantially in the near term as many U.S. consumers have been financing their consumption at least in part by borrowing against the equity in his or her home. Such consumers have refinanced using adjustable rate mortgages. This financial trend combined with the rising interest rate environment will likely slow consumer spending substantially. Present-day low U.S. consumer savings rates could also hamper future consumer spending in the future.

Despite WMT’s position as the largest retailer in the world, its latest sales and earnings growth rates (FY2006) have declined dramatically. Sales grew at 9.4% in FY2006 compared to sales growth of 11.3% last year, while earnings growth slowed from 13.4% in FY2005 to 9.4% this past year.

http://www.citigroup.com/

The Consumer Staples Sector and Retail industry are fairly valued when considering the sector and industry’s P/E, P/S, P/CF, and P/BV ratios (especially relatively to the S&P 500).

Three valuation methods: Free Cash Flow, Dividend Discount Model, and Comparable Valuation Ratio Technique produce consistent values per share to give WMT a one-year price target of $46.00.

Company Overview

Introduction

As of January 31, 2005, WMT operated 1,353 Discount Stores, 1,713 Supercenters, 551 SAM’S CLUBs and 85 Neighborhood Markets in the United States. As of January 31, 2005, the Company operated units in Argentina (11), Brazil (149), Canada (262), Germany (91), South Korea (16), Mexico (679), Puerto Rico (54) and the United Kingdom (282). WMT also operated 43 stores through joint ventures in China as of January 31, 2005. Additionally, WMT recently acquired Seiyu which operates approximately 403 stores throughout Japan and has contributed to WMT’s growing Asian presence. Much of the Company’s international growth in recent years has been due to acquisitions of existing operations in various countries. The three most notable acquisitions include: 1) the Company’s December 2002 purchase of Supermercados Amigo, Inc. (“Amigo”), a supermarket chain located in Puerto Rico with 37 supermarkets at the time of the acquisition; 2) the Company’s February 2004 purchase of Bompreço S.A. Supermercados do Nordeste (“Bompreço”), a supermarket chain in northern Brazil with 118 hypermarkets, supermarkets and mini-markets; and as previously mentioned, Company’s FY2005 acquisition of a 50% stake in Seiyu, a Japanese Retailer with over 403 stores throughout Japan.

As of January 31, 2005, the Company employed approximately 1.7 million Associates worldwide, with approximately 1.3 million Associates in the United States and approximately 410,000 Associates in foreign countries.

Industry Segments 1

WMT is organized into three operating segments: Wal-Mart Stores, SAM’S CLUB, and International. The Wal-Mart Stores segment includes Discount Stores, Supercenters and Neighborhood Markets in the United States as well as Walmart.com. The SAM’S CLUB segment includes the warehouse membership clubs in the United States as well as samsclub.com. The International segment consists of operations in Argentina, Brazil, Canada, China, Germany, Mexico, Puerto Rico, South Korea and the United Kingdom.

Each operating segments’ business is somewhat seasonal. Generally, the highest volume of sales occurs in the fourth fiscal quarter, which includes the holiday season, and the lowest volume occurs during the first fiscal quarter.

Wal-Mart Stores Segment

The Wal-Mart Stores segment had net sales of $191.8 billion, $174.2 billion and $157.1 billion for the fiscal years ended January 31, 2005, 2004, and 2003, respectively. The sales revenue is well diversified

1 Wal-Mart Stores, Inc. FY2005 10-K

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throughout the country as no single Discount Store, Supercenter or Neighborhood Market location accounted for as much as 1% of total Company sales or net income during the most recent fiscal year. Wal-Mart Discount Stores operate in all 50 states, Supercenters in 45 states and Neighborhood Markets in 14 states. The Discount Stores range in size from 30,000 square feet to 220,000 square feet, with the average size of a Discount Store at approximately 100,000 square feet. Supercenters range in size from 100,000 square feet to 261,000 square feet, with the average size of a Supercenter falling at approximately 187,000 square feet. Neighborhood Markets range in size from 38,000 square feet to 55,000 square feet, with the average size being approximately 43,000 square feet.

Wal-Mart Discount Stores and the general merchandise area of Supercenters carry apparel for women, girls, men, boys and infants, domestics, fabrics and notions, stationery and books, shoes, housewares, hardware, electronics, home furnishings, small appliances, automotive accessories, horticulture and accessories, sporting goods, toys, pet food and pet accessories, cameras and supplies, health and beauty aids, pharmaceuticals, jewelry and optical and provide photo processing services. In addition, WMT’s stores offer an assortment of grocery merchandise. The grocery assortment in the Supercenters consists of a full line of grocery items including meat, produce, deli, bakery, dairy, frozen foods and dry grocery. Most of the Discount Stores carry a limited assortment of dry grocery merchandise while a number of the larger Discount Stores in some markets carry a broader assortment of grocery items, including perishable items. Neighborhood Markets are generally organized into departments such as: dry grocery, meat, produce, deli, bakery, dairy, frozen foods, pharmaceuticals, photo processing, health and beauty aids, household chemicals, paper goods, general merchandise and pet supplies. Nationally advertised merchandise accounts for a significant portion of sales in the Wal-Mart Stores segment. WMT also market lines of merchandise under private-label store brands including “Sam’s Choice,” “One Source,” “Great Value,” “Everstart,” “Everactive,” “Ol’ Roy,” “Puritan,” “Equate,” “No Boundaries,” “George,” “Athletic Works” and “Kid Connection.” The Company also markets lines of merchandise under licensed brands, some of which include “Faded Glory,” “General Electric,” “Disney,” “Catalina,” “McDonald’s,” “Mary-Kate and Ashley” and “Starter.”

During the fiscal year ended January 31, 2005, sales in Discount Stores and Supercenters (which are subject to seasonal variance) by product category were as follows:

CATEGORY

PERCENTAGEOF SALES

Grocery, candy and tobacco 28%Hardgoods 19%Softgoods and domestics 16%Pharmaceuticals 9%Electronics 9%Health and beauty aids 7%Sporting goods and toys 6%Stationery and books 3%Photo processing 1%Jewelry 1%Shoes 1% 100%

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SAM’S CLUB Segment

The SAM’S CLUB segment had net sales of $37.1 billion, $34.5 billion and $31.7 billion for the fiscal years ended January 31, 2005, 2004 and 2003, respectively. The SAM’s Club segment is also well diversified as no single club location accounted for as much as 1% of total Company sales or net income during the most recent fiscal year. WMT operates SAM’S CLUBs in 48 states. Facility sizes for SAM’S CLUBs generally range between 70,000 and 190,000 square feet, with the average SAM’S CLUB facility at approximately 128,000 square feet.

SAM’S CLUB offers bulk displays of brand name merchandise, including hardgoods, some softgoods, institutional-size grocery items, and selected private-label items under the “MEMBER’S MARK,” “BAKERS & CHEFS” and “SAM’S CLUB” brands. Generally, each SAM’S CLUB also carries software, electronics, jewelry, sporting goods, toys, tires, stationery and books. Most clubs have fresh departments, which include bakery, meat, produce, floral and Sam’s Cafe. Additionally, a significant number of its clubs offer photo processing, pharmaceuticals, optical departments and gasoline stations. During the fiscal year ended January 31, 2005, sales in the SAM’S CLUB segment, which are subject to seasonal variance, by product category were as follows:

CATEGORY

PERCENTAGEOF SALES

Food 31%Sundries 28%Hardgoods 19%Service Businesses 16%Softgoods 6% 100%

SAM’S CLUBs are membership only, cash-and-carry operations. Limited credit facilities are available, including the “SAM’S Direct” commercial finance program and “Business Revolving Credit” available to qualifying business members. WMT provides “Personal Credit” program available to qualifying club members and accept the Discover Card in all clubs. Credit extended to members under these programs is without recourse to the Company. Typical club members include business owners and operators. Individuals who are not business owners can become “Advantage” members by paying a membership fee. In fiscal 2005, business members paid an annual membership fee of $30 for the primary membership card with a spouse card available at no additional cost. In addition, business members can add up to eight business associates for $30 each. The annual membership fee for an individual “Advantage” member is $35 for the primary membership card with a spouse card available at no additional cost. The SAM’S CLUB PLUS Membership program offers additional benefits and value on services. The annual membership fee for a PLUS Member is $100.

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International Segment

WMT’s International segment is comprised of operations through wholly-owned subsidiaries in Argentina, Canada, Germany, Puerto Rico, South Korea, and the United Kingdom; operations through majority-owned subsidiaries in Brazil and Mexico; and operations through joint ventures in China. Additionally, Wal-Mart has an unconsolidated 37% minority interest in the Japanese retailer, Seiyu (as of FY2005). The International segment’s net sales for the fiscal years ended January 31, 2005, 2004 and 2003, were $56.3 billion, $47.6 billion and $40.8 billion, respectively. Again, the sales are diversified as no single unit accounted for as much as 1% of total Company sales or net income during the most recent fiscal year. Operating formats vary by country, and include Discount Stores in Canada and Puerto Rico; Supercenters in Argentina, Brazil, China, Germany, South Korea, Mexico, Puerto Rico and the United Kingdom; SAM’S CLUBs in Brazil, Canada, China, Mexico, and Puerto Rico; Superamas (traditional supermarket), Bodegas (combination discount and grocery store), Suburbias (specialty department store) and Vips (restaurant) in Mexico; Todo Dias (combination discount and grocery store) and Balaios (discount food and general merchandise store) in Brazil; Neighborhood Markets (traditional supermarkets) in China; ASDA stores (combination grocery and apparel store) and George stores (apparel store) in the United Kingdom; and Amigo supermarkets in Puerto Rico.

The merchandising strategy for the International operating segment is similar to that of WMT’s operations in the United States in terms of the breadth and scope of merchandise offered for sale. While brand name merchandise accounts for a majority of sales, several store brands not found in the United States have been developed to serve customers in the different markets in which the International segment operates.

Macro-economic, Sector, and Competitive Analysis

Macro-economic Analysis

Introduction

WMT falls within the consumer staples sector which is typically a defensive or counter-cyclical sector. WMT operates as a discount (food, drug, and merchandise) retail company that is renowned for its ability to offer consumers “every day low prices”. WMT will typically see increased sales during downturns in the economic cycle (and throughout a recession), because consumers divert their spending from luxury goods to consumer staples that are necessary for every-day life. The demand for staples that WMT sells such as groceries, clothing, and pharmaceutical drugs is inelastic, that is consumers will continue to purchase these goods in comparable quantities regardless of the state of the economy.

