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Page 1: Combined 2
Page 2: Combined 2
Page 3: Combined 2

Analysis of income tax

• recording a net deferred tax liability every year

• much larger since 2003 and averaged about $800 million afterwards

Page 4: Combined 2

Analysis of income tax

Page 5: Combined 2

• 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

Page 6: Combined 2

Unlikely reversal of deferred tax liability

• Walmart continued to purchase property and equipment and investment in international operations

• Growing firm

Analysis of income tax

Page 7: Combined 2

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

Page 8: Combined 2

Analysis of income tax

Page 9: Combined 2

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

Page 10: Combined 2

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

Page 11: Combined 2

• 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

Page 12: Combined 2

• 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

Page 13: Combined 2

• 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

Page 14: Combined 2

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

Page 15: Combined 2

• 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

Page 16: Combined 2

• 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

Page 17: Combined 2

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

Page 18: Combined 2

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

Page 19: Combined 2

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

Page 20: Combined 2

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

Page 21: Combined 2

Net income

0

2000

4000

6000

8000

10000

12000

14000

2008200720062005200420032002200120001999

Walmart(adjusted)

Target(adjusted)

Walmart(unadjusted)

Target(unadjusted)

Effects after restatement

Page 22: Combined 2

D/E Ratio

0.00

0.50

1.00

1.50

2.00

2.50

2008200720062005200420032002200120001999

Walmart(adjusted)

Target(adjusted

Walmart (unadjusted)

Target(unadjusted)

Page 23: Combined 2

Analysis of Depreciation

• Adjustment of changes in depreciation

• No change in accounting method (Straight-Line Method only)

• Change in asset lives

Page 24: Combined 2

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

Page 25: Combined 2

Analysis of Depreciation

• Depreciable asset base

= Buildings and improvements

+ Fixtures and equipment

+ Computer hardware and software

= Net property and equipment

- Land - Construction in progress

Page 26: Combined 2

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

Page 27: Combined 2

Analysis of Depreciation

• Adjusted deprecation expense= Depreciable asset base / Average useful live

• Adjusted net income= Net income + Depreciation expense – Adjusted depreciation expense

Page 28: Combined 2

Analysis of Inventory

• Both used LIFO in 1999-2003

• Both stated “Our inventory valued at LIFO approx equal to that valued at FIFO"

Page 29: Combined 2

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

Page 30: Combined 2

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

Page 31: Combined 2

Analysis of Inventory

Walmart

2000

4000

6000

8000

10000

12000

14000

20082007200620052004200320022001200019991998

net incomeadjusted net income

Page 32: Combined 2

Analysis of Inventory

Walmart

5000

10000

15000

20000

25000

30000

35000

40000

20082007200620052004200320022001200019991998

net incomeInventories

Page 33: Combined 2

Quality of earnings

Page 34: Combined 2
Page 35: Combined 2

• Walmart:– Income Smoothing

• Target:– Adjusted Net Iincome ≈ Reported Net Income– Except 2008, but justified

Page 36: Combined 2

• Walmart– Beneficial earnings management– Major shareholders=management

• Target– Difficult to manipulate earnings– Major shareholders=public investors– Quality of earnings affecting investment decisions

Possible Reasons

Page 37: Combined 2

Target has higher profit margin than Walmart

WALMARTBuy Sell Decision

Page 38: Combined 2

Walmart has higher growth in net sales than Target

WALMARTBuy Sell Decision

Page 39: Combined 2

Walmart has higher ROA than TargetWalmart is more efficient in using their resources

WALMARTBuy Sell Decision

Page 40: Combined 2

Return on Equity

Quite similar, except for different timing in fluctuations, may be due to different selling strategies in different years

WALMARTBuy Sell Decision

Page 41: Combined 2

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

Page 42: Combined 2

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

Page 43: Combined 2

• 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

Page 44: Combined 2

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