walmart inc. (wmt) april 10, 2019walmart’s first international endeavor was in 1991 when they...

Important disclosures appear on the last page of this report.

The Henry Fund

Henry B. Tippie School of Business

Matt Detweiler [[email protected]]

Walmart Inc. (WMT) April 10, 2019

Consumer Staples – Retail Stock Rating Buy

Investment Thesis Target Price $115-120 We recommend a buy rating on Walmart Inc. Walmart has shown strong growth in eCommerce sales, a unit that includes online orders and grocery delivery and pickup. As more retailers expand their online presence to compete with Amazon and other large online retailers, Walmart has shown they are committed to expanding their digital presence. Walmart has also shown efforts to increase efficiency in their international operations by exiting certain markets and increasing their presence in others. Drivers of Thesis

• Walmart has had strong growth in eCommerce sales. eCommerce sales grew 40% for their 2019 fiscal year. We expect Walmart to continue to invest in online platforms, allowing them to compete more effectively against Amazon and other online retailers.

• Developing countries in Central America and Africa present opportunities for Walmart to expand their presence. We forecast 3.00% annual growth in Central America, the highest of any reporting region.

• Walmart is a strong incumbent firm in their industry. Their size allows them to capture economies of scale many smaller firms are not capable of. This allows them to compete directly on price.

Risks to Thesis

• Struggles in international markets such as India, China, and Japan could slow growth prospects in the Walmart International business unit. We forecast low growth in these areas, impacting Walmart’s total revenue growth.

• Difficulty finding a buyer for their UK chain, Asda, could lead to prolonged inefficient capital management in their UK segment of Walmart International. This will hurt their overall revenue growth.

Henry Fund DCF $129.59 Henry Fund DDM $107.63 Relative P/E $119.96 Price Data (Factset) Current Price $103.16 52wk Range $81.78-$106.21 Consensus 1yr Target $109.30 Key Statistics (Factset) Market Cap (B) $283.60 Shares Outstanding (M) 2,870.00 Institutional Ownership 30.00% Five Year Beta (Weekly) 0.595 Dividend Yield 2.10% Est. 5yr Growth 4.75% Price/Earnings (TTM) 19.50 Price/Earnings (FY1) 20.80 Price/Sales (TTM) 0.55 Price/Book (mrq) 3.50 Profitability (Factset) Operating Margin 4.50% Profit Margin 1.30% Return on Assets (TTM) 3.15% Return on Equity (TTM) 8.87%

Earnings Estimates Year 2017 2018 2019 2020E 2021E 2022E

Analysts $4.32 $4.42 $4.91 $4.75 $5.00 $5.29

EPS $4.32 $4.42 $4.91 $6.20 $6.52 $7.06

growth (5.88)% 2.31% 11.09% 26.27% 5.16% 8.28%

12 Month Performance Company Description

Walmart Inc. is an international retailer that sells its products through brick and mortar stores and online through their eCommerce operations. Their main business units are Walmart U.S., Walmart International, and Sam’s Club. Within these units, they provide products in grocery, health and wellness, and general merchandise categories. Walmart focuses on having an “Every Day Low Price” and competes on cost. The first store under the Walmart name was opened in 1962 in Rogers, Arkansas. There are approximately 11,300 stores operating under Walmart Inc. today.

19.5

8.9 10.1

32.0

23.9

15.617.8

23.2

10.5

0

10

20

30

40

P/E ROE EV/EBITDA

Source: Factset

WMT Industry No AMZN

-10%

0%

10%

20%

30%

A M J J A S O N D J F M

WMT S&P 500

EXECUTIVE SUMMARY

Walmart Inc. operates in the retail sales industry. This industry is mature yet highly competitive in developed economies such as the United States, Canada, and Europe. In these developed economies, there are several large, entrenched firms including Walmart. In emerging markets such as Africa, Central America, and the Asia-Pacific region, there is high growth potential for firms entering the markets. Walmart is primarily based in North America, but they have stores and distribution centers in 26 countries outside the U.S.

Walmart’s three business units are Walmart U.S., Walmart International, and Sam’s Club. Each of these units are further divided into segments based on their revenue streams. Walmart U.S. is the largest unit, accounting for approximately 65% of net sales. Walmart International and Sam’s Club account for roughly 23% and 12% of net sales, respectively. Walmart has seen their strongest growth in the Walmart U.S. and Walmart International units. Walmart has rolled back store openings in the U.S. to focus on expanding their eCommerce services. We expect this to continue in the forecast period.

Our model shows that Walmart will have annual revenue growth between 1.4% and 2.25%. This accounts for annual increases in eCommerce sales between 12% and 15% due to Walmart’s increase focus on omni-channel offerings. Higher domestic and Central American growth is offset by stagnant or declining revenue in certain international regions. Our target price range of $115-$120 offers 16%-22% upside on Walmart’s current price of $98.69.

COMPANY DESCRIPTION

Walmart Inc. is a multinational retailer that provides products through retail stores and eCommerce channels. Their goal is to continuously improve the customer experience and they pride themselves on “helping people around the world save money and live better”1. Walmart has approximately 11,300 stores across 27 countries serving approximately 275 million customers each week1. Their products include grocery, health and wellness, and general merchandise.

Walmart was incorporated in Delaware in 1969. Their businesses were first started in 1945 when Sam Walton opened a franchised Ben Franklin variety store in Newport,

Arkansas. In 1962, the first Wal-Mart Discount City opened in Rogers, Arkansas. The first Sam’s Club was opened in 1983, and the first Walmart supercenter opened in 1988. Walmart’s first international endeavor was in 1991 when they entered a joint venture in Mexico. In 1998 Walmart opened their first neighborhood market. Walmart.com was created in 2000, the first eCommerce initiative for the company1.

Walmart’s operations are reported in three segments: Walmart U.S., Walmart International, and Sam’s Club. Historically, Walmart U.S. has constituted the majority of Walmart’s sales, as shown below.

Source: WMT 10-K, 2019

Walmart U.S.

Walmart U.S. is the largest of the three segments. It consists of all stores in the U.S., Puerto Rico, and related eCommerce sales. As of January 31, 2019, there were 4,769 stores in the Walmart U.S. segment. Locations by state are shown below.

Walmart Locations by State

Source: simplemaps.com

0

200000

400000

600000

2018 2019 2020E 2021E

Walmart Net Sales by Business Unit ($M)

Walmart U.S. Walmart International Sam's Club

Walmart U.S. had $331 billion in sales in 2019. This segment was responsible for approximately 65% of net sales in 2019.

WMT 10-K, 2019

The stores within the Walmart U.S. segment are broken into three categories: supercenters, discount stores, and neighborhood markets and other small formats. The table below shows the total number of each store type for the previous 5 years.

Supercenters Discount Stores

Neighborhood Markets

2018 3,561 400 800

2019 3,570 386 813

2020E 3,564 376 818

2021E 3,569 366 823

2022E 3,574 356 828 Source: WMT 10-K, 2019

Supercenters average around 182,000 square feet and employ around 300 associates on average. They combine full grocery selection with general merchandise and health and wellness products. Most are open 24 hours and may have specialty shops such as banks, nail salons, vision centers, or restaurants such as McDonald’s or Subway. The table below shows the net change in supercenters for the past two years and three years of the forecast period.

2018 2019 2020E 2021E 2022E

Openings 30 6 0 0 0

Closings 0 (2) (11) 0 0

Conversions 9 5 5 5 5

Total 3,561 3,570 3,564 3,569 3,574

Net change 39 9 (6) 5 5 Source: WMT 10-K, 2019

Walmart has been opening fewer supercenters in recent years. This due to the company shifting their focus to the eCommerce portion of their business and reduced demand for full-size supercenters. We forecast no new supercenter openings in the five-year forecast period. However, we forecast an average of five conversions of discount stores to supercenters per year. This is in-line with Walmart’s recent store conversions and we believe this trend will continue.

Discount stores are smaller than supercenters, averaging just over 100,000 square feet with around 200 employees. These stores offer general merchandise and health and wellness products and occasionally a limited grocery selection. The table below shows the net change in discount stores in the previous two years and the first three years of the forecast period.

2018 2019 2020E 2021E 2022E

Openings 0 1 0 0 0

Closings (6) (10) (5) (5) (5)

Conversions (9) (5) (5) (5) (5)

Total 400 386 376 366 356

Net change (15) (14) (10) (10) (10) WMT 10-K, 2019

Walmart has opened a total of three new discount stores in the last five years. We do not forecast them opening any new discount stores in the forecast period. We forecast Walmart converting an average of five discount stores per year into supercenters, in-line with their actions in recent years. We also forecast Walmart to close an average of five discount stores per year in the forecast period. This is in-line with recent years and we believe it will continue as Walmart focuses on supercenters and neighborhood markets as well as eCommerce.

Neighborhood markets are designed to leave a smaller footprint on the communities they are in. They average 38,000 square feet with around 100 employees. Neighborhood markets have grocery products including produce, meat and dairy, bakery, and deli as well as household supplies and a pharmacy. The table on the next page shows the net change in neighborhood markets for the previous two years and the first three years of the forecast period.

331.666

120.824

57.839

Net Sales ($B)

Walmart U.S. Walmart International Sam's Club

2018 2019 2020E 2021E 2022E

Openings 85 24 5 5 5

Closings (20) (11) 0 0 0

Conversions 0 0 0 0 0

Total 800 813 818 823 828

Net change 65 13 5 5 5 Source: WMT 10-K, 2019

Walmart has been aggressively adding neighborhood markets in the past several years. We forecast an average net gain of five neighborhood markets per year in the forecast period. We believe Walmart will continue adding neighborhood markets to increase their presence in areas that would not be able to support a full supercenter.

We forecast Walmart U.S. net sales to grow at an average of 2.50% per year between 2020 and 2023. This includes eCommerce sales. We forecast Walmart U.S. net sales to have a continuing value growth rate of 1.50% in 2024 and beyond. The table below shows historical and forecasted Walmart U.S. net sales annual growth rates.

2018 2019 2020E 2021E 2022E 2023E 2024E

3.46% 4.14% 2.50% 2.50% 2.50% 2.50% 1.50%

We forecast lower growth than previous years for multiple reasons. First, we believe this is a more conservative approach that accounts for possible slower economic growth in the forecast period. Additionally, Walmart’s business unit growth has been relatively volatile on a year-to-year basis. This estimate smooths that volatility over the forecast period.

Walmart International

Walmart International is Walmart’s second largest segment. It operates in 26 countries outside of the U.S. in regions such as Africa, Central America, Canada, China, Japan, and India. Walmart International’s formats include retail and wholesale stores including supercenters, hypermarkets, and warehouse clubs. They also have eCommerce platforms including Walmart.com variants tailored to specific regions, asda.com in the UK, and flipkart.com in India. On the next page is a table of stores by reporting region.

Stores by Reporting Region

2018 2019 2020E 2021E

MX/CA 3,136 3,253 3,303 3,353

UK 642 633 633 633

Canada 410 411 411 411

China 443 443 441 439

Other 1,729 1,253* 1,238 1,229 *The large drop in store count is due to Walmart selling their stake in their Brazilian operations in calendar year 2018.

Walmart International had net sales of approximately $121 billion in 2019, accounting for roughly 23% of Walmart’s total sales. Historically, Walmart International has accounted for 23-25% of total sales each year. We believe these proportions will hold relatively constant in the forecast period. However, overall revenue in the international segment may decline if Walmart is able to sell their chain of Asda stores in the UK. Due to uncertainty surrounding possible buyers and the timeframe to sell, we have not forecasted Walmart selling Asda in the forecast period. We have forecasted the UK as the only reporting region with declining revenues due to uncertainty of Asda’s future as well as heightened competition in the UK grocery market. Below are the forecasted revenue growth rates by Walmart International reporting region.