Many consumer staples equities move inversely to the market (S&P 500), and therefore have low market betas (around 0.50). WMT historical stock prices have not displayed the typically negative correlation. On

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the following page is a stock price chart of WMT compared to the S&P 500 (SP5A) over the past ten years and a regression analysis output:

WMT Price Vs. SP5A Price REGRESSION SUMMARY OUTPUT

Regression StatisticsMultiple R 0.585140785R Square 0.342389739Adjusted R Square 0.341125104Standard Error 0.034424929Observations 522

ANOVAdf SS MS F Significance F

Regression 1 0.320849671 0.320849671 270.7419191 2.79716E-49Residual 520 0.616239367 0.001185076Total 521 0.937089038

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%Intercept 0.001703865 0.001511081 1.12758022 0.260017256 -0.001264708 0.004672438WMT Market Beta 1.030748765 0.062643364 16.45423712 2.79716E-49 0.907683631 1.153813898

Regressing WMT stock price returns against the SP5A price returns shows that WMT’s stock price is positively correlated with the market price movements. The output gives an adjusted R2 of 34.0%, which means the SP5A’s price movements explain 34.0% of WMT’s stock price variation. The regression was performed over a period of ten years and yields a 1.03 (10-year) market beta for WMT. In my analysis throughout this report, I will use the 60-month market beta of 0.85, because using the latest market data should improve the accuracy of my projections. Most equity stocks within the consumer staples sector have 60-month betas well below 0.85 and 10-year betas well below 1.03 (i.e., BUD’s 60-month beta is 0.55). In other words, while typical consumer staple equities move conversely to the market, WMT moves coincidentally with the market.

Consumer Spending

Since WMT does not exhibit the typical counter-cyclical stock price behavior that most firms within the consumer staples sector exhibit (or is less defensive), adverse shocks to the market will presumably lead WMT’s stock price to fall. One such potential shock that would be detrimental to the retail industry in general is a sudden, unexpected slowdown in consumer spending and consumption.The charts to the right show that consumer spending and consumption has been increasing steadily over time taking into account seasonality.

History (see the charts to the right) has shown that it does not pay to bet against the U.S. consumer. On the other hand, there are new factors that have a consequential impact on consumer spending that we must now consider including: Adjustable Rate Mortgages and Consumer Indebtedness and importantly, how the two factors relate and how their affects can potentially slowdown consumer spending in the near future. Adjustable Rate Mortgages (ARMs) provide an alternative for the consumer to finance his or her home and the use of ARMs has grown in popularity throughout the past five years, primarily due to

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extremely low interest rates. ARM interest rates are typically priced off of financial instruments with shorter maturities that match the length of the initial adjustment period2. Since the U.S. Fed Funds rate reached a low at 1.00% in FY2002, the FED has increased rates a quarter point at a time to where we stand now at 4.50%. This scenario has caused ARM interest costs to rise. Below is a chart3 that shows the interest rate used to compute interest cost for 1-year ARMs:

Since there is evidence that many consumers financed or refinanced their homes with ARMs through the past five years (ARMs accounted for approximately 30% of jumbo mortgages in 3Q05 down from about 40% a year earlier4), it is reasonable to believe the rising interest rate environment, in which we are currently experiencing, will slow consumer spending. Many analysts are projecting the FED to raise the Fed Funds rate to 4.75% by April of this year, where they expect it to remain at least until July5. Given that nearly half of all consumer debt and about one-quarter of total mortgage debt is currently based on adjustable rates6, the question is, will this additional expected rate hike be enough to rein in spending, which will intern slow WMT’s sales growth in the U.S.?

Furthermore, personal savings as a percentage of disposable personal income has dipped down to negative levels (-0.5% for FY2005: see table7 above and to the right) for the first time since 1933 when the country was struggling to cope with the Great Depression. This data indicates that the U.S. consumer has dipped into his or her savings to fuel consumer spending growth in the past year. Much of this savings may have originated from the consumer borrowing against the equity in his or her home through refinancing with an

2 MortgateDailyNews.com. “Freddie Mac Issues Annual Adjustable Rate Mortgage Survey”. http://www.mortgagenewsdaily.com/172005_Freddie_Mac_Adjustable_Rate_Mortgage_Survey.asp3 HSA online: http://library.hsh.com4 Simon, Ruth. “A Trendy Mortgage Falls From Favor”. The Wall Street Journal. November 29, 2005. pg D15 http://www.forecasts.org/fedfunds.htm6 Valueline. Retail Store Industry Report. February 10, 20067 U.S. Department of Commerce

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*Financial obligations include debt service, rent payments, auto lease payments, homeowners’ property tax payments, and homeowners’ insurance payments

WMT Revenue Vs. Homeowner Indebtedness

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ARM. When you take this together with the rising interest rate environment, it is very realistic that U.S. consumer spending could slow at a material rate.

To further investigate the effects of financial strain on the U.S. consumer and its potential effects on WMT’s sales, I performed a series of regression analyses by regressing WMT’s sales growth to various economic data. The best predictor of WMT’s sales growth with regard to a “consumer debt ratio” was the “Homeowner Financial Obligation Ratio”. The regression results (see chart to the left) did show a negative relationship, this means that as U.S. homeowners

augment debt, WMT sales are adversely impacted. Although the inverse relationship between WMT’s qoq Revenue Growth and Homeowner’s Financial Obligation Ratio supports the claim that WMT is not the typically counter-cyclical consumer staple, the R2 is a meager 26%. Out of the various “consumer debt ratios” I used to regress WMT’s sales growth, this was the closest relationship I found (e.g., the highest R2).

Sector& Industry Valuation

Sector Valuation

Since the economy has been in the recovery stage of the economic cycle for the last two to three years, investors have pulled their money out of large-cap consumer staple stocks like WMT and have found opportunity in other sectors, such as energy. With most experts forecasting FY2006 GDP growth in the neighborhood of 3.0%8 the stock market (SP5A) is expected to rise anywhere from 4% to 10%. It is probable that money will continue to flow out of consumer staples into cyclical sectors where opportunity for stock price appreciation may be greater. As a result of people investing in other sectors aside from consumer staples, the consumer staples sector as a whole is approximately fairly-valued based on valuation ratios: P/E, P/S, P/CF, P/BV.

8 Valueline. Retail Store Industry Report. February 10, 2006.

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Consumer Staples Relative to SP5A P/E P/S P/CF P/BV

High 1.27 0.98 1.54 2.20 Low 0.69 0.50 0.79 1.07

Mean 1.07 0.80 1.26 1.76 Current 1.21 0.74 1.16 1.38

The charts and data above show that the consumer staples index is currently trading at a premium relative to the market (SP5A) when considering each index’s forward P/E ratio. The forward relative P/E ratio of consumer staples index is trading well above its ten-year average of 1.21. When analyzing the other three ratios, we find that the consumer staples index is trading close to its ten-year average. It depends on which valuation ratio the investor considers most valuable, but regardless, this analysis gives us evidence that the consumer staples sector is fairly- to over-valued relative to its long-run (ten-year) average.

Industry Valuation

WMT operates within the Retail Industry, which is traditionally a difficult industry in which to increase earnings mainly because margins are slim to due intense competition. Other firms that operate within the value-chain, both up-stream (the manufacturer) and down-stream (the consumer) have the power to extract the majority of the value created in the value-chain. Because growth within the retail industry is limited, the market typically assigns lower valuation ratios (P/E, P/S, P/CF, P/BV) to retail firms. Like the consumer staples of which WMT is a part, the retail industry is fairly-valued based on the aforementioned relative valuation ratios:

Retail Industry Relative to SP5A P/E P/S P/CF P/BV

High 4.13 0.48 3.18 1.30 Low 0.97 0.21 0.87 0.58

Mean 1.65 0.34 1.41 0.97 Current 1.39 0.34 1.14 1.02

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Notice the break in the relative forward P/E ratio chart is the result of not meaningful P/E ratios during that period due to very low earnings (extremely low EPS in the denominator creates very high and, hence, not meaningful P/E ratios). The data shows that the Retail Industry is trading close to its average for all four valuation rations and therefore can be considered fairly-valued.

Summary

The Consumer Staples Sector and Retail Industry valuations support my valuation of WMT at “HOLD”. If both WMT’s sector and the industry are fairly valued, there is a higher probability that WMT is fairly valued.

Competitive Analysis: Five Forces & Current Strategy

Five Forces Analysis

WMT operates in the retail industry as the preeminent low-cost retailer. WMT’s strategy is built around its pricing philosophy of providing “EDLP- Everyday Low Prices”. WMT’s broad assortment of merchandise that provides one-stop shopping and high in-stock levels provide confidence to customers that WMT will have what they need, and its long operating hours allow customers to shop at their convenience. These qualities provide WTM with an additional competitive advantage.

In order to determine whether or not WMT maintains sustainable competitive advantages within the retail industry as a low-cost retailer, it was necessary to conduct a five forces analysis.

Barriers To Entry (BTE)

Immediate BTEs are relatively low since 1) opening a retail store is relatively low-capital intensive, 2) fixed costs are low, and 3) specific knowledge of operating a retail store is realistically obtainable. Evidence of this typically exists in your local strip mall, where proprietary retail operations are common. On the other hand, when a Wal-Mart store opens in a neighborhood, smaller proprietary retail operations are frequently driven out of business, because WMT has the ability to set prices below the long-run average operating cost of a smaller proprietary retailer. WMT is able to do this because, as the largest retailer in the world, its long-run average operating cost is much lower due to economies of scale it realizes.

Supplier Power

Supplier power is fairly nonexistent. As the largest retailer in the world, WMT maintains a tremendous amount of buyer power to demand volume discounts from suppliers. In many cases, WMT’s business represents a large percentage of any one supplier’s business, further strengthening WMT’s ability to demand discounts from its suppliers.

Supplier power from a human capital standpoint is also very low since most positions within WMT can be classified as unskilled labor positions. Furthermore, WMT does not cater to labor unions and no union is represented in WMT’s business.

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WMT avoids distribution hold-up by operating its own distribution centers. WMT is well known for its proprietary “pull” inventory management system that allows it to avoid inventory build-up and shortages. This system can help mitigate any supplier power as well. Additionally, during fiscal 2005, approximately 81% of the Wal-Mart Stores segments’ purchases of merchandise were shipped from Wal-Mart’s 99 distribution centers, of which 37 are general merchandise distribution centers, 34 are grocery distribution centers, seven are clothing distribution centers and 16 are specialty distribution centers. The balance of merchandise purchased was shipped directly to stores from suppliers. In addition to serving the Wal-Mart Stores segment, some of the grocery distribution centers also serve the SAM’S CLUB segment for perishable items.

