combined 2
DESCRIPTION
TRANSCRIPT
Analysis of income tax
• recording a net deferred tax liability every year
• much larger since 2003 and averaged about $800 million afterwards
Analysis of income tax
• Deferred tax liabilities
• Property and equipment accounted for the largest shares– Due to difference in method of depreciation
• Tax purpose: accelerated • Financial reporting: straight-line
Analysis of income tax
Unlikely reversal of deferred tax liability
• Walmart continued to purchase property and equipment and investment in international operations
• Growing firm
Analysis of income tax
Unlikely reversal of deferred tax liability• No expectation of cash outflow in future
• The liability should be treated as equity Adjustment: Total equity + total deferred tax liability
Total liabilities – total deferred tax liability
Analysis of income tax
Analysis of income tax
Analysis of income tax
• Most significant deferred tax asset relates to “amounts accrued for financial reporting purposes not yet deductible for tax purposes”
• No information provided• Valuation allowance:
Walmart: Present since 2004Target: None
Analysis of income tax
Significant increase in valuation allowance
• REASONS:
– Change of tax legislation in Germany in 2004
– Pre-acquisition loss in 2006-2008
• Tax benefit not realized will be adjusted to goodwill
– Not possible to know if it is done
• Change in valuation allowance did not follow a regular pattern
• Exclude it to give a better picture of recurring performance
• Net income was underestimated• Net income was less smooth after restatement
Adjustment: Total asset + valuation allowance
Analysis of income tax
• Footnote: Permanently reinvested foreign earnings
• No adjustments are required– Walmart earned large profit every year– Quite unlikely it will repatriate the earnings
Analysis of income tax
• Walmart: no reserve for bad debt• Target: Average 8% of gross receivables established as bad
debt allowance• Adjustment:
– Remove bad debt allowance of Target– Add bad debt expense to net income
Write-off = Opening Balance – ending balance – Bad debt expenseAdjusted total asset = reported total asset + ending balance of bad debt allowa
nceAdjusted net income = reported net income - bad debt expense
Analysis of bad debt
Analysis of employee related benefits
• Retirement-related plans:– Walmart: no calculation is shown for the pe
nsion expense– Target: Detailed calculation is shown
• Stock-based compensation plans– Walmart: Assumed a higher dividend yield
and lower volatility for the share
• Non cancelable leases• Obligation for the firm• Operating lease Capital lease• Assumptions:
– fifth year lease payment will be constant thereafter – Estimated useful life
=(Total payment thereafter/fifth year lease payment)+5– Implicit interest rate = capital lease expense/average present
value of capital lease
Lease
• Present value of operating lease• Interest expense = PV of operating lease * implicit interest rate• Amortization expense = PV of operating lease/estimated useful life• Adjusted Net income
= Net income + operating lease expense-interest expense-amortization expense
• Adjusted total liability = Total Debt + PV of operating lease
Restatment methods
Adjustments: 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999
Net income 12731 11284 11231 10267 9054 7955 6671 6295 5377 4430
Operating lease expense
842 797 730 665 589 623 564 387 394 404
Less:Interest
expense-595 -482 -433 -512 -542 -508 -537 -507 -357 -347
Less:Amortization
-840 -690 -643 -413 -380 -401 -432 -371 -291 -249
Adjusted Net income
12138 10909 10885 10006 8721 7669 6266 5803 5123 4238
2008 2007 2006 2005 2004 2003 2002 2001 2000 1999
Total Debt 96967 87460 83551 69504 60298 53986 47142 45647 43236 27085
Add: PV ofOperating Lease
9558 7270 6812 7073 6463 6219 6360 5836 3975 3485
Adjusted Total Debt
106525 94730 90363 76577 66761 60205 53502 51483 47211 30570
Adjustments: 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999
Net income 22142,84
92,78
72,40
83,19
81,84
11,65
41,36
81,26
41,14
4
Operating lease expense
239 142 137 146 163 147 127 111 113 115
Less: Interest expense
-170 -156 -140 -123 -114 -86 -80 -70 -70 -70
Less:Amortization
-94 -77 -60 -64 -67 -67 -66 -56 -57 -57