2020E 2021E 2022E 2023E 2024E

MX/CA 3.00% 3.00% 3.00% 3.00% 2.00%

UK (1.00)% (1.00)% (1.00)% (1.00)% (1.00)%

Canada 1.00% 1.00% 1.00% 1.00% 1.00%

China 2.00% 2.00% 2.00% 2.00% 2.00%

Other 2.50% 2.50% 2.50% 2.50% 2.50%

Total 1.47% 1.50% 1.52% 1.54% 1.29%

We forecast Mexico and Central America to be the strongest region moving forward. This is the largest reporting segment in the international unit. Mexico and Central America account for approximately 40% and 13% of stores in the unit, respectively. Countries such as Guatemala, Honduras, El Salvador, Nicaragua, and Costa Rica have shown heavy growth as Walmart has opened nearly 100 stores there in the last five years15. These stores have contributed strongly to Walmart’s EBITDA, allowing them to put more resources towards expansion in China and India as well as improving eCommerce platforms. Central America also presents a prime target for eCommerce expansion as Amazon has a small presence in

the region along with several Latin American eCommerce sites. Central America is projected to see GDP growth of 4% in 201915, more than double that of South America. We believe this will drive strong growth in the reporting region.

We forecast the UK region to have declining revenues in the forecast period. This is due to increased competition as Aldi and Lidl have entered the UK grocery market, forcing Asda to compete on price. Walmart management has stated that selling their majority stake in Asda allows the company to drive international and eCommerce growth in new ways. It is possible Walmart can sell Asda in the forecast period, but we are unsure when they would finalize a deal as they have had to combat regulatory scrutiny.

Canada has held steady in recent years with approximately 400 stores in the country. We do not believe Walmart will open more stores there as they are focusing on eCommerce in North America.

Walmart has approximately 440 stores in China as of January 2019. In the past five years they have added about 10 new stores per year. We believe Walmart will focus more on eCommerce in China rather than in-store sales and forecast an average of two store closings annually in the forecast period. These store closings are related to declining store quality and we believe Walmart would rather close the stores than renovate or start new construction. We believe this will lead to our low-to-moderate growth rate of 2% in Chinese revenue.

The “Other” reporting region consists of Walmart’s African, Argentinian, Chilean, Indian, and Japanese operations. Below is a table of stores in these regions as a percentage of all stores in the Walmart International unit as of January 2019.

Region Percent of all WMT Int’l Stores

Africa 7.28%

Argentina 1.54%

Chile 6.19%

India 0.37%

Japan 5.54%

Total 20.92% Source: WMT 10-K, 2019

We forecast 2.5% annual growth in the revenue for this region. This is based on factors affecting each subregion in the segment.

Africa has seen large growth in recent years, adding between five and ten stores annually. We expect Walmart to continue expansion in Africa during the forecast period.

Argentina has experienced financial instability in recent years. This has led to Walmart closing stores, including 14 closures in 2019. We expect to diminishing store counts and overall sales in Argentina. Walmart has done relatively well in Chile in recent years. However, they have been closing stores as they focus on improving eCommerce in the country. Walmart recently acquired Cornershop, an online marketplace for on-demand grocery delivery in Mexico and Chile13. Walmart hopes to leverage their supply chain advantage to expand this service. We expect moderate growth from Chilean operations because of this.

India is a difficult market for Walmart to navigate. Walmart acquired a majority stake in Flipkart in May 2018 for approximately $16 billion. Flipkart is India’s largest online retailer. India has amended their foreign direct investment policy to restrict online marketplaces’ ability to enter exclusive vendor deals. Walmart has 22 stores in India, only adding two in the past five years. We currently see the Indian market as a large source of untapped potential for Walmart. As Indian policy currently stands, we are pessimistic on growth projections in the country. If Walmart can overcome regulatory restrictions, we would have a more optimistic outlook.

There was speculation in 2018 that Walmart could sell its stake in Seiyu, a large grocery and merchandise retailer in Japan16. Walmart is seeing increased competition from Amazon in Japan, as well as downward price pressure from competing grocers and retail stores. Seiyu also faces rising capital costs as they must renovate older stores16. Seiyu did make a positive move in 2018, partnering with Amazon-rival Rakuten to provide an online grocery-delivery service. We are neutral on the Japanese segment of Walmart moving forward. It does not appear Seiyu will be able to generate consistent profit, so a sale of the stores is possible in the near future.

Overall, we expect to see modest growth in the Walmart International unit. This growth will mostly come from Mexican, Central American, and African operations. There

is potential for a large customer base in India if their foreign direct investment policy changes.

Sam’s Club

Sam’s Club is a membership-only warehouse club operating in 44 states and Puerto Rico. There were 599 Sam’s Club locations in operation as of January 2019. Sam’s Club’s main competitor is Costco (COST), another membership-only warehouse. Costco had 527 stores in operation as of December 2018. Membership income is a significant portion of Sam’s Club operating income, and the unit operates with lower gross profit rates and operating expenses relative to the other units1. This is due to their bulk, “warehouse-style” sales of grocery and general merchandise products that generates lower profits while selling larger quantities of items. They also sell products through samsclub.com.

Sam’s Club is the smallest of Walmart’s three business units. Historically it has accounted for approximately 11% of Walmart’s net sales. We believe this proportion will remain relatively constant in the forecast period.

Walmart does not disclose the number of current members or the proportions of membership types. Sam’s Club currently has two membership options, shown below.

Plus Membership Club Membership

Annual fee $100 $45

Number of add-ons

Up to 16 Up to 8

Cash rewards Yes No Source: WMT 10-K, 2019

Sam’s Club’s base price of $45 is priced competitively with Costco’s equivalent which costs $60. Costco also has an upgrade called the “Executive Membership” that brings the price to $120. The executive level offers rewards on purchases and other savings and benefits programs.

We believe the most important perk of the “Plus” membership level is free shipping on online orders. This is one way that Sam’s Club and Walmart are trying to match the benefits of Amazon and their Prime program. Online ordering also adds another layer of convenience that Amazon does not currently provide – the ability to return items to a physical store. This saves customers the time required to complete a return shipment of unwanted

merchandise. We believe these perceived conveniences will bolster Sam’s Club’s eCommerce sales. In 2019, eCommerce was 4.67% of sales and we project that amount to rise to 8.90% by 2024. The Plus membership also includes rewards programs similar to the Costco executive membership.

Sam’s Club reports their revenue in five segments shown below with their 2019 sales.

Segment 2019 Sales (millions)

Grocery and consumables $33,708

Fuel, tobacco, other $12,110

Home and apparel $5,452

Tech, office, entertainment $3,388

Health and wellness $3,181

Total $57,839

We project annual revenue growth of 2% for Sam’s Club’s total revenue. We have forecasted each segment as the same proportion of revenue as 2019, as 2019 is the first year Walmart released individual segment revenue. We believe Sam’s Club will have moderate growth due to increases in their eCommerce sales. However, we are unable to forecast membership revenues, the largest portion of Sam’s Club revenue, as Walmart does not disclose these figures.

Company Analysis

Walmart’s total revenue is broken into three segments: grocery, general merchandise, and health and wellness. Their proportions of total revenue have remained extremely constant over time.

2016 2017 2018 2019

Grocery 56% 56% 56% 56%

GM 33% 33% 33% 33%

H&W 11% 11% 11% 11% Source: WMT 10-K, 2019

We expect these proportions to hold in the forecast period. The table below shows Walmart’s same-store sales change by business unit over the past several years.

2015 2016 2017 2018 2019

WMT US 0.6% 1.0% 1.6% 2.1% 3.7%

Sam’s Club 0.0% (3.2)% 0.5% 2.8% 5.4% Source: WMT 10-K 2019

Walmart does not report same-store revenues for their international segment at this time, making it difficult to forecast growth by same-store sales growth. Both the US and Sam’s Club segments saw significant growth in same-store sales in 2019. Walmart stated 1.3% and 0.9% of this growth came from eCommerce sales for the US and Sam’s segments, respectively. Walmart noted the remaining increase for the US segment came from increased store traffic and Sam’s Club benefitted from transfers of sales from stores they closed the previous year. We believe same-store sales growth will remain positive for both segments at 2.5% and 2% for the US and Sam’s segments, respectively. This accounts for eCommerce growth although it will takeaway from in-store sales.

Walmart’s target market is extremely wide-reaching. They appeal to shoppers seeking low prices on items they purchase frequently. They have a presence in all 50 states, DC, and Puerto Rico, as well as 26 other countries. Their stores compete against many other retailers with both brick and mortar stores and eCommerce segments. These competitors range from mega and large cap companies such as Amazon and Target, to mid-size grocers like Kroger, Costco, and Publix, as well as small local retailers.

Walmart has a large competitive advantage with the size and scope of their supply chain. They can leverage their buying power into lower prices on most goods they sell. This gives them a large advantage over small retailers and allows them to match almost any price from larger competitors. Amazon is the competitor that is most similar in overall size, although they do not sell out of brick and mortar locations. Walmart has been increasing their capital expenditures on their eCommerce platforms in the past several years. Management has given guidance of approximately $11 billion in the 2020 fiscal year, a 6.34% increase from 2019. We expect this to continue as Walmart tries to compete head-to-head with Amazon in the online shopping sector.

Retail is a dynamic industry with several large incumbent firms. Walmart should use their size and cost advantages to evolve with the industry. Relative to their peers, Walmart is around the industry average for profitability margins. The peers used for these comparisons are Amazon, Target, Kroger, Costco, Dollar General, CVS, and Walgreens. The comparison is shown in the table below.

Gross Margin

Operating Margin

Net Profit Margin

WMT 24.0% 4.5% 1.3%

AMZN 42.1% 5.5% 4.3%

TGT 28.7% 5.6% 3.9%

KR 21.6% 2.2% 2.5%

COST 13.0% 3.2% 2.2%

DG 30.3% 8.3% 6.2%

CVS 20.2% 5.5% (0.3)%

WBA 22.2% 4.8% 3.8% Source: Factset

Walmart’s performance looks considerably better when compared to traditional retail establishments. We believe Walmart can improve their margins as they shift their focus onto their eCommerce segments. However, margin improvement from eCommerce may be offset by increased costs due to tariffs and international trade agreements.

RECENT DEVELOPMENTS

FY Q4 Earnings and FY 2019 Annual Report

Walmart reported 2019 Q4 earnings on February 19, 2019. Their non-GAAP EPS of $1.41 beat the consensus by $0.08 and revenue of $137.74 billion beat by $113 million. GAAP EPS of $1.27 missed by $0.06. Adjusted EPS excludes two items: a $0.17 charge related to tax reform and a $0.03 unrealized gain on Walmart’s equity investment in JD.com. Their results are as follows:

Category Amount Increase (decrease) Y/Y

Total revenue $138.8 B 1.90%

Total rev excl. currency

$140.5 B 3.10%

Q4 2019 GAAP EPS

$1.27 73.97%

Adj. EPS $1.41 6.02%

FY 2019 GAAP EPS

$2.26 (31.10)%

FY adj. EPS $4.91 11.09% Source: SeekingAlpha

Walmart’s results were interpreted well overall. There were several reasons why:

• The Walmart U.S. segment had comparable sales growth of 6.8% over two years. This is the strongest growth for the segment in nine years.

• Sam’s Club comparable sales grew 3.3% and eCommerce sales grew 21%.

• Walmart U.S. eCommerce sales grew 40% in 2019.

The most notable change is the large increase in eCommerce sales. Walmart now has 2,100 locations offering grocery pickup and 800 locations offering delivery. We expect Walmart to continue expanding these services as well as other online options to provide more convenience to customers. It should be noted that much of the gains in eCommerce sales are at the expense of in-store sales.

Partnership with Google Home

Walmart announced on April 2, 2019 a partnership with Google and their Google Home device. Walmart shoppers will be able to give voice commands to their Google Home system to add items to their Walmart shopping cart. This system is very similar to what Amazon and their Alexa/Echo speakers allow consumers to do. This shows an attempt by Walmart to offer their customers the same convenience as Amazon. Amazon still has the advantage in the smart speaker market share – of the approximately 66 million smart speakers in the U.S., Amazon is responsible for 70% through their Alexa and Echo systems6.