Buyer Power

The end consumer, WMT’s customer, maintains the ultimate buyer power. WMT’s pricing philosophy is to provide “Everyday Low Prices” to consistently draw consumers who trust WMT will provide the lowest price available and concurrently avoid erratic price changes due to promotional activity. By being the most consistent and lowest cost retailer in the market, WMT business model is appealing to the end consumer.

Online shopping also strengthens the end consumers’ buyer power by giving them quick and easy access to pricing information on many comparable goods sold at various retail outlets. To this point, there is not significant evidence that online sales have harmed retail store sales materially.

Substitutes

A major substitute for shopping at retail stores is shopping online. Trends show that online shopping is growing rapidly year-over-year. WMT does provide online shopping on www.walmart.com and the threat of online shopping cannibalizing sales has not been a significant factor to this point. It is possible that once WMT saturates the market with its retail stores, online shopping could become detrimental to its store sales.

Competition

Competition is fierce within the retail industry as evidenced by notoriously tight margins: Ave. Gross Margin (Retail Industry/Market: 26.5% vs. 48.3%); Ave. Operating Margin (Retail Industry/Market: 8.5% vs. 12.6%); Ave. Net Margin (Retail Industry/Market: 3.4% vs. 7.0%)9. WMT competes within many different retail sub-industries: discount, department, drug, variety and specialty stores and supermarkets, many of which are national chains. WMT also compete with other retailers for new store sites. As of January 31, 2005, the Wal-Mart Stores segment ranked first, based on net sales, among all retail department store chains and among all discount department store chains.

Summary

WMT maintains a strong, sustainable competitive advantage in a highly competitive industry based its lowest-cost, one-stop-shop business model. WMT’s realizes many cost advantages through its tremendous buyer power which is generated by its sheer size (volume of business). Unlike many other Fortune 500 companies, WMT has managed to avoid the problems that labor unions present for earnings growth by strategically avoiding labor unions all together. WMT’s business model works with the end consumers’

9 Hoovers Online. Available at http://premium.hoovers.com

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http://www.walmart.com/

demand for consistent, low-cost retail products and helps to mitigate buyer power. Meanwhile, WMT is consistently able to eliminate competition though setting low prices and subsequently driving competition out of business.

Current Strategy 10

Wal-Mart has started to drive sales by attracting the “selective customer” – that is, customers that shop at Wal-Mart for basics but do not see it as an alternative for home, apparel or electronics. For example, Metro 7 continues to perform well and Wal-Mart plans to expand the number of stores that carry this brand to 1,500 by September 2006.

Wal-Mart has reorganized their field operations to allow an Associate to take ownership and improve customer service. Wal-Mart will change its field organization to better improve the customer experience. This includes changes related to:

1) Store cash office redesign2) Front-end service3) Customer needs scheduling4) Positive associate experience and store manager routines5) Merchandise flow6) Increasing customer touch points

This structure will enable Wal-Mart to extract more market knowledge from the customer, which should help it improve profitability.

As part of the new structure, Wal-Mart announced several changes at its year-beginning meeting, including a completely redesigned compensation program which rewards all store associates based on achieving their individual store goals, including sales and return on inventory. With this planning process, the Company hopes to significantly improve execution and close the gap between strategy and performance.

As Wal-Mart makes progress with its in-store process redesign, the Company should continue to see improvements in its cost structure. Wal-Mart is also upgrading existing stores to provide customers with an environment that looks and feels like the Company’s most recent prototypes (similar to the one opened last summer in Rogers, Arkansas). Wal-Mart has undertaken a very aggressive remodel program that will impact 1,800 stores within the next 18 months. This remodel program is being executed by market and will focus on five areas: home, apparel, electronics, food and the restrooms. In 300 stores, Wal-Mart will introduce a new concept for its pharmacies that will have pharmacists more accessible to customers.

The Company has a TV ad campaign that illustrates to consumers that they can find what they need at low prices. The Company has also made changes to its printed circular advertisements. The Company is increasing the number of circulars to 23 this year, up from 12 last year, but the overall page count will be reduced (and as a result, the associated expense is not expected to increase).

10 Tang, Charmaine; Weinswig, Deborah. “WMT: 4Q05 EPS Review: Lackluster Sales Saved by SG&A and Gross Margin”. Citigroup. February 21, 2006.

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Wal-Mart has made significant investments in its marketing organization led by John Fleming. His team now includes Stephen Quinn, Senior Vice President Marketing, formerly Chief Marketing Officer at Frito Lay; Julie Roehm, Senior Vice President of Marketing & Communications, formerly Director of Marketing Chrysler; Robert Atencio, formerly Director of Insight & Consumer strategy for Frito Lay; and Steve Bertschy, Vice President Category Marketing and who formerly was the Senior Vice President and Chief Marketing Officer at Specialty Brands. Another example here Wal-Mart is investing in people is in operations. The Company tries to grow talent internally, and it has developed a detailed selection process to identify the best talent and is providing formal training to build the skills required in these new and expanded roles. Wal-Mart has also complemented its senior leadership teams and operations by offering these new roles to high potential senior executives from other areas of the Company, such as merchandising and logistics. Additionally, the company has also brought in external talent to complement internal promotions. This has been particularly important, as the Company decentralizes its field organization, placing the business units' key leadership teams in the market that they are responsible for.

During 4Q05, Wal-Mart continued its international growth through acquisitions. The company acquired the Sonae retail operations in Southern Brazil and increased its ownership of Seiyu to 53%, up from 42% (at 3Q05-end) resulting in the consolidation of Seiyu in Wal-Mart’s financial statements beginning in January 2006. Wal-Mart is now in 15 countries and expects that number to increase. The company acquired 545 new international stores and 50,000 associates in just one week through acquisition. Wal-Mart plans to build or relocate another 220 international stores in 2006.

Accounting Analysis

It is necessary to conduct an accounting review of WMT’s financial statements before developing projections and a valuation of its current and future operations. There were a few necessary adjustments to make to WMT’s current financial statements in order to paint a more accurate picture of its financial standing. The adjustments were made to WMT’s Balance Sheet and Income Statement to account for its off-balance sheet debt obligations, namely its operating leases and contingency exposures. See Exhibit VI on page 29 for pro forma financial statements that take into account these adjustments.

Operating Leases

In order to get a more complete picture of WMT’s financial standing by analyzing financial measures such as ROE, it was appropriate to capitalize WMT’s off-balance sheet financing. Off-balance sheet obligations mainly took the form of operating leases. In addition to operating leases mentioned in WMT’s 10-K, WMT also mentioned that leases amounting to $30M in annual expenses were (at the time) being finalized, but not included in the operating lease table given in its 10-K. On the next page is the operating lease schedule provided in WMT’s 10-K.

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Fiscal year Leases2006 7302007 7002008 6262009 5782010 530Thereafter 5,908Total minimum rentals 9,072

In order to capitalize the operating leases, I needed to determine the present value of the future total minimum operating rentals. I also added in an additional $30M annually for new leases mentioned in the 10-K. I determined an average annual operating lease expense to be $633M by averaging operating lease expense numbers given from FY2006 to FY2010. The weighted-average effective interest rate on long-term debt was given in the 10-K to be 4.08%. With an average annual operating lease expense of $633M and a total of $9,072, the average life over which the present value of the minimum operating rentals would be amortized was approximately fourteen years ($9,072M/$633M). See graphic below for present value calculations:

Average Annual Op. Lease Expense (FY06-FY10) 633Weighted-Average Effective Interest Rate on LT Debt 4.08%

Projected Off-Balance Sheet Obligations Operating Leases Additional Proj. Leases Present Value2006 730 30 760.002007 700 30 701.382008 626 30 605.582009 578 30 539.262010 530 30 477.222011 633 30 542.682012 633 30 521.412013 633 30 500.972014 633 30 481.332015 633 30 462.462016 633 30 444.332017 633 30 426.922018 633 30 410.182019 633 30 394.102020 213 30 138.82

Total $9,072 $450 $7,407

I added the present value of WMT’s operating leases of $7,407M to its FY2006 balance sheet under fixed assets and capital leases. Furthermore, when capitalizing leases, one must not only add the present value of the assets (PV of minimum rent payments) to the balance sheet, but must also account for the affects on the income statement.

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Operating Lease Capitalization Schedule

FY Beg. Principal Total Pmt Principal Pmt Interest Pmt Ending Principal Depreciation2006 $7,116 $663 $373 $290 $6,744 $5082007 $6,744 $663 $388 $275 $6,356 $5082008 $6,356 $663 $404 $259 $5,952 $5082009 $5,952 $663 $420 $243 $5,532 $5082010 $5,532 $663 $437 $226 $5,095 $5082011 $5,095 $663 $455 $208 $4,640 $5082012 $4,640 $663 $474 $189 $4,166 $5082013 $4,166 $663 $493 $170 $3,673 $5082014 $3,673 $663 $513 $150 $3,160 $5082015 $3,160 $663 $534 $129 $2,626 $5082016 $2,626 $663 $556 $107 $2,070 $5082017 $2,070 $663 $579 $84 $1,491 $5082018 $1,491 $663 $602 $61 $889 $5082019 $889 $663 $627 $36 $262 $5082020 $262 $273 $262 $11 $0 $633

WMT’s annual rent expense, after capitalizing its operating leases, grows to $1,186M annually. This figure is larger than the annual operating lease expense of $730M in FY2006. The expense on the income statement is higher after capitalizing the operating leases because now WMT would have to charge an additional depreciation expense since the assets are now on its balance sheet (see Exhibit VI on page 29 for pro forma balance sheet).

Other Concerns

Aside from operating leases WMT, does not have many accounting issues of which an investor needs to be aware. The only other minor concerns are potential liabilities which WMT may be subject to pay in the future due to litigation and contingency agreements with affiliates and suppliers. There are currently multiple lawsuits currently being tried in the U.S. court system. WMT was unable to estimate financial impacts of such lawsuits. WMT mentions that it has contracts in place with certain suppliers and affiliates and that, if “unlikely events were to occur,” WMT could be liable to pay out $394M in contingency fees. Specifically, WMT mentions three of these types of contingency contracts, which amounts to the $394M.

