Analysis of Walmart Inc. Company Essay

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Introduction

Walmart Company is an American business organization that operates in different parts of the world. The firm has over 10,000 active stores in 24 countries such as Canada, Mexico, Chile, Japan, the United Kingdom, and Argentina (Phillips & Rozworski, 2019). It is a retail corporation that manages a chain of large discount departmental stores, hypermarkets, and groceries. It was founded in 1962 by Sam Walton. It uses a different name in some regions; for instance, in India, the organization is known as Flipkart wholesale, and in Brazil, it was rebranded as Grupo Big.

During its formation, the firm was incorporated under the Delaware General Corporation Law. Currently, it is listed on the New York Stock Exchange. Its revenue is about $548 billion based on the financial statistics of 2020 (Jindal et al., 2021). The company is also one of the biggest private employers having over 2 million employees across all its operating stores. Some of its main competitors in the industry include Costco and Kroger, which provides groceries and similar products Walmart offers in the market.

Retail Industry

Generally, the US economy is one of the biggest in the world, making it have market opportunities for different firms. The retail industry is performing effectively with most of the largest companies in the segment located in the country. There are several emerging economies creating potential areas for investment in the industry. Retailing entails the sales of goods and services to customers’ households or for personal consumption. The retail sector can be classified into different categories such as apparel, groceries, electronics, and other various assortments.

There is increasing advancement in technology use in the industry whereby most business organizations have digitalized their operations to boost their sales. Most companies, including Walmart and Costco Wholesale have adopted the ecommerce technique in the industry. The approach enables them to have proper data management, proper marketing, and supply chain control. The market size of the retail sector constitutes about 31%, especially for wholesale globally (Youssef et al., 2022). Walmart is the leading retail firm in the US, followed by Amazon, Kroger, Home Depot, and Costco Wholesale. In terms of market share of ecommerce retailing, Amazon is on top of the list with over 40%, and then Walmart Company has about 7%. In 2019, Walmart had 13% of the departmental store, while Target led the sector by 38% (Jindal et al., 2021). Globally, the size of the retail market reached $4,581 million in 2019 (Li et al., 2021). The industry is expected to grow by 12% by the end of 2015 (Li et al., 2021). These values indicate how the sector is performing in the world economy.

Walmart’s Business Model

In the past, the business model of Walmart used to revolve around Brick-and-Mortar retail criteria. However, the advancement in technology has improved its operational practice to include the ecommerce platform. Currently, the variation between offline and online engagement is subtle as the two approaches serve the needs of consumers concurrently (Pantano & Gandini, 2018). The giant wholesale deals with a variety of commodities in the sector. They include clothing, footwear, health and supplies, grocery, toys, electronics, pet supplies, movies, automobile spare parts, and furniture. Walmart’s business model is grouped into three different categories: Walmart US, Walmart International, and Sam’s Club.

Walmart used to have two main business strategies in the market. However, following rapid changes in the retail industry, it was forced to adopt other approaches to enable it to remain active and competitive in the sector. They include Everyday Low Cost (EDLC) and Everyday Low Price (EDLP), which deliver a great experience and competitive assortment. These techniques allow the corporation to meet the needs of its consumers. Walmart depends majorly on strategies to thrive and attain a market advantage over its competitors.

Everyday Low Price (EDLP)

Over the years, Walmart Company has been using the EDLP business strategy as its competitive advantage. The firm offers a variety of goods and services to its consumers at relatively low prices enabling the customers to easily afford their wants (Hunt et al., 2018). The technique has allowed the business organization to thrive effectively in the retail industry full of well-established competitors. The corporation is able to achieve and sustain the strategy through its ability to bargain accordingly with its suppliers and the sales of vast products.

Everyday Low Cost (EDLC)

EDLC is also a common strategy that has been a cornerstone for the company’s success in the retail industry. This technique is essential in enabling Walmart to procure its inventory from suppliers without the excessive cost incurred. Generally, Walmart has a massive supply chain with a well-defined procedure of management. The firm does not engage brokers when sourcing the commodities but instead reaches directly to suppliers. The approach allows the business organization to have strong bargaining power following large quantity purchases; thus, it obtains the products at a relatively low cost. The practice facilitates its ability to offer low prices for its customers, making it attract more shoppers.

Delivering Great Experience

The aim of businesses is to ensure customers have a memorable while shopping in their stores. Walmart is not exceptional; they have well-trained professionals across their stores who provide significant services to consumers, thus making them willing to come back next time. Similarly, they offer one point shopping strategy whereby a client can easily access all the products within the facilities. This technique enables consumers to save on money, thus encouraging their budgeting.

Walmart’s Risk Factors

Walmart faces significant challenges that lower its operations and the ability to make a considerable return in the market. Some of the risk factors are international, while others are domestic and cannot be controlled by the business organization. Most of the uncertainties affect some segments of the firm, thus hindering the expected output. They include economic aspects, currency exchange fluctuations, variation in market interest rates, geopolitical concerns, and transportation and consumer confidence. Operating issues such as the ability to integrate acquired businesses, sudden changes in corporation objectives, cyber security, effective tax rates, and implementation of operating strategies. Moreover, the organization encounters regulatory factors that limit its potential to access large markets.

Accounting Perspective

Despite the massive operations undertaken by the business organization, Walmart has a centralized accounting structure that collects all sorts of information, including sales and purchases. The company’s system contains the daily details of all transactions from all its stores. This allows it to have a clear view and effectively make a relevant projection of inflows and outflows. The approach makes it easier for the management to understand the money movement in all its stores across its facilities, making it able to control the operations.