Asda Sale

Walmart has been attempting to sell their majority stake in its chain of supermarkets in the UK, called Asda. Walmart wants to use this move to increase investment in their eCommerce platform and developing markets. They believe their Asda division has struggled due to an increasingly-competitive environment in the UK, spurred by the entry of Aldi and Lidl9.

A tentative deal to sell the stores to UK supermarket chain Sainsbury for $9.6 billion (£7.3 billion) was blocked by the Competition and Markets Authority (CMA) in February 2019. The CMA said the acquisition would likely see higher prices and poorer choices for consumers8.

Sainsbury has offered to sell up to 150 stores to appease the UK regulatory authority. Although Sainsbury has received interest from potential buyers, they are concerned it will not be enough to satisfy the CMA. Sainsbury has also pledged to reduce prices by more than $1 billion over the next three years8.

Analysts believe a deal will be made even if it is not with Sainsbury10. An alternative, such as a private equity bid, is likely to emerge if the Sainsbury deal is ultimately unfeasible. An alternative bid would most likely fetch a lower price than the initial Sainsbury deal. We have not forecasted a sale of Asda in our forecast period. However, we have forecasted a stagnant number of stores in the UK as well as declining revenues for the UK reporting region as more competition has entered the market. It is possible Walmart may try to sell their stake in Flipkart if Indian legislation does not change, although we have not seen the company indicate that is their plan at this time.

Flipkart

Walmart purchased a majority stake Flipkart in May 2018, India’s largest online retailer, attempting to leverage Flipkart’s online retail market share in India. Walmart paid approximately $16 billion for this stake. However, Walmart has faced several obstacles after acquiring the majority stake.

Days after the acquisition was announced, it was protested by small traders in India who saw it as a threat to their businesses. The Confederation of All India Traders (CAIT) filed an anti-trust petition with the Competition Commission of India (CCI) over the deal. This is a troubling start to Walmart’s foray into India, as they face opposition from CAIT, representing over 70 million traders12.

On February 1, 2019, the Indian government implemented several new restrictive changes to their foreign direct investment (FDI) policy for eCommerce. The new rules prohibit online marketplaces from entering exclusive deals for selling products and having a single vendor supply more than 25% of the inventory12. This change will result in negative effects for Walmart as well as other large online vendors in India, such as Amazon. Because of this, we forecast stagnant revenues in the India portion of the Walmart International business segment.

Lawsuits

Walmart is involved in several legal proceedings. Accruals have been made, where appropriate, and are reflected in their consolidated financial statements. If a liability is not probable or cannot be reasonably estimated, an accrual has not been made. Walmart may enter into settlement agreements if they believe it is in the best interest of the company and shareholders.

Their Asda stores are currently a defendant in a class-action “equal value” claim. The claimants allege there was a disparity in pay between male and female workers doing the same jobs and are requesting differential backpay. Walmart has not disclosed an accrual amount for this lawsuit.

Walmart is also a named defendant in a consolidated lawsuit asserting claims generally concerning the impacts of widespread opioid abuse. The consolidated lawsuit is pending in the U.S. Northern District Court of Ohio as of late March 2019. Walmart is unable to reasonably estimate any potential loss in this matter and makes no assurances as to whether operations or cash flows will be materially, adversely affected.

We have not factored Walmart’s lawsuits into our forecasts because Walmart is unsure of how they will impact earnings. This is something to monitor going forward.

INDUSTRY TRENDS

Retail is an evolving industry where firms constantly compete to keep up with each other. Over the past decade, eCommerce has become a very common way for consumers to shop. As consumers’ preferences shift, Walmart and other retail firms must change their business channels to meet those needs.

Firms in the industry try to differentiate from one another and compete on various advantages. Walmart primarily competes on price. As their supply chain has become more efficient, they are able to lower prices and move product more efficiently.

eCommerce

eCommerce sales have grown at very high rates in the past several years, as shown below.

Source: Statista

Walmart’s eCommerce revenue grew 40% from 2018 to 2019. We do not forecast such extreme growth in the model, rather 12%-15% annual growth in eCommerce sales. We believe this is possible for Walmart as they have supply chains capable of handling higher online orders and plan to invest more in the coming years.

A large portion of eCommerce sales come at the expense of in-store sales. Grocery pickup, for example, replaces grocery orders that may have been shopped in the store. We do not see eCommerce growth as a liability to Walmart’s physical locations as these locations are needed to service pickup orders. Ecommerce also has potential for “impulse buys” that may not be as accessible when shopping in a physical store.

A key driver in the growth of online sales is smartphone penetration in the U.S. and around the world. As more people have access to smartphones, their access to online retailers is increased. On the following page is the smartphone ownership rate in select countries.

0.00%

10.00%

20.00%

30.00%

2014 2015 2016 2017 2018 2019E 2020E 2021E

eCommerce Annual Growth Rate

eCommerce annual growth rate

Source: Statista

Many western countries have the highest smartphone penetration rates. The U.S. is Walmart’s largest eCommerce market, followed by Mexico and Central America. China, India, and Japan represent the biggest opportunity to increase eCommerce sales through smartphones as they have very high percentages of the population with cell phones. If those with non-smart mobile phones make the switch to smart devices, a large segment of customers could easily access mobile marketplaces through the web and phone apps.

Store Closings

Many large retail chains have experienced store closings in recent years and brands such as Toys R Us and Sears have filed for bankruptcy, partially at the hands of Walmart. While Walmart and some of their peers have closed stores, there is a focus on converting stores as well. For example, Walmart has been converting discount stores carrying only general merchandise and limited grocery into full supercenters.

Walmart has also been opening neighborhood markets at a fast rate and Target has been opening similar locations as well. Firms are strategically placing these smaller stores in areas without a strong grocery presence as they are untapped markets. These locations don’t require the space or labor of full supercenters while still providing a full grocery selection. We expect these to be Walmart’s primary U.S. store openings along with conversions of discount stores.

Private Label Growth

Private labels are a new way for mass merchandisers to differentiate their products from the competition while increasing margins. Retailers can earn 25%-30% higher gross margins on private labels compared to manufacturer brands19 and private label sales growth is three-times that of branded products19.

Large firms such as Walmart, Target, Costco, and Amazon have the manufacturing and supply chain capabilities to create products customers want at a much lower prices than traditional manufacturers.

Walmart already has multiple private label brands across clothing, food, household products, and furniture. Currently, they do not report results for individual brands or private labels.

MARKETS AND COMPETITION

Industry History

Department and retail stores began to take hold in the early 1930s the first malls and supermarkets were introduced along with the invention of the shopping cart. It wasn’t until the early 1960s when big box retail stores such as Target, K-Mart, and Walmart appeared. Malls and department stores dominated the retail landscape until the late 1990s when online retailers, such as Amazon, began to appear. Since then, technological advancements have led to eCommerce growing at a rapid rate with omni-channel retail becoming the norm in the 2010s.

Industry Dynamics

Retail is a highly-competitive, ever-evolving industry. It encompasses a high number of firms, some large multinational companies and others are small, local shops. For comparison with Walmart, we focused on large companies in grocery and general merchandise sales.

The largest traditional competitors in Walmart’s general market are Target, Kroger, Costco, CVS, and Walgreens. Amazon is a unique competitor in that they are primarily in online sales but do have physical locations in Whole Foods.

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Smartphone Penetration by Country (2018)

Smartphone Mobile phone (not smart) No mobile phone

Threat of New Entrants

New retail establishments are constantly entering and leaving the market. Some smaller outlets are bought by the larger firms mentioned above. It would be very difficult for a new firm to enter the market and compete on the level of Walmart or Amazon due to their sheer size advantage. It is possible that multiple smaller firms could merge to create a larger entity, but it is mostly established firms competing for market share.

Threat of Substitution

Large firms in this industry do not have to worry about the threat of substitutes in a traditional sense. They have very complex supply chains that are already vertically integrated, allowing them to reduce costs. Suppliers above them cannot vertically integrate up the supply chain as many of the products they supply would not be feasible for customers to purchase directly from the manufacturer.

Walmart’s main threat for substitution comes from consumers’ ability to compare prices online. Consumers must no longer travel to multiple stores but can check prices at multiple outlets with a few clicks on a computer. This forces Walmart to compete with many more retailers than they have historically.

Supplier Power

Many of the large firms, especially Walmart, can leverage their buying power into lower prices from their suppliers. This is so common with Walmart it is sometimes known as the “Walmart Effect”23. Walmart and other large firms offer a level of exposure that suppliers are almost forced to sell to Walmart at a price of their choice. This forces the supplier to either cut production costs or take a loss on their sale to Walmart. Large retailers also have the power to display name brand goods and private labels where they wish, usually placing private labels in customers’ line of vision.

Buyer Power

Buyer power is not as concerning to Walmart, Amazon, etcetera, as it is to smaller firms. Because of the power these large firms exert over their suppliers, they can undercut many small firms’ prices. This gives customers more power, but they will use that power to shop at

Walmart or another retailer with lower prices. This is most commonly seen in online price comparisons when shopping. If customers can wait a day or two for an item to arrive, they will most likely choose the retailer with the lowest price.

Peer Comparisons

Walmart competes in a variety of retail spaces including grocery, general merchandise, and eCommerce. Because of this, they have a wide selection of competitors offering varying products and services to compare against. For peer comparison we selected seven companies that are similar in size and product scope to compare against Walmart: Amazon, Target, Kroger, Costco, Dollar General, CVS, and Walgreens.

Grocery Comparison

There are approximately 40,000 grocery stores in the United States. Below are the grocery locations for each comparison company.

Firm Grocery Properties

WMT 4,413

TGT 1,844

KR 2,764

COST 527

AMZN (Whole Foods) 479 Source: Company 10-K Forms

Together these firms account for approximately 25% of the grocery store market share in the United States. Below is their market share relative to each other based on store locations.

4413

1844

2764

527 479

Relative Store Market Share 2018

WMT TGT KR COST AMZN

It is not common for these firms to acquire specific stores. New stores are built by the firm or are converted from an existing building. The grocery industry is relatively fragmented as there are many private chains operating in varying geographic regions. These include Publix in the southeastern U.S. and Meijer and Hy-Vee in the midwest31.

Dollar General is not included in these numbers because they do not have a traditional selection of groceries, nor do they break out sales for groceries specifically. They had 15,472 stores as of March 1, 2019. Their consumables segment which includes groceries accounts for approximately 77% of total revenue30. DG is a tangential competitor to tradition grocery and big box stores. They do not have the inventory selection or store size to supply large populations but have a niche in small towns that can’t support a full-size grocery store. These would compete more with Walmart’s discount store locations; which Walmart has been reducing in recent years.

Pharmacy Comparison

There are approximately 67,000 pharmacies in the United States. Below are the pharmacy locations for each company.

Firm Pharmacy Properties

WMT 4,403

CVS 9,900

WBA 9,451 Source: Company 10-K Forms

Together these firms account for approximately 35% of pharmacies in the United States. Below is their market share relative to each other by store count.

CVS and Walgreens account for a very large share of the pharmacy market compared to Walmart.

Overall Comparison

Although these are all large firms in their respective markets, their sizes vary drastically from each other based on revenue and market capitalization.

Firm Revenue ($M) Market Cap ($M)

WMT $514,405 $283,209

TGT $74,433 $41,647

KR $121,162 $19,112

COST $138,434 $107,731

AMZN $232,887 $901,770

DG $25,625 $32,216

CVS $194,579 $69,697

WBA $131,537 $49,829 Source: Company 10-K Forms, Yahoo Finance

Although Walmart has the highest revenue, Amazon has a much higher market capitalization. This is due to Amazon having other operations that solely retail and thus it is not valued the same as a consumer staples or retail company. For that reason, they will be excluded from some comparisons.