Financial Analysis

In order to accurately assess WMT’s financial health, it was necessary to conduct both a time-series analysis and a cross-sectional analysis of its financial ratios that measure the Company’s: 1) Cash Flow, 2) Profitability, 3) Efficiency, 4) Liquidity and, 5) Leverage. See Exhibit VIII on page 30 for a compilation of WMT’s financial ratios.

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Cash Flow

Time-Series Analysis

WMT’s cash flow seems to be healthy and growing (See Exhibit V on page 28 for WMT’s Statement of Cash Flows). WMT’s cash flow from operations (CFO) has seen double-digit growth from FY2002 to FY2006, with one year of negative growth (from FY2004 to FY2005) primarily due to cash outflow in its working capital accounts (mostly due to inventory build-up). From FY2001 to FY2006, Net Income as a percentage of CFO has remained relatively constant ranging from 60% to 68%, aside from FY2004 when NI was 55% of CFO mostly due to slower yoy net earnings growth. Overall cash flow has been positive and fairly steady.

Cross-Sectional Analysis

Since WMT operations span multiple retail industries, I compared WMT to both the retail drug industry and retail department stores. WMT is in the middle of the pack with regards to Free Cash Flow/Total Cash Flow:

Free CF/Company Ticker Total CFSTEIN MART INCORPORATED SMRT 83.56FEDERATED DEPARTMENT STORES INC FD 69.01GOTTSCHALKS INCORPORATED GOT 64.33PENNEY J C INCORPORATED JCP 63.44RITE AID CORPORATION RAD 63.2NORDSTROM INCORPORATED JWN 59.29LONGS DRUG STORES INCORPORATED LDG 49.72DILLARDS INCORPORATED DDS 48.5TARGET CORPORATION TGT 19.71WAL-MART STORES INCORPORATED WMT 14.3WALGREEN COMPANY WAG 9.75KOHLS CORPORATION KSS 6.13JACOBSON STORES INCORPORATED JCBSQ 5.93RETAIL VENTURES INCORPORATED RVI 5.24BON-TON STORES INCORPORATED BONT -9.08CVS CORPORATION CVS -47.42Median 34.11Mean 31.60

FCF is important to investors because it is commonly regarded as the amount of cash generated by operations remaining (after changes in working capital and cap ex) that can be devoted to pay shareholders, both debt-holders and equity-holders.

Profitability


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WMT’s Net Income along with EPS has exhibited double-digit growth since FY2002 until this past year.

Earnings Growth (YOY) 2002 2003 2004 2005 2006Diluted net income per common share 6.4% 20.1% 15.6% 16.4% 11.2%Net Income 6.0% 19.2% 13.8% 13.4% 9.4%

The major contributor to WMT’s net income growth in the future should be its International segment, which has shown substantially increasing growth in its sales and operating margin.

Sales:YOY (QOQ) Growth 2002 2003 2004 2005 2006Wal-Mart Stores 14.1% 12.9% 10.9% 10.1% 9.4%Sam's Club 9.7% 7.8% 8.9% 7.5% 7.2%International 10.5% 15.0% 16.6% 18.3% 11.4%

Operating Margin:Operating Margin 2001 2002 2003 2004 2005 2006

Wal-Mart Store Operating Margin 7.9% 7.3% 7.5% 7.4% 7.4% 7.3%Sam's Club Margin 3.5% 3.5% 3.2% 3.3% 3.4% 3.5%International Margin 3.0% 3.7% 4.9% 5.0% 5.3% 5.3%

Return on Equity (ROE) is an important measure for measuring the return generated on the stockholder’s investment. Below is WMT’s ROE from FY2001 to FY2006. It is broken down into components (using the DuPont Analysis method):

AdjustedROE 2001 2002 2003 2004 2005 2006 2006ProfitabilityROE 20.1% 20.1% 21.4% 21.8% 22.1% 21.9% 21.5%

Net Margin 3.3% 3.1% 3.5% 3.5% 3.6% 3.6% 3.5%Asset Turnover 2.4 2.7 2.6 2.6 2.5 2.4 2.3Leverage Ratio 2.5 2.4 2.4 2.4 2.4 2.5 2.7

WMT’s ROE has been very consistent over the past five years and has grown slightly. Included in “Adjusted 2006” numbers is the capitalization of operating leases and its effects on WMT’s balance sheet and income statement (which are relatively non-material). The only change has come in asset turnover (decreasing from 2.7 in FY2002 to 2.3 in FY2006) and an increase in leverage ratio. This is to be expected given WMT’s asset growth (mainly through debt financing) from its recent international acquisitions and domestic store growth. WMT’s ten-year average ROE is 21.1%, and in the long-run, assuming a mean-reversion scenario, WMT’s ROE should settle around 21.1%.


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On the next page is a comparison chart for the retail industry (drug and department stores) that compare yoy revenue and EPS growth (for the past three years).

Rev Grw EPS Grw Rate Rate ROE

Stock Name Symbol 3yr PTP 3yr PTP Stock Name Symbol T4QBON-TON STORES INCORPORATED BONT 21.7 18.56 NORDSTROM INCORPORATED JWN 26.65CVS CORPORATION CVS 15.23 16.32 WAL-MART STORES INCORPORATED WMT 22.17KOHLS CORPORATION KSS 13.99 9.59 PENNEY J C INCORPORATED JCP 19.32WALGREEN COMPANY WAG 13.43 15.21 WALGREEN COMPANY WAG 18.1TARGET CORPORATION TGT 11.33 19.61 STEIN MART INCORPORATED SMRT 17.76WAL-MART STORES INCORPORATED WMT 10.88 14.39 WAL-MART DE MEXICO SA ADR CL V WMMVY 17.31NORDSTROM INCORPORATED JWN 8.9 46.99 TARGET CORPORATION TGT 17.15RETAIL VENTURES INCORPORATED RVI 5.88 NEG CVS CORPORATION CVS 15.3FEDERATED DEPARTMENT STORES INC FD 5.17 8.62 KOHLS CORPORATION KSS 15.03RITE AID CORPORATION RAD 2.39 NMN FEDERATED DEPARTMENT STORES INC FD 10.9STEIN MART INCORPORATED SMRT 2.38 33 LONGS DRUG STORES INCORPORATED LDG 7.48PENNEY J C INCORPORATED JCP 1.81 67.15 BON-TON STORES INCORPORATED BONT 6.28LONGS DRUG STORES INCORPORATED LDG 1.15 4 GOTTSCHALKS INCORPORATED GOT 4.93GOTTSCHALKS INCORPORATED GOT -0.66 9.77 DILLARDS INCORPORATED DDS 3.89DILLARDS INCORPORATED DDS -2.25 -17.19 RETAIL VENTURES INCORPORATED RVI -22.58JACOBSON STORES INCORPORATED JCBSQ -6.09 NEG JACOBSON STORES INCORPORATED JCBSQ -99.9WAL-MART DE MEXICO SA ADR CL V WMMVY RITE AID CORPORATION RAD NMNMean (not incld. "NM" or "NEG") 8.79 23.04 Mean 4.99Median 5.525 15.21 Median 15.17

The above list is sorted by Revenue Growth and WMT is near the top of the list, but remains below its major competitors in both the retail department store and retail drug industries. It remains in the middle of the pack with regards to EPS growth (a relative measure considering that the calculation depends on weighted-average number of shares outstanding which can be manipulated through share-buyback programs).

WMT’s ROE is high compared to the market (13.4% on average11), but about average for the entire retail industry (20.0%12). Notice that the ROE numbers in the chart above are 4Q05 (in WMT’s case, 4Q06) numbers. Compared to its major competitors, WMT does have a substantially higher ROE. If we again consider a reversion to the mean scenario, we would expect to see WMT’s ROE figure drop to the industry average at about 20.0%.

Efficiency


WMT’s degree of operational efficiency can be measured by calculating its margins: 1) Gross Margin, 2) Operating Margin, and 3) Net Margin. Gross Margin normally measures how efficiently a firm can produce a product, but in this case since WMT is a retailer, gross margin measures the spread WMT makes on the products it sells. Meanwhile, Operating Margin will measure how efficiently it can bring these products to market. Below is a breakdown of WMT’s margins over time.

11 Hoovers Online. Available at http://premium.hoovers.com/12 Hoovers Online. Available at http://premium.hoovers.com/

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Margins 2001 2002 2003 2004 2005 2006Gross Margin (% of Net Sales) 22.4% 22.1% 23.2% 23.4% 23.9% 24.1%Operating Margin

Wal-Mart Store Operating Margin 7.9% 7.3% 7.5% 7.4% 7.4% 7.3%Sam's Club Margin 3.5% 3.5% 3.2% 3.3% 3.4% 3.5%International Margin 3.0% 3.7% 4.9% 5.0% 5.3% 5.3%Other -0.1% -0.3% -0.6% -0.5% -0.5% -0.5%

Total Operating Margin 5.9% 5.4% 5.7% 5.8% 6.0% 5.9%Net Margin 3.3% 3.0% 3.4% 3.5% 3.6% 3.6%

Each of WMT’s three margins is increasing over time. I would expect all margins to increase at a decreasing rate in the future, aside from WMT’s International Segment’s operating margin. I would expect this to near the Wal-Mart Store Segment’s operating margin of 7.3%. Since WMT’s major sales growth comes from the International Segment (a trend which should continue), it is important that WMT International continue to increase its operating margin. This will be the key factor affecting WMT’s overall earnings growth in the near-future.


Below is a chart that compares WMT’s margins to those of its competitors (note, margins are computed five-year averages for each company). WMT stands above average with regards to net margin and EBITDA Margin, which is equivalent to operating margin, but below average when it comes to gross margin. WMT’s margin figures makes sense considering its low-cost retailer strategy -- WMT charges a smaller mark-up, but is more efficient than many of its competitors at bringing products to market, given its aforementioned competitive advantages. WMT’s higher than average operating and net margins make sense given its tremendous, world-leading volume of sales.