Adjusted Net income
2188 2758 2724 2367 3180 1836 1635 1353 1250 1132
2008 2007 2006 2005 2004 2003 2002 2001 2000 1999
Total Debt 30394 29253 21716 20790 19264 20283 19160 16294 12971 11281
Add: PV of Operating
Lease1944 1772 1424 1480 1576 998 924 788 800 796
Adjusted Total Debt
32338 31025 23140 22270 20840 21281 20084 17082 13771 12077
Net income
0
2000
4000
6000
8000
10000
12000
14000
2008200720062005200420032002200120001999
Walmart(adjusted)
Target(adjusted)
Walmart(unadjusted)
Target(unadjusted)
Effects after restatement
D/E Ratio
0.00
0.50
1.00
1.50
2.00
2.50
2008200720062005200420032002200120001999
Walmart(adjusted)
Target(adjusted
Walmart (unadjusted)
Target(unadjusted)
Analysis of Depreciation
• Adjustment of changes in depreciation
• No change in accounting method (Straight-Line Method only)
• Change in asset lives
Analysis of Depreciation
Analysis of Depreciation
• Estimated useful live• Annual reports have not
mentioned - estimated useful live of each specific item - changes in asset lives
• Apply Average useful live• Average useful live
= Depreciable asset base / Depreciation expense
Analysis of Depreciation
• Depreciable asset base
= Buildings and improvements
+ Fixtures and equipment
+ Computer hardware and software
= Net property and equipment
- Land - Construction in progress
Analysis of Depreciation
Average Life
5
10
15
20
25
30
35
40
45
2008 2007 2006 2005 2004 2003 2002 2001 2000 1999
Walmart Target
Analysis of Depreciation
• Adjusted deprecation expense= Depreciable asset base / Average useful live
• Adjusted net income= Net income + Depreciation expense – Adjusted depreciation expense
Analysis of Inventory
• Both used LIFO in 1999-2003
• Both stated “Our inventory valued at LIFO approx equal to that valued at FIFO"
Inventories FIFO
0
5000
10000
15000
20000
25000
30000
35000
40000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Walmart
Target
Analysis of Inventory
Cost of sales
0
50000
100000
150000
200000
250000
300000
350000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Walmart
Target
Analysis of Inventory
Analysis of Inventory
Walmart
2000
4000
6000
8000
10000
12000
14000
20082007200620052004200320022001200019991998
net incomeadjusted net income
Analysis of Inventory
Walmart
5000
10000
15000
20000
25000
30000
35000
40000
20082007200620052004200320022001200019991998
net incomeInventories
Quality of earnings
• Walmart:– Income Smoothing
• Target:– Adjusted Net Iincome ≈ Reported Net Income– Except 2008, but justified
• Walmart– Beneficial earnings management– Major shareholders=management
• Target– Difficult to manipulate earnings– Major shareholders=public investors– Quality of earnings affecting investment decisions
Possible Reasons
Target has higher profit margin than Walmart
WALMARTBuy Sell Decision
Walmart has higher growth in net sales than Target
WALMARTBuy Sell Decision
Walmart has higher ROA than TargetWalmart is more efficient in using their resources
WALMARTBuy Sell Decision
Return on Equity
Quite similar, except for different timing in fluctuations, may be due to different selling strategies in different years
WALMARTBuy Sell Decision
Debt to Equity Ratio
Target has higher and less stable debt to equity ratio, may have difficulty in poor times
On the other hand, Walmart is much more stable and healthy
WALMARTBuy Sell Decision
Free Cash Flow
Walmart has much higher free cash flow, except for 2000, which it invested in international operations
Buy Sell Decision
WALMARTBuy Sell Decision
• Based on the ratio analysis above, Walmart performs better than Target
• Current News– Walmart announced sales for March, its overall sales increas
ed by 3.1%, it seems that its low-price strategy is appropriate for customers in such a tough time
– However, its share price continues to decline, from $51 in late March to $49 currently, which is a 4% down
– Possible reason is the selling-off of shares in retail industry as the global economy is not doing well
WALMARTBuy Sell Decision
Conclusion• buy Walmart for long term holding
• but not short term sell
∵it may encounter a sell-off at any point of time in such a volatile trading environment especially when expectations are not met.
WALMARTBuy Sell Decision