Below is the revenue per store and revenue per square foot for each company, Amazon excluded.

Firm Rev/Store ($M) Rev/Sq. Ft.

WMT $45.28 $729.65

TGT $40.36 $323.20

KR $43.84 $676.88

COST $181.67 $1,250.53

DG $1.66 $231.00

CVS $19.65 $2,417.13

WBA $13.92 $876.91 Source: Company 10-K Forms

Walmart outperforms every competitor except for Costco on a revenue per store basis. This is partially due to Walmart having online operations that KR, CVS, and WBA do not have, although WMT is relatively close to KR and TGT on a revenue by store basis. We believe Costco has large advantage here because they sell exclusively wholesale in a warehouse club format, like Sam’s Club. This allows them to sell mass quantities at fewer total locations. CVS and WBA most likely have lower per store

4403

9900

9451

Relative Pharmacy Market Share 2018

WMT CVS WBA

revenues due to selling fewer items at many more locations including pharmacies inside larger stores.

Walmart has a much higher revenue per square foot than TGT or KR. We believe this is due to WMT having higher online sales than TGT and KR as well as Sam’s Club inflating the revenue per square foot. Costco has a higher revenue per square foot for the same reason Sam’s Club would; they are able to move more inventory in less space due to their warehouse format. CVS and WBA have high revenue per square foot figures because their average store size is much smaller than WMT, TGT, KR, or COST and they sell pharmaceuticals which have much higher prices than traditional retail products.

The table below contains various ratios for the comparison companies for their most recent reported years.

Op. Margin ROA ROE ROIC

WMT 4.5% 3.1% 8.9% 9.9%

TGT 5.6% 7.3% 25.5% 12.8%

KR 2.2% 8.0% 41.5% 7.5%

COST 3.2% 8.5% 26.9% 16.3%

AMZN 5.5% 7.0% 26.9% 15.8%

DG 8.33% 12.27% 25.34% 17.65%

CVS 5.5% (0.4)% (1.2)% 5.7%

WBA 4.8% 7.3% 19.7% 13.7% Source: Factset

WMT is towards the bottom of the pack based on common ratio analysis. Compared to traditional retailers TGT, KR, and COST, they have a high operating margin but a below-average ROA, ROE, and ROIC. This leads us to believe that WMT’s management may not be effectively using their assets. We believe that WMT has an acceptable ROIC although they could improve on it moving forward. We forecast a ROIC of 17%-20% for WMT in the forecast period.

It is difficult to compare Amazon and Walmart because Amazon is not a traditional retailer. Although Amazon is a direct competitor in the eCommerce marketplace, we do not believe comparing certain comparable measures of Amazon and Walmart yields meaningful conclusions. In the next column is a table with more comparison metrics.

D/E Div. Yld. Beta Int. Cov.

WMT 80.0% 2.17% 0.60 9.67x

AMZN 113.2% 0.00% 1.24 8.97x

TGT 119.0% 3.57% 0.81 9.15x

KR 193.1% 1.94% 0.70 4.39x

COST 46.8% 0.92% 0.82 30.55x

CVS 126.1% 3.05% 1.00 4.15x

WBA 72.8% 2.39% 0.87 9.04x

DG 44.6% 1.01% 0.71 20.61x Source: Factset

Aside from AMZN and TGT to an extent, most of these stocks are considered traditional consumer staples companies. We can see they all have betas less than or equal to 1 (AMZN excluded), indicating they are less volatile than the market. WMT, TGT, KR, CVS, and WBA have strong dividend yields for the sector. COST and DG have the lowest dividend yields, mostly due to their lower leverage and overall risk. COST and DG appear to be the “safest” choices in the industry as they have very high interest coverage (EBIT/interest expense) along with low debt to equity ratios. WMT, TGT, and WBA also have strong coverage ratios with WMT and WBA being on the lower end of the debt to equity ratios.

We believe, WMT, COST, and DG present the best potential moving forward in the industry. These companies each operate in slightly different areas of the retail landscape and use their strengths to their advantage while actively improving weaknesses.

Disruption

The internet will continue to disrupt the way traditional retail transactions have taken place. Consumers no longer need to leave their house to compare prices or order anything they want. The main trade-off will be time – would customers rather get the product immediately in a physical location or wait to receive it in the mail. The firms that can adapt to technology quickly and efficiently will be the ones poised to capture the most market share. We believe Walmart has taken the proper steps to improve their eCommerce platforms and compete with Amazon in both the U.S. and abroad.

ECONOMIC OUTLOOK

Trade Agreements

Increased tariffs with China would affect Walmart in several ways. Walmart imports and exports both finished goods and materials for manufacturing goods. Household appliances were some of the first items to have tariffs imposed on them. It was a 20% tariff imposed in mid-2018.

3-Month Percent Change – Other Appliances

Source: Bureau of Labor Statistics

This graph shows the three-month percent price change for non-major appliances, like the types Walmart sells. This chart shows that the tariff was passed almost entirely to consumers, as prices of laundry equipment rose approximately 3%, a steeper increase than most years in the past decade. Some companies can pass these tax burdens onto consumers; however, we do not believe Walmart will be able to do this as easily. Since Walmart competes on price, they must compete to keep prices low. This means they would assume the losses that come from the tariffs or lose customers as prices increase.

Economic Downturns

Historically, Walmart has performed well relative to peers in the event of an economic downturn or recession. However, Walmart has been slow to catch up to the market during bull periods. This is shown on the chart below.

Walmart is a relatively safe defensive stock. The negative side of that is they do not see large price increases when the economy is doing well. This is due to their beta being 0.595.

Labor and Employment

Unemployment has been at historic lows for the last couple years as shown in the chart below. This has caused upward pressure on wages as companies like Walmart compete for workers in the United States.

Seasonally Adjusted Unemployment

Source: Bureau of Labor Statistics

Walmart has responded by raising their starting wage from $9/hour to $11/hour as well as expanding maternity benefits beginning in early 201932. Walmart may be forced to raise their starting wage higher as Amazon has hiked their minimum wage to $15 beginning in late 2018, and Target plans to do the same by 202033.

Walmart has had a long history of dubious employment practices. Issues include a 2017 report stating Walmart penalized workers for sick days and lawful absences and settled a dispute with union-supporting employees in 201834,35. These public issues make it harder for Walmart to attract new employees and retain current workers. The company has stated they are working on improving worker relations and working conditions.

CATALYSTS FOR GROWTH

Developing Economies

Developing economies in Asia, Africa, and Central America present the greatest international growth potential. On the next page is an annual GDP growth map of the world. Darker shading represents higher growth.

Source: WorldBank

The markets with the highest growth are China, India, and several African countries. Walmart has an established presence in these countries and has been adding stores rapidly, especially in Africa. China presents a lucrative opportunity to expand eCommerce sales, however tariffs could dampen these results. India has a share of regulatory hurdles as well. Walmart will need to overcome these obstacles to harness the sales potential in developing regions.

Online Grocery

Online grocery has been the key driver for Walmart’s eCommerce revenue growth. As of January 2019, Walmart offers grocery pickup at over 2,100 locations and delivery at over 800 locations. The map below shows Walmart locations with grocery pickup available.

WMT Grocery Pickup Locations 2019

Source: Walmart.com

Walmart has been rapidly expanding grocery pickup and delivery services in the past two years, increasing from 1,100 locations in 2017 to 2,100 in early 2019. We believe they will continue expanding online grocery services to serve markets with few online options. Currently their grocery pickup service is free – consumers pay what they would if they shopped in the store. Their delivery service has a variable fee depending on time and order size. Tipping is an option but not required, and Walmart would not see those revenues anyway.

INVESTMENT POSITIVES

• Strong eCommerce growth gives Walmart an opportunity to increase revenues while lowering costs. eCommerce growth has been strongest in the Walmart U.S. unit; however, Sam’s Club could also see higher growth with their Plus Membership perks. The acquisition of Cornershop will drive eCommerce growth in Mexico and Chile.

• As Walmart expands their eCommerce operations they will have an advantage in their economies of scale. If they can efficiently utilize their existing supply chain, they can distribute online orders without large capital outlays.

• Walmart can expand further into developing economies. There is increasing demand for retail goods in African, Central American, and Asian-Pacific countries. They can sell products through both brick and mortar stores and eCommerce platforms.

INVESTMENT NEGATIVES

• An economic slowdown could hurt overall sales. Although Walmart has fared relatively well during slowdowns, they are not immune to reduced consumer spending.

• Walmart has potential for larger losses impacting 2020 earnings stemming from continued problems with the Flipkart acquisition. Indian FDI policy could make Walmart’s investment unable to generate the revenue they expected at the time of the acquisition.

• Difficulty finding a suitor for Asda could hurt Walmart’s bottom line in the short-term. Asda has not fared well

against increased competition in the UK market, and UK regulators are making it difficult to sell the stores.

VALUATION

Model Valuations

The model valuations for Walmart are as follows:

• Henry Fund DCF/EP: $128-$130

• Henry Fund DDM: $104-$107

• Relative P/E: $72-$76

• Relative P/S: $70-$72

Walmart’s current stock price is $103.16. The DCF model indicates the stock is undervalued. The DDM, relative P/E and P/S models indicate the stock is overvalued. It should be noted the P/E and P/S models do not use AMZN as a comparison due to the unique nature of the company. There are currently 33 analysts covering Walmart. The analyst consensus one-year target price is $109.30. Our target price range of $115-$120 represents an 11%-16% upside on the current price and a 5%-10% upside on the analyst target price.

We believe the target price lies somewhere between the Henry Fund models and the relative models. We believe the undervaluation of the relative models do not account for the size and market saturation of WMT and their strong position in the industry. The DCF and DDM models reflect our optimism for WMT’s future as well as a consistently rising dividend for the company.

Cost of Capital Assumptions

Walmart’s weighted average cost of capital was calculated using the yield on the 10-year U.S. Treasury Bill for a risk-free rate of 2.48%. The assumed market risk premium is 4.95%. This is the Henry Fund consensus based on historical and forward-looking data. The beta used was 0.595, calculated using five-year weekly returns against the S&P 500. The pre-tax cost of debt was 3.78%, via Factset. These gave a 5.42% cost of equity using the capital asset pricing model. We used a 17.80% marginal tax rate based on Walmart’s marginal tax rate given in their 10-K. This resulted in a 5.08% WACC that is used in all years.

Revenue Growth Assumptions

Revenue growth was projected by Walmart’s three business units: Walmart U.S., Walmart International, and Sam’s Club. Below is their respective annual growth rates and continuing value growth rate for the 2024E year.

Unit Annual Growth CV Growth

WMT U.S. 2.5% 2%

WMT Int’l 1.5% 1.3%

Sam’s Club 2% 2%

Walmart U.S. sales projections were based on historical trends as well as accounting for a possible economic slowdown and the effects of tariffs with China and other countries. We believe 2.5% annual growth is on the conservative side, especially if Walmart has continued high growth in eCommerce sales.

It should be noted that Walmart International growth fluctuates around the 1.5% mark. This is due to forecasting the individual reporting regions that make up the international unit. Further detail can be found in the Walmart International section of the Company Description. We believe the international growth rate encapsulates the uncertainty in certain international markets as well as the strong growth shown in others.

Sam’s Club has fluctuated between slightly negative and positive growth in recent years. We believe a 2% annual increase in-line with inflation is appropriate for the business unit.

Margin Assumptions

Walmart has had decreasing cost of goods sold as a percentage of sales in recent years. We believe this will continue as they expand their eCommerce sales. We have forecasted a COGS/sales percentage of 74.50% in the first year with a 20 basis-point annual decrease. We believe this adequately reflects the cost-savings of higher eCommerce sales. Walmart’s gross, operating, and net profit margins are shown on the following page.