Gross EBITDA Net Prof Margin Margin Marg Adj

Stock Name Symbol 5yr Avg 5yr Avg 5yr AvgKOHLS CORPORATION KSS 34.18 12.92 6.31FEDERATED DEPARTMENT STORES INC FD 39.98 13.19 4.53TARGET CORPORATION TGT 34.94 10.11 3.75NORDSTROM INCORPORATED JWN 34.09 10.3 3.61WALGREEN COMPANY WAG 27.08 6.88 3.6WAL-MART STORES INCORPORATED WMT 22.39 7.58 3.47CVS CORPORATION CVS 25.89 6.47 3.09STEIN MART INCORPORATED SMRT 25.18 4.35 1.99PENNEY J C INCORPORATED JCP 35.46 6.41 1.68BON-TON STORES INCORPORATED BONT 36.44 6.19 1.56DILLARDS INCORPORATED DDS 32.73 7.82 1.07LONGS DRUG STORES INCORPORATED LDG 25.45 3.51 1.05GOTTSCHALKS INCORPORATED GOT 35.13 4.34 0.58RETAIL VENTURES INCORPORATED RVI 37.2 1.16 -0.47RITE AID CORPORATION RAD 23.83 1.59 -1.34JACOBSON STORES INCORPORATED JCBSQ -1.58Mean 31.33 6.85 2.06Median 34.09 6.47 1.84

Liquidity


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In order to measure WMT’s degree of liquidity or solvency, I used three ratios: 1) Interest Coverage Ratio, 2) Current Ratio, and 3) Quick Ratio. These three ratios will give an investor insight as to any dangers WMT might run into with regard to having cash on hand to service immediate obligations. I calculated the ratios in the following manner: Interest Coverage Ratio (FCF/Interest Expense); Current Ratio (Current Assets/Current Liabilities); Quick Ratio (Cash and Cash Equivalents plus Accounts Receivable/Current Liabilities).

AdjustedLiquidity 2001 2002 2003 2004 2005 2006 2006Interest Coverage Ratio 15.3 15.7 24.8 31.7 28.7 28.0 22.2Current Ratio 0.92 1.02 0.93 0.91 0.90 0.90 0.89Quick Ratio 0.13 0.15 0.15 0.17 0.17 0.19 0.18

WMT, the largest retailer in the world, has plenty of free cash flow to meet its annual, short-term debt obligations. Its interest coverage ratio increased dramatically from FY2001 to FY2006 an account of WMT’s rapidly growing CFO. Despite the fact that adjustments from capitalizing operating leases brings down the interest coverage ratio from 28.0 to 22.2, it is still a high number and it is evident that WMT does not have much solvency risk at this point.


WMT ranks absolute last for Current Ratio and Quick Ratio with regards to its peers (See chart to the right). This is not a problem for WMT since it holds $6.4B of cash and its CFO was $17.6B (both figures from FY2006). In my opinion, WMT is doing a good thing by maintaining low liquidity ratios, because it forces management to manage WMT’s cash and cash flows efficiently and provides less freedom to squander cash on investments that will decrease the return to shareholders (ROE).

Leverage


WMT’s leverage ratios were not as high as one would expect. As a result of its reasonable debt structure and plush cash flow from operations, WMT continues to maintain an AA S&P credit rating13. I analyzed WMT’s: 1) Leverage Ratio, 2) Debt/Equity, and 3) Long-term Debt/Total Capital.

13 Business Week Online. Available at http://research.businessweek.com

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Current QuickStock Name Symbol Ratio RatioKOHLS CORPORATION KSS 2.5 1.1PENNEY J C INCORPORATED JCP 2.44 1.48BON-TON STORES INCORPORATED BONT 2.38 0.66DILLARDS INCORPORATED DDS 2.19 0.49STEIN MART INCORPORATED SMRT 2.19 0.56GOTTSCHALKS INCORPORATED GOT 2.18 0.15NORDSTROM INCORPORATED JWN 1.92 0.78WALGREEN COMPANY WAG 1.86 0.55RITE AID CORPORATION RAD 1.8 0.39FEDERATED DEPARTMENT STORES INC FD 1.75 1TARGET CORPORATION TGT 1.69 0.89RETAIL VENTURES INCORPORATED RVI 1.66 0.1CVS CORPORATION CVS 1.63 0.44LONGS DRUG STORES INCORPORATED LDG 1.51 0.46JACOBSON STORES INCORPORATED JCBSQ 1.21 0.5WAL-MART STORES INCORPORATED WMT 0.9 0.17Mean 1.86 0.61Median 1.83 0.53

AdjustedLiquidity 2001 2002 2003 2004 2005 2006 2006Leverage Ratio 2.5 2.4 2.4 2.4 2.4 2.5 2.7Debt/Equity 49.9% 53.4% 49.8% 46.1% 47.9% 56.7% 70.0%Debt/Total Capital 28.5% 30.9% 29.7% 28.2% 28.9% 33.2% 41.2% Here, the affects of capitalizing WMT’s operating leases are profound. Notice that the D/E ratio rises from 56.7% to 70% and D/TC grows from 33.2% to 41.2%. While WMT’s debt ratios are increasing with time,

it is not in much danger of being over-levered at its current capital structure. Again, given its vast amounts of cash on hand and CFO, WMT can easily handle the debt service at this point. I would expect WMT’s debt level to continue to grow slightly given its plans for international and domestic expansion, and its recent quest to refurbish over 1,800 of its stores already in existence.


When it comes to the retail industry, WMT maintains a capital structure that puts it in the middle of the pack with regard to its use of debt. Adding in the changes made by capitalizing WMT’s operating leases, its five-year average LTD/TC would most likely increase to approximately

40%. One would also have to capitalize WMT’s competitors’ operating leases and make the necessary adjustments to make an apples-to-apples comparison. Assuming most of WMT’s competitors maintain a comparable percentage of operating leases, WMT would most likely remain near the industry average for LTD/TC.

Valuation Analysis

I used three different techniques to value WMT: 1) Free Cash Flow Model, 2) Dividend Discount Model, and 3) Comparable Valuation Ratio technique. Each valuation turns out very similar numbers for a one-year price target, all of which are in the vicinity of where WMT is trading today ($45.45). The FCF valuation assigns WMT an intrinsic value of $46.73. The DDM model gives WMT an intrinsic value of $44.50. The Comparable Valuation Ratio technique gives WMT an average intrinsic value of $47.20. Considering all three models, I give WMT a one-year target price of $46.00.

FCF Valuation Model

See Exhibits I, II, and III on pages 24, 25, and 26 for a complete description of the FCF valuation model used, including all major assumptions used in calculating WMT’s intrinsic value of $46.73, which is a 2.8% discount compared to its current price of $45.45. Below is a list of major assumptions that were made:

Discount Rate used was 10%, which is relatively high compared to its computed average cost of capital.

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LT Debt/Tot Cap

Stock Name Symbol 5Yr Avg%RITE AID CORPORATION RAD 100RETAIL VENTURES INCORPORATED RVI 59.25TARGET CORPORATION TGT 47.44GOTTSCHALKS INCORPORATED GOT 45.37PENNEY J C INCORPORATED JCP 45.19NORDSTROM INCORPORATED JWN 44.48DILLARDS INCORPORATED DDS 41.12FEDERATED DEPARTMENT STORES INC FD 36.5BON-TON STORES INCORPORATED BONT 32.76WAL-MART STORES INCORPORATED WMT 32.39KOHLS CORPORATION KSS 23.47LONGS DRUG STORES INCORPORATED LDG 18.96CVS CORPORATION CVS 15.21STEIN MART INCORPORATED SMRT 11.16WALGREEN COMPANY WAG 0.14JACOBSON STORES INCORPORATED JCBSQMean 36.90Median 36.50

Earnings projections were made up to and including FY2015, and afterward, a terminal growth of 5.5% was used to calculate the terminal present value of future cash flows.

Changes in working capital would remain consistent and would near zero. Depreciation and Amortization would remain a constant percentage (1.5%) into the future. It has

been very consistent, near 1.5% in the past five years. Cap Ex would decrease as a percentage of assets due to decreasing growth prospects. The terminal growth rate coupled with the discount rate would give WMT a terminal intrinsic value

to earnings ratio that could be compared with WMT’s present day P/E ratio.

Furthermore, I performed a stress test to note the affects of using different discount and terminal growth rates.

5% 8% 10% 12% 15%$258.65 $59.07 $37.26 $26.53 $17.97 4%

NM $75.53 $42.94 $29.17 $19.06 5%NM $108.45 $51.47 $32.69 $20.39 6%NM $207.20 $65.68 $37.61 $22.05 7%NM NM $94.11 $44.99 $24.18 8%PV

of F

CF

Discount Rate

Terminal

Value

The stress test gives us an idea of what WMT’s intrinsic value would be if our assumptions were different. WMT’s intrinsic value grows as the terminal rate gets bigger and as the discount rate gets smaller. Normally, one would discount the FCFs using the company’s WACC. I computed the WACC for WMT, but it was abnormally low at about 6.8% (See WACC Calculation in Exhibit VII on page 30). I felt 6.8% was too low and does not accurately capture the risk of owning WMT. Discounting WMT’s expected cash flows by its WACC gives WMT a target price of $177, which is a 288% discount. Apparently the market agrees that discounting WMT at its WACC does not account for all risk of owning WMT.

Dividend Discount Model

The DDM values WMT at $44.50. The DDM discounts expected dividends a stockholder would receive in the future. I kept the discount rate at 10%, but I used a different terminal growth for WMT’s dividends. I assumed dividend growth would be higher than WMT’s FCF growth at 8.3%. I believe this assumption is justified because WMT’s current dividend payout ratio is relatively low (22%). Assuming that WMT is a maturing company, many investors would expect WMT to begin paying out more of its earnings at a higher payout rate (30%+).

Below is a graphic that contains the DDM valuation and assumptions.

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DDM

2003 2004 2005 2006 2007 2008 2009 2010 Termimal========================================================================================================================================

Dividends Per Share 0.30 0.36 0.52 0.60 0.69 0.79 0.91 1.05 66.85yoy % Change 20.0% 44.4% 15.4% 15.0% 15.0% 15.0% 15.0%

Terminal Growth Rate 8.3%Discount Rate 10.0%PV of Expected Divs. Per Share $44.50

To arrive at the $44.40 valuation, I assumed WMT’s dividend would grow at 15% for each of the next four years, and at a terminal 8.3% afterwards. Comparable Valuation Ratio Technique

The Comparable Valuation Ratio technique produced an average intrinsic value for WMT of $47.20. Since I wanted to determine a one-year price target, I assumed WMT would trade at the same levels that it currently is trading at with regard to P/E-1year forward, P/S, P/CF, and P/BV. Using this method to determine a 5-year (or longer price target), one would use long-term “mean” or “median” data for the firm’s P/E, P/S, P/CF and P/BV. Using my earnings, sales, book value and cash flow estimates for FY2007, I determined projected EPS, Sales per Share, Cash Flow per Share, and Book Value per Share. Next, I used that data to compute WMT’s intrinsic value today.

