This "look-ahead" post discusses how I came up with an estimate for Walmart's earnings for fiscal year 2021's fourth quarter, which ended on January 31, 2021, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between.
Once the company’s official results become available on February 18, 2021, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative. Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.
But, before getting into the details, let's take a step back and start with background information about Walmart.
Walmart is large retailer known for keeping its costs and prices low. In addition to its many eponymous storers, Walmart also owns Sam's Club warehouses. To fight off competition from Amazon and other online retailers, Walmart has invested significant sums to improve Walmart.com. This strategy is starting to pay off, and the company's online sales are growing rapidly. The person that led Walmart's ecommerce efforts, Marc Lore, left the company on January 31, 2021, so that might be a concern. Walmart's reputation for low prices, especially for groceries, cleaning products, and other consumer staples, paid off in the early days of the pandemic when home-bound consumers were stocking up on supplies. Walmart is now taking steps to reduce its overseas operations. It announced an agreement to sell its UK subsidiary and business in Argentina. Walmart also made a deal to sell a majority interest in its subsidiary in Japan.
Shares of Walmart now trade for about $144 each, giving the company a market value of $411 billion. These shares can be found in the Dow Jones Industrial Average, Standard and Poors 500, Standard and Poors 100, Standard and Poors Dividend Aristocrats, New York Stock Exchange Composite, and Russell 1000 stock indices.
Walmart recorded profits of $20 billion on revenue of $549 billion during the last year. In the quarter that ended on October 31, 2020, Walmart earned $1.34 per share (excluding certain items), which significantly beat the $1.18 Wall Street consensus forecast.
Revenue in the October 2020 quarter totaled $134.7 billion, 5 percent more than last year. The Walmart U.S. business was responsible for 66 percent of overall revenue, and this unit's revenue grew by 6.2 percent compared to the year-earlier result. The Walmart International business contributed 22 percent of revenue, and this unit's revenue increased by 1.3 percent. The Sam's Club unit supplied 12 percent of revenue, and this business's revenue rose by 8.3 percent.
My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts. It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling. I also look for other information about the company in the news, and I take advantage of trends in the company's historical results. While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP). Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.
Walmart did not provide any guidance about the fourth quarter when the company reported results last November. I have had to rely on historical trends and national economic data to estimate Walmart earnings.
In particular, data on U.S. Retail and Food Service Sales are published by the Census Bureau and are readily available. These reports indicated, for example, that sales were up 3.7 percent in November 2020, compared to November 2019. Walmart is so large that its Revenue correlates fairly well with the national data, and I use this relationship to estimate the company's Revenue. Although there's no national data yet for January 2021, my preliminary fourth-quarter estimate for Walmart's revenue, using the data that is available, is $145 billion.
In the first three quarters of fiscal year 2021, Walmart's Gross Margin rose from 23.9 percent to 25.4 percent of Revenue. Counterintuitively, the Gross Margin in the January quarter is usually a little less than in the preceding October quarter. This history led me to select 25.0 percent as my estimate for the January 2021 quarter. The corresponding Cost of Goods Sold is (1-0.25) * $145 billion = $108.75 billion.
Sales, General, and Administrative (SG&A) expenses should be a little more than 20 percent of Revenue if history is a valid guide. To be specific, I used 20.25 percent of Revenue to come up with a $29.4 billion SG&A estimate.
The numbers above combine to produces an estimate for Operating Income of just under $6.9 billion, which is a hefty 29 percent higher than the equivalent quantity in the year-earlier quarter.
I'm aware of two large items items that may be listed as non-operating gains and losses on Walmart's Income Statement for the fourth quarter. I've estimated using publicly available data that the equity investment in JD.com earned about $1.0 billion, if the size of the Walmart's stake in the Chinese firm did not change. On the other side of the ledger, Walmart previously announced it would recognize a non-cash loss of approximately $2.0 billion, after tax, in the fourth quarter of fiscal 2021 on the sale of a majority stake in Seiyu, a retailer in Japan. On pre-tax basis, this loss could be $2.4 billion.
I used $525 million for the estimate of net interest paid and 26 percent for the effective income tax rate. With these figures, the estimate for Net Income (GAAP) in the quarter is $3.57 billion (1.25 per share).
The following Income Statement summarizes the estimates made as discussed above.
This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed. Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company. These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).
#walmart #wmt #gauges #gcfr #gcfr2 #lookahead #nac_financialanalysis
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