2019 2020E 2021E 2022E 2023E 2024E

GM 25.10% 25.70% 25.90% 26.10% 26.30% 26.50%

OM 4.27% 4.95% 5.15% 5.35% 5.55% 5.75%

PM 1.30% 3.51% 3.64% 3.82% 4.00% 4.17%

The main driver behind Walmart’s increasing margins is the decrease in the COGS/sales ratio. We believe Walmart will see rising margins as they focus on eCommerce growth and improving efficiency in their international markets.

Capital Expenditure Guidance

Walmart management has given capital expenditure guidance of approximately $11 billion. This is an increase from 2019’s expense of $10.34 billion. We believe this is due to increased capital expenditures put towards improving their eCommerce platforms. Below is a breakdown of their capital expenditures over the past two years.

Capex Allocation 2019 2018

eCommerce/tech $5,218 $4,521

Remodels $2,152 $2,009

New stores $313 $914

Total U.S. $7,683 $7,444

WMT Int’l $2,661 $2,607

Total Capex $10,344 $10,051 Source: WMT 10-K, 2019

International and remodeling capital expenditures show small increases. Most of the increase is coming from an increase in eCommerce spending which is partially offset by a decrease in new stores. We believe this trend will continue in the short term as Walmart continues to compete with Amazon. Our capital expenditure forecast is shown below.

It is possible capex will decrease as Walmart refines their eCommerce operating efficiency.

KEYS TO MONITOR

Walmart’s success in their eCommerce endeavors will be one of the most important factors in their future growth. They will need to successfully compete with Amazon’s pricing, convenience, and supply chain logistics to capture market share.

Walmart International’s growth in specific regions should be monitored carefully going forward. The most important region is India because of their massive potential consumer base. If Indian foreign direct investment regulation is relaxed, Walmart will have a much easier time tapping into this market. Other firms such as Amazon would be competing with Walmart for market share, but Walmart has an advantage in Flipkart. If they are not able to successfully penetrate the Indian market, there could be large impairment charges on Flipkart. It is also important to monitor progress on a potential Asda sale, as Walmart would be exiting the UK market.

Trade agreements could affect how Walmart buys and sells in international markets. Tariffs would hurt domestic manufacturing that relies on foreign parts as well as increase the prices of finished goods that Walmart sells. It will be important to monitor further negotiations to assess the impact on Walmart’s costs.

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REFERENCES

1. WMT 10-K, 2014-2019 2. Factset 3. Bloomberg 4. Yahoo Finance 5. Deloitte – 2019 Retail Industry Outlook 6. SeekingAlpha 7. Reuters – Asda overtakes suitor Sainsbury to become

UK’s No. 2 supermarket 8. Bloomberg – Sainsbury and Asda Offer to Sell Stores to

Save $9.6 Billion Deal 9. Forbes – Why Tesco Says Sale Of Walmart’s ASDA

Should Not Be Cleared 10. The Wall Street Journal – Walmart’s Multibillion-Dollar

U.K. Merger Faces Big Hurdle 11. CNBC – Walmart is keeping the faith in its $16 billion

bet to take on Amazon 12. Quartz India – Despite the many policy pricks, Walmart

can’t just walk away from Flipkart 13. Walmart.com – Our Business 14. Simplemaps.com – Custom maps 15. Bloomberg – Walmart’s Killing It in Central America 16. Motley Fool – Walmart Says It’s Not Leaving Japan 17. Statista – e-commerce sales growth worldwide 2014-

2021 18. Mordor Intelligence – Retail Industry Trends 19. CB Insights – Private Labels Rising 20. CNN Money – Walmart is where the trade war comes

home 21. Bureau of Labor Statistics 22. WorldBank – GDP growth 23. Investopedia – Walmart Effect 24. Kroger 10-K, 2019 25. Costco Wholesale 10-K, 2018 26. CVS 10-K, 2019 27. Walgreens Boots Alliance 10-K, 2019 28. Amazon 10-K, 2019 29. Target 10-K, 2019 30. Dollar General 10-K, 2019 31. Forbes – America’s Largest Private Companies –

Grocery Stores 32. CNBC – Walmart to raise its starting wage to $11 33. CNBC – Amazon’s minimum wage hike puts pressure

on Walmart, Target, others to follow 34. New York Times – Walmart Is Accused of Punishing

Workers for Sick Days

35. Washington Post – Walmart to settle with labor activists in dispute over union organizing

IMPORTANT DISCLAIMER

Henry Fund reports are created by students enrolled in the Applied Securities Management program at the University of Iowa’s Tippie College of Business. These reports provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of our students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold an investment position in the companies mentioned in this report.

Walmart Inc.

Revenue Decomposition

Fiscal Years Ending Jan. 31 2017 2018 2019 2020E 2021E 2022E 2023E 2024E

Total revenue 485,144 499,909 514,405 521,555 533,068 544,874 556,981 565,377

% change 0.63% 3.04% 2.90% 1.39% 2.21% 2.21% 2.22% 1.51%

eCommerce portion of net sales 25,100 28,248 31,963 36,389 41,724 48,239

As % of net sales 4.88% 5.42% 6.00% 6.68% 7.49% 8.53%#DIV/0! 12.54% 13.15% 13.85% 14.66% 15.61%

Walmart U.S.Net sales 307,833 318,477 331,666 339,958 348,457 357,168 366,097 371,589

% change 3.17% 3.46% 4.14% 2.50% 2.50% 2.50% 2.50% 1.50%Grocery 172,386 178,347 184,202 188,807 193,527 198,365 203,325 206,374

GM 33,862 35,032 108,739 111,457 114,244 117,100 120,028 121,828

Health and wellness 101,585 105,097 35,788 36,683 37,600 38,540 39,503 40,096 Other 2,937 3,010 3,086 3,163 3,242 3,291

eCommerce portion of net sales 11,214 15,700 18,013 20,769 24,084 28,116 33,087

% of net sales 3.52% 4.73% 5.30% 5.96% 6.74% 7.68% 8.90%Operating income 17,745 17,869 17,386 17,758 17,939 18,121 18,303 18,355

Operating margin 5.76% 5.61% 5.24% 5.22% 5.15% 5.07% 5.00% 4.94%Total assets 104,262 104,347 105,114 103,702 109,223 114,955 120,412 125,925

Depreciation and amortization 3,298 3,655 6,201 6,430 6,769 7,129 7,512 7,919

as % of total assets 3.16% 3.50% 5.90% 6.20% 6.20% 6.20% 6.24% 6.29%Capital expenditures 6,090 5,680 6,034 6,417 6,824 7,256 7,717 8,206

Walmart International

Net sales 116,119 118,068 120,824 122,602 124,435 126,327 128,277 129,929 % change -5.91% 1.68% 2.33% 1.47% 1.50% 1.52% 1.54% 1.29%

Mexico and Central America 31,790 32,744 33,726 34,738 35,780 36,496

UK 30,547 30,242 29,939 29,640 29,343 29,050 Canada 18,613 18,799 18,987 19,177 19,369 19,562 China 10,702 10,916 11,134 11,357 11,584 11,816 Other 29,172 29,901 30,649 31,415 32,200 33,005


% of net sales 5.55% 5.82% 6.13% 6.47% 6.84% 7.29%Operating income 5,758 5,352 4,883 4,987 5,038 5,089 5,140 5,155

Operating margin 4.96% 4.53% 4.04% 4.07% 4.05% 4.03% 4.01% 3.97%

Total assets 74,508 81,549 97,066 95,763 100,861 106,154 111,192 116,284 Depreciation and amortization 2,629 2,601 2,590 2,686 2,827 2,977 3,137 3,307 Capital expenditures 2,967 2,607 2,661 2,830 3,009 3,200 3,403 3,619

Sam's Club

Net sales 57,365 59,216 57,839 58,996 60,176 61,379 62,607 63,859 % change 0.94% 3.23% -2.33% 2.00% 2.00% 2.00% 2.00% 2.00%

Grocery and consumables 33,708 34,382 35,070 35,771 36,487 37,216

Fuel, tobacco, and other categories 12,110 12,352 12,599 12,851 13,108 13,370 Home and apparel 5,452 5,561 5,672 5,786 5,901 6,019 Tech, office, entertainment 3,388 3,456 3,525 3,595 3,667 3,741 Health and wellness 3,181 3,245 3,310 3,376 3,443 3,512


as % of net sales 4.67% 5.25% 5.93% 6.74% 7.71% 8.90%Operating income 1,671 982 1,520 1,550 1,581 1,613 1,645 1,678 Operating margin 2.91% 1.66% 2.63% 2.63% 2.63% 2.63% 2.63% 2.63%Total assets 14,125 13,418 12,893 12,720 13,397 14,100 14,769 15,446 Depreciation and amortization 487 466 639 663 697 735 774 816

Capital expenditures 639 626 450 479 509 541 575 612

Corporate and support

Net sales - - - - - - - - Operating income (2,410) (3,766) (1,832) (1,362) (1,641) (1,674) (1,708) (1,908)

Total assets 5,930 5,208 4,222 4,165 4,387 4,617 4,836 5,058

Depreciation and amortization 3,666 3,807 1,248 1,294 1,362 1,435 1,512 1,594 Capital expenditures 1,193 1,138 1,199 1,275 1,356 1,442 1,533 1,631

Consolidated

Net sales 481,317 495,761 510,329 521,555 533,068 544,874 556,981 565,377 Operating income (loss) 22,764 20,437 21,957 22,427 22,655 22,885 23,115 23,180

Operating margin 4.73% 4.12% 4.30% 4.30% 4.25% 4.20% 4.15% 4.10%Interest, net (2,267) (2,178) (2,129) (2,201) (1,897) (1,893) (1,874) (1,881)

Loss on extinguishment of debt - (3,136) - 0 0 0 0 0

Other gains and (losses) (8,368) 0 0 0 0 0Income before income taxes 20,497 15,123 11,460 19,600 20,118 20,338 20,572 20,621

Total assets 198,825 204,522 219,295 216,350 227,868 239,826 251,210 262,713 Depreciation and amortization 10,080 10,529 10,678 11,072 11,655 12,275 12,935 13,636 Capital expenditures 10,889 10,051 10,344 11,000 11,698 12,439 13,228 14,067

ecommerce 25,100

Units as % of total sales

WMT US 63.45% 63.71% 64.48% 65.18% 65.37% 65.55% 65.73% 65.72%WMT INTL 23.93% 23.62% 23.49% 23.51% 23.34% 23.18% 23.03% 22.98%

SAMS 11.82% 11.85% 11.24% 11.31% 11.29% 11.26% 11.24% 11.29%

Walmart Inc.

Income Statement


Sales 485.14 499.91 514.41 521.56 533.07 544.87 556.98 565.38

Cost of Goods Sold (COGS) incl. D&A 361.26 373.40 385.30 390.91 399.80 408.93 418.29 424.88

COGS excluding D&A 351.18 362.87 374.62 379.83 388.15 396.65 405.36 411.24

Depreciation & Amortization Expense 10.08 10.53 10.68 11.07 11.66 12.28 12.93 13.64 Gross Income 123.89 126.51 129.10 130.65 133.27 135.95 138.69 140.50

SG&A Expense 101.85 105.31 107.15 108.22 110.61 113.06 115.57 117.32EBIT (Operating Income) 22.04 21.20 21.96 22.43 22.66 22.88 23.11 23.18

Nonoperating Income - Net 0.87 0.59 0.22 0.47 0.48 0.49 0.50 0.51

Other Income (Expense) 0.77 0.44 -

Interest Expense 2.41 2.33 2.35 2.20 1.90 1.89 1.87 1.88

Unusual Expense - Net - 4.34 8.37

Unrealized Valuation Gain/Loss - - (8.37)

Restructuring Of Debt - 3.14 -

Pretax Income 20.50 15.12 11.46 19.60 20.12 20.34 20.57 20.62

Income Taxes 6.20 4.60 4.28 3.49 4.03 4.07 4.11 4.13

Consolidated Net Income 14.29 10.52 7.18 16.11 16.09 16.26 16.46 16.49

Minority Interest 0.65 0.66 0.51 0.60 0.60 0.60 0.60 0.60

Net Income 13.643 9.862 6.67 15.51 15.49 15.66 15.86 15.89

Discontinued Operations - - - - - - - - Net Income available to Common 13.64 9.86 6.67 15.51 15.49 15.66 15.86 15.89

Per Share

EPS (recurring) 4.39 3.29 2.26 5.26 5.25 5.31 5.38 5.39

Beg total shares outstanding (M) 3,162 3,048 2,952 2,952 2,951 2,950 2,950 2,950

End Total Shares Outstanding (M) 3,048 2,952 2,952 2,951 2,950 2,950 2,950 2,949

Weighted average shares outstanding 3,105 3,000 2,952 2,951 2,951 2,950 2,950 2,950

Dividends per Share 2.00 2.04 2.08 2.12 2.16 2.20 2.24 2.28

Dividends total 6.10 6.02 6.14 6.26 6.37 6.49 6.61 6.72

All figures in billions of U.S. Dollar except per share and labeled items.