The major assumption that I made here is that WMT would be trading at its current multiples one year from now. This scenario will mostly likely not be the case. See the graphs below for a historical range of WMT’s valuation ratios. Currently, WMT is trading at low multiples, and in the long-run, an investor should expect to see a reversion to the mean for each ratio. It is also important to consider WMT’s relative (to SP5A) valuation ratio range, which shows that WMT is trading at normal valuation multiples (See Exhibit IX on page 31).

Notice with this more imprecise methodology for valuing a firm’s shares, there is a wider value per share range. The range in this case is from $41.89 (using the P/E ratio and EPS estimate for FY2007) to $53.00 (using the P/S ratio and Sales per share estimate for FY2007). Given the impreciseness of this method, the average implied price is $47.20 (averaging all four implied price figures from the above chart). This number is still very consistent with the figures generated by the other two valuation methodologies.

23

Comparable Valuation RatiosPrice/"X" Current Expected "X" per Share Implied Value

P/E-1yr Fwd 13.61 3.08 41.89P/S 0.61 86.88 53.00

P/CF 9.62 4.63 44.50P/BV 3.58 13.80 49.40

Average $47.20Discount (Premium) 3.8%

WMT P/E (1-Yr Forward)

0

10

20

30

40

50

60

2/23

/199

6

2/23

/199

7

2/23

/199

8

2/23

/199

9

2/23

/200

0

2/23

/200

1

2/23

/200

2

2/23

/200

3

2/23

/200

4

2/23

/200

5

2/23

/200

6

WMT P/S

0

0.5

1

1.5

2

2.5

2/23

/199

6

2/23

/199

7

2/23

/199

8

2/23

/199

9

2/23

/200

0

2/23

/200

1

2/23

/200

2

2/23

/200

3

2/23

/200

4

2/23

/200

5

2/23

/200

6

WMT P/CF

05

101520253035404550

2/23

/199

6

2/23

/199

7

2/23

/199

8

2/23

/199

9

2/23

/200

0

2/23

/200

1

2/23

/200

2

2/23

/200

3

2/23

/200

4

2/23

/200

5

2/23

/200

6

WMT P/BV

0246

8101214

2/23

/199

6

2/23

/199

7

2/23

/199

8

2/23

/199

9

2/23

/200

0

2/23

/200

1

2/23

/200

2

2/23

/200

3

2/23

/200

4

2/23

/200

5

2/23

/200

6

Summary

All three valuation models provide a consistent one-year forward valuation of WMT’s firm value per share that I averaged to get $46.00 per share. I have taken into account all data mentioned in this report concerning the consumer staples sector, the retail industry, and WMT’s firm-specific competitive advantages to develop specific sales growth estimates, cost estimates, and earnings estimates for the coming years.

24

Exhibit I: Pro Forma Income Statement

Actual Projected(Amounts in millions except per share data) 2001 2002 2003 2004 01/31/2005 2005 04/30/2005 07/31/2005 10/31/2005 01/31/2006 2006 4/30/2006E 7/31/2006E 10/31/2006E 1/31/2007E 2007E 2008E

Fiscal years ended January 31,Revenues:Wal-Mart Stores 121,889 139,131 157,120 174,220 42,133 191,826 47,641 51,809 50,243 60,218 209,911 51,929 57,249 55,016 66,842 231,036 251,829Sam's Club 26,798 29,395 31,702 34,537 7,976 37,119 9,155 9,969 10,019 10,655 39,798 9,704 10,567 10,821 11,721 42,812 45,809International 32,100 35,485 40,794 47,572 11,958 56,277 14,112 15,033 15,174 18,400 62,719 15,805 16,837 17,450 27,600 77,693 93,231Other 10,542 13,788Net sales 191,329 217,799 229,616 256,329 62,067 285,222 70,908 76,811 75,436 89,273 312,428 77,438 84,653 83,287 106,162 351,541 390,869Other income, net 1,787 1,873 1,961 2,352 469 2,767 772 709 817 854 3,152 811 744 858 897 3,310 165

Total Revenue $193,116 $219,672 $231,577 $258,681 $62,536 $287,989 $71,680 $77,520 $76,253 $90,127 $315,580 $78,249 $85,397 $84,145 $107,059 $354,850 $391,035

Costs and expenses: 243,656Cost of sales 150,255 171,562 178,299 198,747 48,447 219,793 54,571 58,787 57,988 69,045 240,391 59,240 64,760 64,131 81,214 269,345 295,888Operating, selling, general and administrative expenses 31,550 36,173 39,983 44,909 9,667 51,105 13,168 14,054 14,216 15,222 56,660 14,645 15,856 15,016 19,506 65,022 71,968

Operating Income:Wal-Mart Stores 9,600 10,200 11,840 12,916 3,552 14,163 3,307 3,992 3,312 4,714 15,325 3,635 4,007 4,126 5,013 16,782 18,635Sam's Club 942 1,028 1,023 1,126 272 1,280 295 371 342 377 1,385 330 359 368 398 1,456 1,558International 949 1,305 1,998 2,370 774 2,988 667 750 797 1,116 3,330 790 842 925 1,463 4,020 4,941Other (196) (617) (1,290) (1,387) (176) (1,340) (328) (434) (402) (347) (1,511) (391) (427) (421) (535) (1,774) (1,955)Operating income $11,311 $11,937 $13,295 $15,025 $4,422 $17,091 $3,941 $4,679 $4,049 $5,860 $18,529 $4,364 $4,782 $4,998 $6,339 $20,483 $23,179

Interest:Debt 1,104 1,083 799 729 86 934 199 301 348 324 1,172 235 256 252 321 1,065 1,173Capital leases 279 274 260 267 80 253 53 60 60 76 249 78 85 84 107 355 391Interest income (188) (171) (132) (164) (31) (201) (52) (59) (59) (78) (248) (78) (85) (84) (107) (355) (391)

Interest, net 1,195 1,186 927 832 135 986 200 302 349 322 1,173 235 256 252 321 1,065 1,173

Income from continuing operations before 10,116 10,751 12,368 14,193 4,287 16,105 3,741 4,377 3,700 5,538 17,356 4,129 4,525 4,746 6,018 19,418 22,006income taxes and minority interest

Provision for income taxes:Current 3,350 3,712 3,883 4,941 5,326 0 0Deferred 342 185 474 177 263 0 0

Total Provision for Taxes 3,692 3,897 4,357 5,118 1,620 5,589 1,212 1,503 1,254 1,835 5,804 1,404 1,539 1,614 2,046 6,602 7,482

Income from continuing operations before 6,424 6,854 8,011 9,075 2,667 10,516 2,529 2,874 2,446 3,703 11,552 2,725 2,987 3,132 3,972 12,816 14,524minority interestMinority interest (129) (183) (193) (214) (40) (249) (68) (69) (72) (114) (323) (68) (75) (78) (99) (320) (363)

Income from continuing operations 6,295 6,671 7,818 8,861 2,627 10,267 2,461 2,805 2,374 3,589 11,229 2,657 2,912 3,054 3,873 12,496 14,161Income from discontinued operation, net of tax 137 193

Net income $6,295 $6,671 $7,955 $9,054 $2,627 $10,267 $2,461 $2,805 $2,374 $3,589 $11,229 $2,657 $2,912 $3,054 $3,873 $12,496 $14,161

Basic net income per common share:Income from continuing operations 1.77 2.03 2.41 0.86 0.86 0.64 0.71 0.76 0.97 3.08 3.54Income from discontinued operation 0.03 0.05Basic net income per common share 1.41 1.49 1.80 2.08 0.59 2.41 0.58 0.67 0.57 0.86 2.68 0.64 0.71 0.76 0.97 3.08 3.54

Diluted net income per common share:Income from continuing operations 1.76 2.03 2.41 0.86 0.86 0.64 0.71 0.75 0.97 3.08 3.54Income from discontinued operation 0.03 0.04Diluted net income per common share 1.40 1.49 1.79 2.07 0.59 2.41 0.58 0.67 0.57 0.86 2.68 0.64 0.71 0.75 0.97 3.08 3.54

Weighted-average number of common shares:Basic 4,465 4,465 4,430 4,363 4,259 4,259 4,228 4,175 4,165 4,166 4,166 4,124 4,083 4,042 4,002 4,042 4,002Diluted 4,484 4,481 4,446 4,373 4,266 4,266 4,234 4,180 4,169 4,170 4,170 4,128 4,087 4,046 4,006 4,046 4,006

Dividends per common share 0.30 0.36 0.52 0.6016.8% 17.4% 0.0% 21.6% 0.0% 0.0% 0.0% 0.0% 22.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Exhibit II: Pro Forma Income Statement Assumptions

Assumptions Actual Projected2001 2002 2003 2004 01/31/2005 2005 04/30/2005 07/31/2005 10/31/2005 01/31/2006 2006 4/30/2006E 7/31/2006E 10/31/2006E 1/31/2007E 2007E 2008E

As a % of Net SalesWal-Mart Stores 63.7% 63.9% 68.4% 68.0% 67.9% 67.3% 67.2% 67.4% 66.6% 67.5% 67.2% 67.1% 67.6% 66.1% 63.0% 65.7% 64.4%Sam's Club 14.0% 13.5% 13.8% 13.5% 12.9% 13.0% 12.9% 13.0% 13.3% 11.9% 12.7% 12.5% 12.5% 13.0% 11.0% 12.2% 11.7%International 16.8% 16.3% 17.8% 18.6% 19.3% 19.7% 19.9% 19.6% 20.1% 20.6% 20.1% 20.4% 19.9% 21.0% 26.0% 22.1% 23.9%

YOY (QOQ) Growth 2002 2003 2004 01/31/2005 2005 04/30/2005 07/31/2005 10/31/2005 01/31/2006 2006Wal-Mart Stores 14.1% 12.9% 10.9% 11.3% 10.1% 9.3% 10.4% 9.5% 42.9% 9.4% 9.0% 10.5% 9.5% 11.0% 10.1% 9.0%Sam's Club 9.7% 7.8% 8.9% 7.8% 7.5% 5.9% 5.9% 10.3% 33.6% 7.2% 6.0% 6.0% 8.0% 10.0% 7.6% 7.0%International 10.5% 15.0% 16.6% 48.0% 18.3% 12.4% 12.3% 12.0% 53.9% 11.4% 12.0% 12.0% 15.0% 50.0% 23.9% 20.0%Net Sales 13.8% 5.4% 11.6% 16.4% 11.3% 9.5% 10.2% 10.1% 43.8% 9.5% 9.2% 10.2% 10.4% 18.9% 12.5% 11.2%Other income, net 4.8% 4.7% 19.9% 171.1% 17.6% 13.5% -3.8% 7.2% 82.1% 13.9% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%Total Revenue 13.8% 5.4% 11.7% 16.9% 11.3% 9.5% 10.0% 10.1% 44.1% 9.6% 9.2% 10.2% 10.3% 18.8% 12.4% 10.2%Weighted Ave. Shares:Basic 0.0% -0.8% -1.5% -1.5% -2.4% -1.5% -2.1% -1.8% -2.2% -2.2% -1.0% -1.0% -1.0% -1.0% -3.0% -1.0%Diluted -0.1% -0.8% -1.6% -1.6% -2.4% -1.6% -2.2% -1.9% -2.3% -2.3% -1.0% -1.0% -1.0% -1.0% -3.0% -1.0%