Walmart Inc.

Balance Sheet


Assets

Cash & Short-Term Investments 6.87 6.76 7.72 5.42 15.98 27.00 37.32 48.05

Accounts Receivables, Net 5.84 5.61 6.28 6.26 6.40 6.54 6.68 6.78

Bad Debt/Doubtful Accounts (0.08) - - - - - - -

Inventories 43.05 43.78 44.27 44.33 45.31 46.31 47.34 48.06

Other Current Assets 1.94 3.51 3.62 3.65 3.73 3.81 3.90 3.96 Total Current Assets 57.69 59.66 61.90 59.67 71.42 83.66 95.24 106.85

Net Property, Plant & Equipment 114.18 114.82 111.40 110.67 110.01 109.43 108.94 108.53

Property, Plant & Equipment - Gross 191.13 197.86 198.57 208.91 219.91 231.61 244.05 257.28

Accumulated Depreciation and Amortization 76.95 83.04 87.18 98.25 109.90 122.18 135.11 148.75

Intangible Assets 17.04 18.24 31.18 31.18 31.18 31.18 31.18 31.18

Deferred Tax Assets 1.57 1.88 1.13 0.87 1.01 1.02 1.03 1.03

Other assets (tangible) 8.36 9.92 14.82 15.12 15.42 15.73 16.04 16.36

Other tangible assets 6.79 8.04 13.69 13.96 14.24 14.53 14.82 15.12 Total Assets 198.83 204.52 219.30 216.35 227.87 239.83 251.21 262.71

Liabilities & Shareholders' EquityST Debt & Curr. Portion LT Debt 3.92 9.66 7.83 8.02 7.65 7.65 6.96 6.96

Accounts Payable 41.43 46.09 47.06 46.94 47.98 49.04 50.13 50.88

Income Tax Payable 0.92 0.65 0.43 0.35 0.40 0.41 0.41 0.41

Other Current Liabilities 20.65 22.12 22.16 22.73 23.23 23.74 24.27 24.64 Total Current Liabilities 66.93 78.52 77.48 78.03 79.26 80.84 81.77 82.89

Long-Term Debt 42.02 36.83 50.20 42.54 42.42 42.61 42.81 43.02

Provision for Risks & Charges 0.20 0.18 - 0.21 0.21 0.21 0.21 0.22

Deferred Tax Liabilities 4.33 3.83 11.98 2.09 2.42 2.44 2.47 2.48

Other Liabilities 4.81 4.34 - 4.51 4.60 4.70 4.79 4.89 Total Liabilities 118.29 123.70 139.66 127.39 128.91 130.81 132.05 133.50

Common Equity 77.80 77.87 72.50 81.82 91.82 101.88 112.02 122.08

Common stock plus APIC 2.68 2.94 3.25 4.14 5.03 5.92 6.81 7.70

Retained Earnings 89.35 85.11 80.79 90.04 99.15 108.33 117.58 126.75

Cumulative Translation Adjustment/Unrealized For. Exch. Gain (14.36) (10.49) (11.54) (11.54) (11.54) (11.54) (11.54) (11.54)

Other Appropriated Reserves 0.13 0.31

Total Shareholders' Equity 77.80 77.87 72.50 81.82 91.82 101.88 112.02 122.08

Accumulated Minority Interest 2.74 2.95 7.14 7.14 7.14 7.14 7.14 7.14 Total Equity 80.54 80.82 79.63 88.96 98.96 109.02 119.16 129.22

Total Liabilities & Shareholders' Equity 198.83 204.52 219.30 216.35 227.87 239.83 251.21 262.71

All figures in billions of U.S. Dollar except per share items.

Walmart Inc.Cash Flow Statement

Fiscal Years Ending Jan. 31 2014 2015 2016 2017 2018 2019

Operating Activities

Net Income / Starting Line 16.551 16.814 15.08 14.293 10.523 7.179Depreciation, Depletion & Amortization 8.87 9.173 9.454 10.08 10.529 10.678

Depreciation and Depletion 8.87 9.173 9.454 10.08 10.529 -Deferred Taxes & Investment Tax Credit -0.279 -0.503 -0.672 0.761 -0.304 -0.499

Deferred Taxes -0.279 -0.503 -0.672 0.761 -0.304 -0.499Other Funds 0.938 0.785 1.41 0.206 4.346 10.1Funds from Operations 26.08 26.269 25.272 25.34 25.094 27.458

Changes in Working Capital -2.823 2.295 2.117 6.19 3.243 0.295Receivables -0.566 -0.569 -0.019 -0.402 -1.074 -0.368

Inventories -1.667 -1.229 -0.703 1.021 -0.14 -1.311Accounts Payable 0.531 2.678 2.008 3.942 4.086 1.831Income Taxes Payable -1.224 0.166 -0.472 0.492 -0.557 -0.04Other Accruals 0.103 1.249 1.303 1.137 0.928 0.183

Net Operating Cash Flow 23.257 28.564 27.389 31.53 28.337 27.753

Investing ActivitiesCapital Expenditures -13.115 -12.174 -11.477 -10.619 -10.051 -10.344

Capital Expenditures (Fixed Assets) -13.115 -12.174 -11.477 -10.619 -10.051 -10.344Net Assets from Acquisitions -0.015 -1.844 -1.326 -2.553 -0.383 -14.656Sale of Fixed Assets & Businesses 0.727 1.241 0.881 1.118 1.424 1.395

Purchase/Sale of Investments 0 0 0 -1.901 0 -Purchase of Investments 0 0 0 1.901 0 -

Other Funds 0.105 -0.192 -0.079 -0.122 -0.058 -0.431

Other Uses - -0.192 -0.079 -0.122 -0.058 -0.431Other Sources 0.105 0 0 0 0 -

Net Investing Cash Flow -12.298 -12.969 -12.001 -14.077 -9.068 -24.036

Financing ActivitiesCash Dividends Paid -6.139 -6.185 -6.294 -6.216 -6.124 -6.102

Common Dividends -6.139 -6.185 -6.294 -6.216 -6.124 -6.102Change in Capital Stock -6.683 -1.015 -4.112 -8.298 -8.296 -7.41

Repurchase of Common & Preferred Stk. -6.683 -1.015 -4.112 -8.298 -8.296 -7.41Issuance/Reduction of Debt, Net 3.015 -5.018 -3.158 -3.591 -1.437 12.035

Change in Current Debt 0.911 -6.288 1.235 -1.673 4.148 -0.053Change in Long-Term Debt 2.104 1.27 -4.393 -1.918 -5.585 12.088

Issuance of Long-Term Debt 7.072 5.174 0.039 0.137 7.476 15.872Reduction in Long-Term Debt -4.968 -3.904 -4.432 -2.055 -13.061 -3.784

Other Funds -1.21 -1.009 -1.232 -0.734 -4.01 -1.06Other Uses -1.21 -1.009 -1.232 -0.734 -4.01 -1.06

Net Financing Cash Flow -11.017 -13.227 -14.796 -18.839 -19.867 -2.537

Exchange Rate Effect -0.442 -0.514 -1.022 -0.452 0.487 -0.438

Net Change in Cash -0.5 1.854 -0.43 -1.838 -0.111 0.742

Free Cash Flow 10.142 16.39 15.912 20.911 18.286 17.409

Free Cash Flow per Share 3.089248 5.053962 4.946223 6.719473 6.075083 5.911375Free Cash Flow Yield (%) 4.136647 5.947237 7.453621 10.068135 5.698952 6.168606

All figures in billions of U.S. Dollar except per share items.

Carriage Services, Inc.

Cash Flow Statement

Fiscal Years Ending Jan. 31 2020E 2021E 2022E 2023E 2024E

Cash flow from operating activities

Net income 15.51 15.49 15.66 15.86 15.89

Depreciation and amortization 11.07 11.66 12.28 12.93 13.64

Change in accounts receivable 0.02 (0.14) (0.14) (0.15) (0.10)

Change in inventories (0.06) (0.98) (1.00) (1.03) (0.71)

Change in other current assets (0.03) (0.08) (0.08) (0.08) (0.06)

Change in deferred tax assets 0.26 (0.14) (0.01) (0.01) (0.00)

Change in deferred tax liabilities (9.89) 0.33 0.02 0.02 0.01

Change in accounts payable (0.12) 1.04 1.06 1.09 0.76

Change in income tax payable (0.08) 0.05 0.00 0.00 0.00

Change in other current liabilities 0.57 0.50 0.51 0.53 0.37 Net cash from operating activities 17.26 27.73 28.31 29.17 29.78

Investing activities

Change in goodwill - - - - -

Change in intangible assets - - - - -

Capital expenditures (10.34) (11.00) (11.70) (12.44) (13.23)

Change in other assets (tangible) (0.27) (0.28) (0.28) (0.29) (0.30) Net cash used in investing activities (10.62) (11.28) (11.98) (12.73) (13.52)

Financing activities

Change in current debt 0.19 (0.37) - (0.69) -

Change in long-term debt (7.66) (0.12) 0.20 0.19 0.22

Change in other long-term liabilities 4.51 0.09 0.09 0.09 0.10

Change in risk provision 0.21 (0.00) 0.00 0.00 0.00

Dividends paid (6.26) (6.37) (6.49) (6.61) (6.72)

Proceeds from ESOP 0.89 0.89 0.89 0.89 0.89

Purchase of stock to retire (0.82) (0.82) (0.82) (0.82) (0.56) Net cash used in financing activities (8.94) (5.89) (5.31) (6.12) (5.52)

Net increase (decrease) in cash & equivalents (2.30) 10.56 11.01 10.32 10.74

Beginning of year cash 7.72 5.42 15.98 27.00 37.32

End of year cash 5.42 15.98 27.00 37.32 48.05

Walmart Inc.

Common Size Income Statement


Sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Cost of Goods Sold (COGS) incl. D&A 74.46% 74.69% 74.90% 74.95% 75.00% 75.05% 75.10% 75.15%Gross Income 25.54% 25.31% 25.10% 25.05% 25.00% 24.95% 24.90% 24.85%

SG&A Expense 20.99% 21.07% 20.83% 20.75% 20.75% 20.75% 20.75% 20.75%EBIT (Operating Income) 4.54% 4.24% 4.27% 4.30% 4.25% 4.20% 4.15% 4.10%

Nonoperating Income - Net 0.18% 0.12% 0.04% 0.09% 0.09% 0.09% 0.09% 0.09%

Nonoperating Interest Income 0.02% 0.03% 0.04% 0.03% 0.03% 0.03% 0.03% 0.03%

Other Income (Expense) 0.16% 0.09% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Interest Expense 0.50% 0.47% 0.46% 0.42% 0.36% 0.35% 0.34% 0.33%

Pretax Income 4.22% 3.03% 2.23% 3.76% 3.77% 3.73% 3.69% 3.65%

Income Taxes 1.28% 0.92% 0.83% 0.67% 0.76% 0.75% 0.74% 0.73%

Consolidated Net Income 2.95% 2.10% 1.40% 3.09% 3.02% 2.99% 2.95% 2.92%

Minority Interest 0.13% 0.13% 0.10% 0.12% 0.11% 0.11% 0.11% 0.11%Net Income 2.81% 1.97% 1.30% 2.97% 2.91% 2.87% 2.85% 2.81%

Discontinued Operations 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Net Income available to Common 2.81% 1.97% 1.30% 2.97% 2.91% 2.87% 2.85% 2.81%

Walmart Inc.