MarginsGross Margin (% of Net Sales) 22.4% 22.1% 23.2% 23.4% 22.7% 23.9% 24.1% 24.4% 24.2% 23.6% 24.1% 23.5% 23.5% 23.0% 23.5% 24.3% 24.3%Operating Margin

Wal-Mart Store Operating Margin 7.9% 7.3% 7.5% 7.4% 8.4% 7.4% 6.9% 7.7% 6.6% 7.8% 7.3% 7.0% 7.0% 7.5% 7.5% 7.3% 7.4%Sam's Club Margin 3.5% 3.5% 3.2% 3.3% 3.4% 3.4% 3.2% 3.7% 3.4% 3.5% 3.5% 3.4% 3.4% 3.4% 3.4% 3.4% 3.4%International Margin 3.0% 3.7% 4.9% 5.0% 6.5% 5.3% 4.7% 5.0% 5.3% 6.1% 5.3% 5.0% 5.0% 5.3% 5.3% 5.2% 5.3%Other -0.1% -0.3% -0.6% -0.5% -0.3% -0.5% -0.5% -0.6% -0.5% -0.4% -0.5% -0.5% -0.5% -0.5% -0.5% -0.5% -0.5%

Total Operating Margin 5.9% 5.4% 5.7% 5.8% 7.1% 6.0% 5.6% 6.1% 5.4% 6.6% 5.9% 5.6% 5.6% 5.9% 5.9% 5.8% 5.9%Net Margin 3.3% 3.0% 3.4% 3.5% 4.2% 3.6% 3.4% 3.6% 3.1% 4.0% 3.6%Interest as a % of Sales:

Debt 0.6% 0.5% 0.3% 0.3% 0.1% 0.3% 0.3% 0.4% 0.5% 0.4% 0.4% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3%Capital leases 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%Interest income -0.1% -0.1% -0.1% -0.1% 0.0% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1%

Interest, net 0.6% 0.5% 0.4% 0.3% 0.2% 0.3% 0.3% 0.4% 0.5% 0.4% 0.4% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3%

Taxes as % of EBTMI:Current 33.1% 36.7% 38.4% 48.8% 0.0% 33.1% 0.0% 0.0% 0.0% 0.0% 0.0% 32.0% 32.0% 32.0% 32.0% 0.0% 32.0%Deferred 3.4% 1.7% 3.8% 1.2% 0.0% 1.6% 0.0% 0.0% 0.0% 0.0% 0.0% 2.0% 2.0% 2.0% 2.0% 0.0% 2.0%

Total Provision for Taxes 36.5% 36.2% 35.2% 36.1% 37.8% 34.7% 32.4% 34.3% 33.9% 33.1% 33.4% 34.0% 34.0% 34.0% 34.0% 34.0% 34.0%

Income From Minority Interest as % of Inc. from Cont Ops. -2.0% -2.7% -2.4% -2.4% -1.5% -2.4% -2.7% -2.4% -2.9% -3.1% -2.8% -2.5% -2.5% -2.5% -2.5% -2.5% -2.5%Net Income Margin 3.3% 3.0% 3.4% 3.5% 4.2% 3.6% 3.4% 3.6% 3.1% 4.0% 3.6% 3.4% 3.4% 3.6% 3.6% 3.5% 3.6%YOY (QOQ) Growth

*Assumptions made to forecast income statement line items are highlighted in green.

Exhibit III: Pro Forma Statement of FCF and FCF Valuation

Year (in millions, except per share) 2006A 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E Terminal Value======================================================================================================================================================================================================================== ===============

Net Revenue $315,580 $354,850 $391,035 $430,138 $473,152 $518,101 $564,731 $615,556 $667,879 $721,309 % Growth 9.6% 12.4% 10.2% 10.0% 10.0% 9.5% 9.0% 9.0% 8.5% 8.0%

Operating Income 18,529 20,483 23,179 25,808 28,389 31,086 33,884 36,933 40,073 43,279 Operating Margin 5.9% 5.8% 5.9% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%

Interest and Other- net (1,173) (1,065) (1,173) (1,290) (1,419) (1,554) (1,694) (1,847) (2,004) (2,164) Interest % of Sales 0.4% 0.3% 0.3% -0.3% -0.3% -0.3% -0.3% -0.3% -0.3% -0.3%

Taxes (5,804) (6,602) (7,482) (7,846) (8,630) (9,450) (10,301) (11,228) (12,182) (13,157) Tax Rate 33.4% -34.0% -34.0% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0% 32.0%Equity Income, net (323) (320) (363) 0 0 52 282 616 668 721 % of sales -0.1% -0.1% -0.1% 0.0% 0.0% 0.0% 0.1% 0.1% 0.1% 0.1%

Net Income $11,229 $12,496 $14,161 $16,672 $18,339 $20,133 $22,171 $24,475 $26,555 $28,679 % Growth 9.4% 11.3% 13.3% 17.7% 10.0% 9.8% 10.1% 10.4% 8.5% 8.0%

======================================================================================================================================================Add Depreciation/Amort 4,734 5,322.8 5,866 6,452 7,097 7,772 8,471 9,233 10,018 10,820 % of Sales 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% % of Capex 34.9% 34.9% 34.9% 37.5% 37.5% 40.5% 40.5% 42.9% 42.9% 45.5%Plus/(minus) Changes WC 1,000 900 500 500 (500) (500) (400) (300) (200) (100) Initial Working CapitalSubtract Cap Ex (13,570) (15,259) (16,814) (17,206) (18,926) (19,170) (20,895) (21,544) (23,376) (23,803) Capex % of sales 4.3% 4.3% 4.3% 4.0% 4.0% 3.7% 3.7% 3.5% 3.5% 3.3%

Free Cash Flow $3,392.76 $3,459.92 $3,711.77 $6,418.70 $6,010.57 $8,235.19 $9,347.25 $11,863.39 $12,997.28 $15,595.68 YOY growth 2.0% 7.3% 72.9% -6.4% 37.0% 13.5% 26.9% 9.6% 20.0%

Valuation

Discount Rate 10.0% '06-10 Cash/Op's $104,768 Terminal Value $365,632Terminal Growth Rate 5.5% Cash/Op's % of Sales 5.3% P/E 12.75

FCF Yield 4.3%% Of Total

NPV of FCF $44,296 22.2%NPV of Terminal Value $155,064 77.8%Present Value of Firm (M) $199,359FCF Yield 1.7%

Shares Outstanding (M) 4266.0Current Historical P/E 18.9 Implied Value Per Share $46.73Current Price $45.45Current Discount (Premium) 2.8%

27

Exhibit IV: Balance Sheet

(Amounts in millions except per share data) 2001 2002 2003 2004 2005 2006

January 31,AssetsCurrent assets:Cash and cash equivalents 2,054 2,161 2,758 5,199 5,488 6,414Receivables 1,768 2,000 2,108 1,254 1,715 2,662Inventories 21,442 22,614 24,891 26,612 29,447 32,191Prepaid expenses and other 1,291 1,103 726 1,356 1,841 2,591

Total current assets $26,555 $27,878 $30,483 $34,421 $38,491 $43,858Property and equipment, at cost:Land 9,433 10,241 11,228 12,699 14,472Buildings and improvements 24,537 28,527 33,750 40,192 46,582Fixtures and equipment 12,964 14,135 15,946 17,934 21,461Transportation equipment 879 1,089 1,313 1,269 1,530

Property and equipment, at cost 47,813 53,992 62,237 72,094 84,045 97,302Less accumulated depreciation 10,196 11,436 13,537 15,684 18,637 21,427

Property and equipment, net 37,617 42,556 48,700 56,410 65,408 75,875Property under capital lease 4,620 4,626 4,814 4,286 4,997Less accumulated amortization 1,303 1,432 1,610 1,673 1,838

Property under capital lease, net 3,317 3,194 3,204 2,613 3,159 3,415Goodwill 9,059 8,566 9,521 9,882 10,803 12,188Other assets and deferred charges 1,582 1,333 2,777 2,079 2,362 2,833

Total assets $78,130 $83,527 $94,685 $105,405 $120,223 $138,169

Liabilities and shareholders equityCurrent liabilities:Commercial paper 2,286 743 1,079 3,267 3,812 3,754Accounts payable 15,092 15,617 17,140 19,425 21,671 25,373Accrued liabilities 6,355 7,174 8,945 10,671 12,155 13,465Accrued income taxes 841 1,343 739 1,377 1,281 1,322Long-term debt due within one year 4,234 2,257 4,538 2,904 3,759 4,595Obligations under capital leases due within 141 148 176 196 210 299one year

Total current liabilities $28,949 $27,282 $32,617 $37,840 $42,888 $48,808

Long-term debt 12,501 15,687 16,607 17,102 20,087 26,429Long-term obligations under capital leases 3,154 3,045 3,001 2,997 3,582 3,742Deferred income taxes and other 1,043 1,204 1,761 2,359 2,947 4,552Minority interest 1,140 1,207 1,362 1,484 1,323 1,467

Commitments and contingencies

Shareholders equity:Preferred stock (0.10 par value; 100 sharesauthorized, none issued)Common stock (0.10 par value; 11,000 shares 447 445 440 431 423authorized, 4,234 and 4,311 issued andoutstanding in 2005 and 2004, respectively)Capital in excess of par value 1,411 1,484 1,482 2,135 2,425 3,013Other accumulated comprehensive income (684) (1,268) (509) 851 2,694 1,053Retained earnings 30,169 34,441 37,924 40,206 43,854 49,105

Total shareholders equity $31,343 $35,102 $39,337 $43,623 $49,396 $53,171

Total liabilities and shareholders equity $78,130 $83,527 $94,685 $105,405 $120,223 $138,169