Common Size Balance Sheet


Assets

Cash & Short-Term Investments 1.42% 1.35% 1.50% 1.04% 3.00% 4.95% 6.70% 8.50%

Accounts Receivables, Net 1.20% 1.12% 1.22% 1.20% 1.20% 1.20% 1.20% 1.20%

Bad Debt/Doubtful Accounts -0.02% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Inventories 8.87% 8.76% 8.61% 8.50% 8.50% 8.50% 8.50% 8.50%

Other Current Assets 0.40% 0.70% 0.70% 0.70% 0.70% 0.70% 0.70% 0.70%Total Current Assets 11.89% 11.93% 12.03% 11.44% 13.40% 15.35% 17.10% 18.90%

Net Property, Plant & Equipment 23.53% 22.97% 21.66% 21.22% 20.64% 20.08% 19.56% 19.20%

Intangible Assets 3.51% 3.65% 6.06% 5.98% 5.85% 5.72% 5.60% 5.52%

Deferred Tax Assets 0.32% 0.38% 0.00% 0.17% 0.19% 0.19% 0.18% 0.18%

Other Assets 1.72% 1.98% 2.88% 2.90% 2.89% 2.89% 2.88% 2.89%Total Assets 40.98% 40.91% 42.63% 41.48% 42.75% 44.02% 45.10% 46.47%

Liabilities & Shareholders' Equity 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

ST Debt & Curr. Portion LT Debt 0.81% 1.93% 1.52% 1.54% 1.44% 1.40% 1.25% 1.23%

Accounts Payable 8.54% 9.22% 9.15% 9.00% 9.00% 9.00% 9.00% 9.00%

Income Tax Payable 0.19% 0.13% 0.08% 0.07% 0.08% 0.07% 0.07% 0.07%

Other Current Liabilities 4.26% 4.43% 4.31% 4.36% 4.36% 4.36% 4.36% 4.36%Total Current Liabilities 13.80% 15.71% 15.06% 14.96% 14.87% 14.84% 14.68% 14.66%

Long-Term Debt 8.66% 7.37% 9.76% 8.16% 7.96% 7.82% 7.69% 7.61%

Provision for Risks & Charges 0.04% 0.04% 0.00% 0.04% 0.04% 0.04% 0.04% 0.04%

Deferred Tax Liabilities 0.89% 0.77% 2.33% 0.40% 0.45% 0.45% 0.44% 0.44%

Other Liabilities 0.99% 0.87% 0.00% 0.87% 0.86% 0.86% 0.86% 0.86%Total Liabilities 24.38% 24.74% 27.15% 24.43% 24.18% 24.01% 23.71% 23.61%

Common Equity 16.04% 15.58% 14.09% 15.69% 17.22% 18.70% 20.11% 21.59%

Common Stock Par/Carry Value 0.06% 0.06% 0.06% 15.69% 17.22% 18.70% 20.11% 21.59%

Retained Earnings 18.42% 17.02% 15.70% 17.26% 18.60% 19.88% 21.11% 22.42%

Cumulative Translation Adjustment/Unrealized For. Exch. Gain -2.96% -2.10% 0.00% -2.21% -2.17% -2.12% -2.07% -2.04%

Unrealized Gain/Loss Marketable Securities 0.00% 0.33% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Other Appropriated Reserves 0.03% 0.06% -2.24% 0.00% 0.00% 0.00% 0.00% 0.00%

Total Shareholders' Equity 16.04% 15.58% 14.09% 15.69% 17.22% 18.70% 20.11% 21.59%

Accumulated Minority Interest 0.56% 0.59% 1.39% 1.37% 1.34% 1.31% 1.28% 1.26%Total Equity 16.60% 16.17% 15.48% 17.06% 18.56% 20.01% 21.39% 22.86%

Total Liabilities & Shareholders' Equity 40.98% 40.91% 42.63% 41.48% 42.75% 44.02% 45.10% 46.47%

Walmart Inc.Value Driver Estimation


NOPLATEBITA

Net sales 485.14 499.91 514.41 521.56 533.07 544.87 556.98 565.38 - Cost of goods sold (351.18) (362.87) (374.62) (379.83) (388.15) (396.65) (405.36) (411.24) - Depreciation (10.08) (10.53) (10.68) (11.07) (11.66) (12.28) (12.93) (13.64) - Operating expenses (101.85) (105.31) (107.15) (108.22) (110.61) (113.06) (115.57) (117.32) + Implied interest on operating leases 0.64 0.55 0.47 0.44 0.43 0.43 0.43 0.43

EBITA 22.67 21.76 22.43 22.86 23.09 23.32 23.54 23.61

Less: Adjusted taxesProvision for income taxes 6.20 4.60 4.28 3.49 4.03 4.07 4.11 4.13 + Tax shield on interest expense 0.76 0.73 0.74 0.69 0.60 0.60 0.59 0.59

+ Tax shield on implied lease interest 0.20 0.17 0.15 0.14 0.14 0.14 0.13 0.13 - Tax shield on other interest income, net (0.24) (0.14) - - - - - - - Tax on sale of assets -

Adjusted Taxes 6.92 5.37 5.17 4.32 4.77 4.81 4.84 4.85

Plus: Change in deferred tax (DT) liabilitiesCurrent year DT liabilities 4.33 3.83 11.98 2.09 2.42 2.44 2.47 2.48 - Current year DT current assets- Current year DT long-term assets (1.57) (1.88) (1.13) (0.87) (1.01) (1.02) (1.03) (1.03)

Net DT liabilities for current year 2.77 1.95 10.85 1.22 1.41 1.43 1.44 1.44 Previous year DT liabilities 3.36 4.33 3.83 11.98 2.09 2.42 2.44 2.47 - Previous year DT current assets- Previous year DT long-term assets (1.50) (1.57) (1.88) (1.13) (0.87) (1.01) (1.02) (1.03)

Net DT liabilites for previous year 1.85 2.77 1.95 10.85 1.22 1.41 1.43 1.44 Net change in DT liabilities 0.92 (0.82) 8.90 (9.63) 0.19 0.01 0.01 0.00

NOPLAT (EBITA - Adjusted taxes + Change in DT) 16.67 15.57 26.16 8.91 18.51 18.52 18.72 18.76

8.78% -6.60% 68.03% -65.92% 107.66% 0.07% 1.04% 0.21%Invested CapitalOperating current assets

Normal cash (lesser or actual %) 6.87 6.76 7.72 5.42 8.00 8.17 8.35 8.48 Actual 6.87 6.76 7.72 5.42 15.98 27.00 37.32 48.05 % of sales 7.28 7.50 7.72 7.82 8.00 8.17 8.35 8.48

Accounts receivable, net 5.84 5.61 6.28 6.26 6.40 6.54 6.68 6.78 Inventory 43.05 43.78 44.27 44.33 45.31 46.31 47.34 48.06 PPD expensesOther current assets 1.94 3.51 3.62 3.65 3.73 3.81 3.90 3.96

Operating current assets 57.69 59.66 61.89 59.67 63.44 64.84 66.28 67.28

Operating current liabilitiesAccounts payable 41.43 46.09 47.06 46.94 47.98 49.04 50.13 50.88 Accrued expenses 6.11 7.00 6.50 6.82 6.97 7.12 7.28 7.39 Income taxes payable 0.92 0.65 0.43 0.35 0.40 0.41 0.41 0.41

Operating current liabilities 48.46 53.74 53.99 54.11 55.35 56.57 57.82 58.69

Net operating working capital (NOWC) 9.23 5.93 7.90 5.56 8.09 8.27 8.46 8.59

Plus: Net PPE 114.18 114.82 111.40 110.67 110.01 109.43 108.94 108.53 Plus: PV of operating leases 14.61 12.51 11.54 11.46 11.39 11.33 11.28 11.24 Plus: Other operating assets 8.36 9.92 14.82 15.12 15.42 15.73 16.04 16.36 Less: Other operating liabilities (4.81) (4.34) - (4.51) (4.60) (4.70) (4.79) (4.89)

Invested Capital 132.34 132.91 137.75 132.73 132.22 131.80 131.47 131.25

Change (1.57) 0.57 4.85 (5.02) (0.51) (0.42) (0.33) (0.22)

Value DriversROIC (NOPLAT/Invested capital) 12.45% 11.76% 19.68% 6.47% 13.95% 14.01% 14.20% 14.27%

EP (Invested capital*(ROIC-WACC)) 9.75 8.88 20.11 1.91 11.77 11.80 12.02 12.08

FCF (NOPLAT - change in invested capital) 18.24 15.00 21.31 13.94 19.02 18.95 19.04 18.98

Walmart Inc.

Weighted Average Cost of Capital (WACC) Estimation

Inputs Source

Risk-free rate 2.48% 10 Yr TreasuryEquity market risk premium 4.95% Henry Fund consensus

Beta 0.595 5 year weeklyCost of debt 3.78% Factset

Cost of equity 5.42% Risk-free + Beta(MRP)Marginal tax rate 17.80% Based on historical, accounting for tax rate changeCost of preferred stock 0 Factset - no preferred stock

Market value of equity 290,642 millions

Shares outstanding (2018) 2,945.00 millionsShare price $98.69

Market value of debt 50,301 fair value in last 10k + leases

Market value of preferred stock 0

Total value 340,943

WACC 5.08%

Walmart Inc.

Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs:

CV Growth 1.51%

CV ROIC 14.27%

WACC 5.08%

Cost of Equity 5.42%


DCF Model

Discount period 1 2 3 4 4

NOPLAT 8.91 18.51 18.52 18.72 18.76

Invested capital 132.73 132.22 131.80 131.47 131.25

Capex (10.34) (11.00) (11.70) (12.44) (13.23)

FCF 13.94 19.02 18.95 19.04 18.98

Discount rate 1.05 1.10 1.16 1.22 1.22

CV 469.22

PV of cash flows 13.26 17.23 16.33 15.62 384.82

Total value of OPS 447.25

EP ModelNOPLAT 8.91 18.51 18.52 18.72 18.76 Beginning IC 137.75 132.73 132.22 131.80 131.47

EP 1.91 11.77 11.80 12.02 12.08

CV 337.75

Discount rate 1.05 1.10 1.16 1.22 1.22

PV of EP 1.82 10.66 10.17 9.86 276.99

Total value of OPS 447.25

Excess cash -

Value of debt (50.56)

Other LT liabilities (4.51)

PV of operating leases (11.46)

ESOPs (0.89)

Net value of other liabilities and assets (67.42)

Net value of company 379.83

Shares outstanding 2.95

Intrinsic value as of 1/31/2019 128.71

Intrinsic value as of 4/2/2019 129.61

Walmart Inc.