Exhibit V: Cash Flow Statement

(Amounts in millions)Fiscal years ended January 31, 2001 2002 2003 2004 2005 2006

Cash flows from operating activitiesIncome from continuing operations 6,295 6,671 7,818 8,861 10,267 11,231Adjustments to reconcile net income tonet cash provided by operating activities:Depreciation and amortization 2,868 3,290 3,364 3,852 4,405 4,717Deferred income taxes 342 185 474 177 263Other operating activities 244 66 685 173 378 509Changes in certain assets and liabilities,net of effects of acquisitions:Decrease (increase) in accounts receivable (422) (210) (159) 373 (304) (456)Increase in inventories (1,795) (1,235) (2,219) (1,973) (2,635) (1,733)Increase in accounts payable 2,061 368 1,748 2,587 1,694 2,390Increase in accrued liabilities 11 1,125 1,212 1,896 976 975

Net cash provided by operating activities 9,604 10,260 12,923 15,946 15,044 17,633of continuing operationsNet cash provided by operating activities 82 50of discontinued operation

Net cash provided by operating activities $9,604 $10,260 $13,005 $15,996 $15,044 $17,633$0.66 $0.65 $0.60 $0.55 $0.68 $0.64

Cash flows from investing activitiesPayments for property and equipment (8,042) (8,383) (9,245) (10,308) (12,893) (14,563)Investment in international operations (627) 0 (749) (38) (315) (601)Proceeds from the disposal of fixed assets 284 331 311 481 953 1,049Proceeds from the sale of McLane 1,500Other investing activities (329) (228) (73) 78 (96) (68) Proceeds from termination or sale of net investment hedges 1134

Net cash used in investing activities of (8,714) (7,146) (9,756) (8,287) (12,351) (14,183)continuing operationsNet cash used in investing activities of (83) (25)discontinued operation

Net cash used in investing activities ($8,714) ($7,146) ($9,839) ($8,312) ($12,351) ($14,183)

Cash flows from financing activitiesIncrease in commercial paper (2,022) (1,533) 1,836 688 544 (704)Proceeds from issuance of long-term debt 3,778 4,591 2,044 4,099 5,832 7,691Purchase of Company stock (193) (1,214) (3,383) (5,046) (4,549) (3,580)Dividends paid (1,070) (1,249) (1,328) (1,569) (2,214) (2,511)Payment of long-term debt (1,519) (3,519) (1,261) (3,541) (2,131) (2,724)Payment of capital lease obligations (173) (167) (216) (305) (204)Other financing activities 176 113 (62) 111 113 (594) Proceeds from issuance of Company stock 581

Net cash used in financing activities ($442) ($2,978) ($2,370) ($5,563) ($2,609) ($2,422)

Effect of exchange rate changes on cash (250) (29) (199) 320 205 (102)

Net increase in cash and cash equivalents 198 107 597 2,441 289 926Cash and cash equivalents at beginning 1,856 2,054 2,161 2,758 5,199 5,488of year (1)

Cash and cash equivalents at end of year $2,054 $2,161 $2,758 $5,199 $5,488 $6,414

Supplemental disclosure of cash flow informationIncome tax paid 3,509 3,196 4,539 4,358 5,593Interest paid 1,319 1,312 1,085 1,024 1,163Capital lease obligations incurred 576 225 381 252 377

29

Exhibit VI: Pro Forma Balance Sheet & Income Statement After Capitalizing Operating Leases

Pro Forma Balance Sheet Pro Forma Income Statement

Adjusted Adjusted(Amounts in millions except per share data) 2006 2006 (Amounts in millions except per share data) 2006 2006

January 31,AssetsCurrent assets: Fiscal years ended January 31,Cash and cash equivalents 6,414 6,414 Revenues:Receivables 2,662 2,662 Wal-Mart Stores 209,911 209,911Inventories 32,191 32,191 Sam's Club 39,798 39,798Prepaid expenses and other 2,591 2,591 International 62,719 62,719

OtherTotal current assets $43,858 43,858 Net sales 312,428 312,428Property and equipment, at cost: Other income, net 3,152 3,152LandBuildings and improvements Total Revenue $315,580 $315,580Fixtures and equipmentTransportation equipment Costs and expenses:

Cost of sales 240,391 240,391Property and equipment, at cost 97,302 97,302 Operating, selling, general and administrative expenses 56,660 56,500Less accumulated depreciation 21,427 21,427

Operating income $18,529 $18,689Property and equipment, net 75,875 75,875Property under capital lease Interest:Less accumulated amortization Debt 1,172 1,172

Capital leases 249 551Property under capital lease, net 3,415 10,822 Interest income (248) (248)Goodwill 12,188 12,188Other assets and deferred charges 2,833 2,833 Interest, net 1,173 1,475

Total assets $138,169 $145,576 Income from continuing operations before 17,356 17,214income taxes and minority interest

Liabilities and shareholders equityCurrent liabilities: Provision for income taxes:Commercial paper 3,754 3,754 Current 0 0Accounts payable 25,373 25,373 Deferred 0 0Accrued liabilities 13,465 13,465Accrued income taxes 1,322 1,322 Total Provision for Taxes 5,804 5,853Long-term debt due within one year 4,595 4,595Obligations under capital leases due within 299 660 Income from continuing operations before 11,552 11,361one year minority interest

Minority interest (323) (323)Total current liabilities $48,808 $49,169

Income from continuing operations 11,229 11,038Long-term debt 26,429 26,429 Income from discontinued operation, net of taxLong-term obligations under capital leases 3,742 10,788Deferred income taxes and other 4,552 4,552Minority interest 1,467 1,467 Net income $11,229 $11,038

Commitments and contingencies Basic net income per common share:Income from continuing operations 0.86 2.65

Shareholders equity: Income from discontinued operationPreferred stock (0.10 par value; 100 shares Basic net income per common share 2.68 2.65authorized, none issued)Common stock (0.10 par value; 11,000 shares Diluted net income per common share:authorized, 4,234 and 4,311 issued and Income from continuing operations 0.86 2.65outstanding in 2005 and 2004, respectively) Income from discontinued operationCapital in excess of par value 3,013 3,013 Diluted net income per common share 2.68 2.65Other accumulated comprehensive income 1,053 1,053Retained earnings 49,105 49,105 Weighted-average number of common shares:

Basic 4,166 4,166Total shareholders equity $53,171 53,171 Diluted 4,170 4,170

Total liabilities and shareholders equity $138,169 $145,576 Dividend Per Share 0.60 0.60

*Adjustments for capitalizing operating leases affected the line items highlighted in yellow.

30

VII: WACC and Cost of Equity Calculation

WACC Calculation Cost of Equity CalculationCost of Equity 9.65%Average Cost of Debt 4.08% Re = Rf + Beta * Market Risk PremiumD/D+E 41.17% 9.65% 4.55% 0.85 6%E/D+E 58.83%Tax Rate 34%WACC 6.8%

VIII: Financial Ratios

AdjustedROE 2001 2002 2003 2004 2005 2006 2006ProfitabilityROE 20.1% 20.1% 21.4% 21.8% 22.1% 21.9% 21.5%

Net Margin 3.3% 3.1% 3.5% 3.5% 3.6% 3.6% 3.5%Asset Turnover 2.4 2.7 2.6 2.6 2.5 2.4 2.3Leverage Ratio 2.5 2.4 2.4 2.4 2.4 2.5 2.7

Check: 20.1% 20.1% 21.4% 21.8% 22.1% 21.9% 21.5%

ROA 8.1% 8.3% 8.9% 9.0% 9.1% 8.7% 8.1%Net Income Growth (YOY) 6.0% 19.2% 13.8% 13.4% 9.4% 7.5%

AdjustedEfficiency 2001 2002 2003 2004 2005 2006 2006Gross Margin 22.4% 22.1% 23.2% 23.4% 23.9% 24.1% 24.1%Operating Margin

Wal-Mart Store Operating Margin 7.9% 7.3% 7.5% 7.4% 7.4% 7.3%Sam's Club Margin 3.5% 3.5% 3.2% 3.3% 3.4% 3.5%International Margin 3.0% 3.7% 4.9% 5.0% 5.3% 5.3%Other -0.1% -0.3% -0.6% -0.5% -0.5% -0.5%

Total 5.9% 5.4% 5.7% 5.8% 6.0% 5.9% 6.0%Adjusted

Liquidity 2001 2002 2003 2004 2005 2006 2006Interest Coverage Ratio 15.3 15.7 24.8 31.7 28.7 28.0 22.2Current Ratio 0.92 1.02 0.93 0.91 0.90 0.90 0.89Quick Ratio 0.13 0.15 0.15 0.17 0.17 0.19 0.18

AdjustedLiquidity 2001 2002 2003 2004 2005 2006 2006Leverage Ratio 2.5 2.4 2.4 2.4 2.4 2.5 2.7Debt/Equity 49.9% 53.4% 49.8% 46.1% 47.9% 56.7% 70.0%Debt/Total Capital 28.5% 30.9% 29.7% 28.2% 28.9% 33.2% 41.2%

31

Exhibit IX: WMT’s Relative Valuation Ratios (to S&P 500- SP5A)

Relative P/E (1-Yr Forward)

0

0.5

1

1.5

2

2.5

2/23

/199

6

2/23

/199

7

2/23

/199

8

2/23

/199

9

2/23

/200

0

2/23

/200

1

2/23

/200

2

2/23

/200

3

2/23

/200

4

2/23

/200

5

2/23

/200

6

Relative P/S

00.10.20.30.40.50.60.70.80.9

1

2/23

/199

6

2/23

/199

7

2/23

/199

8

2/23

/199

9

2/23

/200

0

2/23

/200

1

2/23

/200

2

2/23

/200

3

2/23

/200

4

2/23

/200

5

2/23

/200

6

Relative P/CF

0

0.5

1

1.5

2

2.5

3

2/23

/199

6

2/23

/199

7

2/23

/199

8

2/23

/199

9

2/23

/200

0

2/23

/200

1

2/23

/200

2

2/23

/200

3

2/23

/200

4

2/23

/200

5

2/23

/200

6

Relative P/BV

0

0.5

1

1.5

2

2.5

3

2/23

/199

6

2/23

/199

7

2/23

/199

8

2/23

/199

9

2/23

/200

0

2/23

/200

1

2/23

/200

2

2/23

/200

3

2/23

/200

4

2/23

/200

5

2/23

/200

6

32

2006 winter walmart

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