Dividend Discount Model (DDM) or Fundamental P/E Valuation Model


EPS 5.26$ 5.25$ 5.31$ 5.38$ 5.39$

Key Assumptions CV growth 1.51% CV ROE 13.02%

Cost of Equity 5.42%

Future Cash Flows P/E Multiple (CV Year) 22.57 EPS (CV Year) 5.39$

Future Stock Price 121.63$ Dividends Per Share 2.12 2.16 2.20 2.24 2.28

Future Cash Flows 2.12 2.16 2.20 2.24 2.28

Discount period 1 2 3 4 Discount rate 1.05 1.11 1.17 1.24

Discounted Cash Flows 2.01 1.94 1.88 #######

Intrinsic Value as of 1/31/2019 104.10$ Intrinsic Value as of 4/8/2019 107.63$

Walmart Inc.Relative Valuation Models Relative P/E Excluding AMZN

EPS EPS EPS EPSTicker Company Price 2019E 2020E P/E 19 P/E 20 Ticker Company Price 2019E 2020E P/E 19 P/E 20

AMZN Amazon $1,780.75 $27.53 $39.74 64.7 44.8 TGT Target $80.26 $5.82 $6.23 13.79 12.88 TGT Target $80.26 $5.82 $6.23 13.8 12.9 KR Kroger $24.60 $2.20 $2.38 11.18 10.34 KR Kroger $24.60 $2.20 $2.38 11.2 10.3 COST Costco Wholesale $242.14 $7.99 $8.49 30.31 28.52 COST Costco Wholesale $242.14 $7.99 $8.49 30.3 28.5 CVS CVS Health 53.93 6.82 7.28 7.91 7.41 CVS CVS Health 53.93$ 6.82$ 7.28$ 7.91 7.41 WBA Walgreens Boots Alliance $55.06 $6.06 $6.15 9.09 8.95 WBA Walgreens Boots Alliance $55.06 $6.06 $6.15 9.1 9.0 Average 14.45 13.62

Average 22.8 18.8

WMT Walmart Inc. $98.69 $ 5.26 $ 5.25 18.8 18.8

Implied Value: Implied Value:

Relative P/E (EPS19) $ 119.96 Relative P/E (EPS19) 75.96$

Relative P/E (EPS20) 98.76$ Relative P/E (EPS20) 71.48$

Price to Sales (millions) Price to sales excluding AMZN

Sales Sales Sales SalesTicker Company Market Cap (B) 2019E 2020E P/S 19 P/S 20 Ticker Company Market Cap (B) 2019E 2020E P/S 19 P/S 20

AMZN Amazon 919,505$ 274,986 323,789 3.3438 2.839828 TGT Target $42,716 77,683 80,189 0.55 0.53

TGT Target 42,716$ 77,683 80,189 0.5499 0.532692 KR Kroger $20,325 121,162 122,973 0.17 0.17

KR Kroger 20,325$ 121,162 122,973 0.1678 0.16528 COST Costco Wholesale $107,810 152,255 162,879 0.71 0.66

COST Costco Wholesale 107,810$ 152,255 162,879 0.7081 0.661902 CVS CVS Health $67,815 251,430 260,926 0.27 0.26 CVS CVS Health 67,815$ 251,430 260,926 0.2697 0.259901 WBA Walgreens Boots Alliance $49,925 136,755 139,884 0.37 0.36

WBA Walgreens Boots Alliance 49,925$ 136,755 139,884 0.3651 0.356903 Average 0.41 0.40

Average 0.9007 0.8028

WMT Walmart Inc. $295,400.00 514,400 528,510 0.5743 0.5589

Implied Value: Implied Value:

Relative P/S (Sales19) 157.01$ Relative P/S (Sales19) 71.82$

Relative P/S (Sales20) 143.79$ Relative P/S (Sales20) 70.81$

Walmart Inc.

Key Management Ratios


Liquidity Ratios

Working capital (CA-CL) -9.24 -18.86 -15.58 -18.37 -7.83 2.82 13.47 23.96Current ratio (total CA/total CL) 75.94% 67.38% 69.92% 69.51% 69.95% 70.10% 70.84% 70.93%

Quick ratio (total CA+cash/CL) 86.20% 75.98% 79.89% 76.46% 90.11% 103.49% 116.47% 128.90%

Activity or Asset-Management Ratios

Receivables turn (sales/AR) 82.03 89.05 81.87 83.33 83.33 83.33 83.33 83.33 Days' receivables (365/rec turn) 4.45 4.10 4.46 4.38 4.38 4.38 4.38 4.38

Inventory turn (COGS/inventory) 8.39 8.53 8.70 8.82 8.82 8.83 8.84 8.84 Days' inventory (365/inv turn) 43.49 42.80 41.94 41.39 41.37 41.34 41.31 41.28 Fixed asset turn (sales/net fixed assets) 3.96 4.01 4.08 4.15 4.25 4.35 4.46 4.53

Total asset turn (sales/TA) 2.44 2.44 2.35 2.41 2.34 2.27 2.22 2.15

Financial Leverage RatiosDebt ratio (TL/TA) 0.59 0.60 0.64 0.59 0.57 0.55 0.53 0.51

D/E ratio (TL/TE) 1.47 1.53 1.75 1.43 1.30 1.20 1.11 1.03 Equity ratio (TE/TA) 0.41 0.40 0.36 0.41 0.43 0.45 0.47 0.49

Profitability Ratios

Gross margin ((sales-COGS)/sales) 25.54% 25.31% 25.10% 25.05% 25.00% 24.95% 24.90% 24.85%Operating margin (op income/sales) 4.54% 4.24% 4.27% 4.30% 4.25% 4.20% 4.15% 4.10%Net profit margin (NI/sales) 2.81% 1.97% 1.30% 2.97% 2.91% 2.87% 2.85% 2.81%ROA (NI/avg TA) 11.65% 8.15% 5.07% 11.62% 12.08% 12.06% 12.07% 11.97%

ROE (NI/avg SE) 16.62% 12.22% 8.31% 18.40% 16.48% 15.06% 13.90% 12.80%

Payout Policy RatiosPayout ratio 45.52% 62.06% 92.06% 40.34% 41.16% 41.43% 41.67% 42.31%

Total payout ratio (Dividends+repurchases)/Net income 44.68% 61.06% 92.06% 45.63% 46.46% 46.68% 46.86% 45.84%

Present Value of Operating Lease Obligations (2019) Present Value of Operating Lease Obligations (2018) Present Value of Operating Lease Obligations (2017)

Operating Operating OperatingFiscal Years Ending Jan. 31 Leases Fiscal Years Ending Jan. 31 Leases Fiscal Years Ending Jan. 31 Leases

2020 1856 2019 1933 2018 2270

2021 1655 2020 1718 2019 1787

2022 1420 2021 1532 2020 1679

2023 1233 2022 1381 2021 1524

2024 1063 2023 1158 2022 1342

Thereafter 6891 Thereafter 7644 Thereafter 9537

Total Minimum Payments 14118 Total Minimum Payments 15366 Total Minimum Payments 18139

Less: Interest 2583 Less: Interest 2857 Less: Interest 3526

PV of Minimum Payments 11535 PV of Minimum Payments 12509 PV of Minimum Payments 14613

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 3.78% Pre-Tax Cost of Debt 3.78% Pre-Tax Cost of Debt 3.78%

Number Years Implied by Year 6 Payment 6.48 Number Years Implied by Year 6 Payment 6.6 Number Years Implied by Year 6 Payment 7.1

Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment

1 1856 1788.4 1 1933 1862.6 1 2270 2187.3

2 1655 1536.6 2 1718 1595.1 2 1787 1659.2

3 1420 1270.4 3 1532 1370.6 3 1679 1502.1

4 1233 1062.9 4 1381 1190.5 4 1524 1313.8

5 1063 883.0 5 1158 961.9 5 1342 1114.8

6 & Beyond 1063 4994.0 6 & beyond 1158 5528.1 6 & beyond 1342 6835.4

PV of Minimum Payments 11535.4 PV of Minimum Payments 12508.8 PV of Minimum Payments 14612.6

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 32,754Average Time to Maturity (years): 4.50

Expected Annual Number of Options Exercised: 7,279

Current Average Strike Price: 71.79$

Cost of Equity: 5.42%

Current Stock Price: $98.69

2020E 2021E 2022E 2023E 2024E

Increase in Shares Outstanding: 7,279 7,279 7,279 7,279 3,639Average Strike Price: 71.79$ 71.79$ 71.79$ 71.79$ 71.79$

Increase in Common Stock Account: 522,548 522,548 522,548 522,548 261,274

Change in Treasury Stock 822,548 822,548 822,548 822,548 561,274

Expected Price of Repurchased Shares: 98.69$ 104.04$ 109.69$ 115.64$ 121.91$

Number of Shares Repurchased: 8,335 7,906 7,499 7,113 4,604

Shares Outstanding (beginning of the year) 2,952,000 2,950,944 2,950,317 2,950,097 2,950,262

Plus: Shares Issued Through ESOP 7,279 7,279 7,279 7,279 3,639Less: Shares Repurchased in Treasury 8,335 7,906 7,499 7,113 4,604 Shares Outstanding (end of the year) 2,950,944 2,950,317 2,950,097 2,950,262 2,949,297

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol WMT

Current Stock Price $98.69Risk Free Rate 2.48%Current Dividend Yield 2.10%

Annualized St. Dev. of Stock Returns 14.23%

Average Average B-S Value

Range of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price Granted

Range 1 8,799 75.39 4.50 24.50$ 215,568$ Range 2 23,955 70.47 4.50 28.10$ 673,073$

Total 32,754 71.79$ 4.50 35.08$ 888,641$

Beta

128.71 0.395 0.495 0.595 0.695 0.795 0.895 0.995 1.095 1.195 1.295 1.395

2.45% 262.49 234.26 211.14 191.86 175.53 161.52 149.38 138.74 129.36 121.01 113.54

2.95% 239.28 210.93 188.13 169.42 153.77 140.49 129.09 119.18 110.50 102.83 96.00

3.45% 219.59 191.50 169.27 151.25 136.34 123.80 113.11 103.88 95.83 88.76 82.49

3.95% 202.66 175.07 153.52 136.24 122.06 110.22 100.19 91.57 84.10 77.54 71.76

4.45% 187.96 160.99 140.18 123.63 110.16 98.97 89.53 81.47 74.49 68.40 63.03

Risk Premium 4.95% 175.07 148.80 128.73 112.89 100.07 89.48 80.59 73.02 66.48 60.79 55.79

5.45% 163.67 138.14 118.79 103.63 91.42 81.38 72.98 65.84 59.71 54.37 49.69

5.95% 153.52 128.73 110.09 95.56 83.92 74.38 66.42 59.68 53.89 48.87 44.48

6.45% 144.43 120.37 102.40 88.47 77.35 68.27 60.71 54.32 48.85 44.11 39.97

6.95% 136.24 112.89 95.56 82.19 71.55 62.89 55.70 49.63 44.44 39.95 36.03 7.45% 128.82 106.16 89.44 76.58 66.39 58.11 51.26 45.48 40.55 36.28 32.56

WACC

128.71 2.58% 3.08% 3.58% 4.08% 4.58% 5.08% 5.58% 6.08% 6.58% 7.08% 7.58%

11.77% 466.35 311.55 231.43 182.43 149.37 125.56 107.58 93.53 82.24 72.97 65.23

12.27% 469.14 313.42 232.82 183.53 150.28 126.32 108.24 94.10 82.75 73.43 65.64

12.77% 471.72 315.14 234.10 184.55 151.11 127.02 108.84 94.63 83.22 73.84 66.01

13.27% 474.10 316.74 235.28 185.48 151.88 127.67 109.40 95.12 83.65 74.23 66.36

13.77% 476.31 318.21 236.38 186.35 152.59 128.27 109.92 95.57 84.05 74.59 66.68 CV ROIC 14.27% 478.36 319.59 237.41 187.16 153.25 128.83 110.40 95.99 84.42 74.92 66.98

14.77% 480.27 320.87 238.36 187.91 153.87 129.35 110.85 96.39 84.77 75.23 67.26

15.27% 482.06 322.06 239.25 188.61 154.45 129.84 111.27 96.75 85.09 75.52 67.52

15.77% 483.74 323.18 240.08 189.27 154.99 130.30 111.66 97.10 85.40 75.79 67.77

16.27% 485.31 324.24 240.87 189.89 155.50 130.73 112.03 97.42 85.68 76.05 68.00 16.77% 486.79 325.23 241.60 190.47 155.98 131.13 112.38 97.72 85.95 76.29 68.21

walmart inc. (wmt) april 10, 2019walmart’s first international endeavor was in 1991 when they...

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