Walmart applies the US Generally Accepted Accounting Principles (GAAP) to report its financial position. The rules require the company to display the cost, revenue, matching, and disclosure. The approach allows the organization to account for and forecast its operation effectively. According to the financial report of Walmart, there were no value-relevant off-balance-sheet risks that could interfere with the overall accounting.

Financial Analysis

Walmart’s Profitability

These are financial ratios that indicate the ability of Walmart to generate earnings relative to the available operating costs, revenue, assets, and shareholders’ equity. They include net profit ratio, return on investment, and operating profit margin. The metrics are essential for both the managers and potential investors because they give deep insight into how the firm is capable of maximizing its assets to produce more income for stakeholders.

Return on Assets (ROA)

2021, ROA = Net Profit / Average Total Assets

ROA = 13,510,000 / [(252,496,000 + 236,495,000) / 2]

= 13,510,000 / 244,495,500

= 0.05526

= 5.5%

2020 ROA = 14,881,000 / [(236,495,000 + 219,295,000) / 2]

= 14,881,000 / 227,895,000

= 0.06530

= 6.53%

Operating Profit Margin

Operating profit margin = (Operating Income / Revenue) *100

2021, Operating profit margin = (22,548,000 / 559,151,000) *100

= 0.0403*100

= 4.03%

2020, Operating profit margin = (20,568,000 / 523,964,000) * 100

= 0.0393 * 100

= 3.93%

Net Profit Margin

Net profit margin = Net Income / Revenue

2021, Net profit margin = 13,510,000 / 559,151,000

= 0.0241

= 2.41%

2020, Net profit margin = 14,881,000 / 523,964,000

= 0.0284

= 2.84%

Costco Wholesale Profitability Analysis

Return on Assets (ROA)

2021, ROA = Net Profit / Average Total Assets

= 5,007,000 / [(59,268,000 + 55,556,000) / 2]

= 5,007,000 / 57,412,000

= 0.0872

= 8.72%

2020 ROA = 4,002,000 / [(55,556,000 + 45,400,000) / 2]

= 4,002,000 / 50,478,000

= 0.0793

= 7.93%

Operating Profit Margin

Operating profit margin = (Operating Income / Revenue) *100

2021, Operating profit margin = (6,708,000 / 195,929,000) * 100

= 0.0342 * 100

= 3.42%

2020, Operating profit margin = (5,435,000 / 166,761,000) * 100

= 0.0326 * 100

= 3.26%

Net Profit Margin

Net profit margin = Net Income / Revenue

2021, Net profit margin = 5,007,000 / 195,929,000

= 0.0256

= 2.56%

2020, Net profit margin = 4,002,000 / 166,761,000

= 0.024

= 2.4%

Retail Industry 2020

Operating profit margin = Operating Income / Revenue

= 2.8%

Return on Assets (ROA) = Net Income / Total Assets

= 2.2%

Based on the ratio analysis above, in 2021, the ROA of Walmart dropped to 5.5% compared to 2020, when it was 6.53%. On the other hand, its operating profit margin increased from 3.93% to 4.03%, indicating a rise in income for the company. The net profit margin ratio declined from 2.84% in 2020 to 2.41% in 2021. For the business organization to maintain its profitability, it should improve ROA in order to obtain more revenue. Similarly, the corporation should lower its operating and non-operating costs to boost the operating profit margin. The average industry performance, which is 2.2% for ROA and 2.8% operating profit margin, is below Walmart’s, which implies that the business organization is performing effectively in the retail market.

Comparing Walmart to Costco, the ROA of Costco is higher than Walmart’s, and it increased from 7.93% in 2020 to 8.72% in 2021. This shows that the management of Costco is appropriately utilizing the available assets to generate income than Walmart. Similarly, both Costco’s operating profit margin and net profit margin have a positive increase. This indicates the firm is minimizing the operating costs effectively. It is clear from the analysis that Walmart did not perform effectively because it manages massive stores and operates on a low price basis, making it have higher operating costs, thus leaving it with less net income.

Investors Ratios

Walmart Company

Debt-to-Equity Ratio

2021, Debt-to-Equity ratio = Total liabilities / Total equity

= 164,965,000 / 87,531,000

= 1.889

2020, Debt-to-Equity ratio = 154,943,000 / 81,552,000

= 1.899

Return on Equity (ROE)

2021, ROE = Net Income / Shareholders Equity

= 13,510,000 / 87,531,000

= 0.1543

= 15.43%

2020, ROE = 14,881,000 / 81,552,000

= 0.1825

= 18.25%

Costco Company

Debt-to-Equity Ratio

2021, Debt-to-Equity ratio = Total liabilities / Total equity

= 41,190,000 / 18,078,000

= 2.278

2020, Debt-to-Equity ratio = 36,851,000 / 18,705,000

= 1.970

2021, ROE = Net Income / Shareholders Equity

= 5,007,000 / 18,078,000

= 0.2769

= 27.69%

2020, ROE = 4,002,000 / 18,705,000

= 0.2140

= 21.4%

Industry

2020, Debt-to-Equity ratio = Total liabilities / Total equity

= 1.82

2020, ROE = Net Income / Shareholders Equity

= -1.9%

The analysis indicates that Walmart has maintained its debt-to-equity ratio from 2020 to 2021. Its ROE declined from 18.25% in 2020 to 15.43% in 2021 (“Yahoo is part of the Yahoo family of brands,” 2022a). The reduction in ROE shows that the company’s management has made less effort to utilize the capital contributed by shareholders to generate revenue. While comparing the average industry debt ratio and Walmart’s rate, the firm is using enough debt to finance its operation accordingly. The company’s ROE is higher than the average ROE for the industry. This means that the business organization is using the available capital appropriately in the market.

In relation to Costco, Walmart is using less debt to finance its business operation. Costco experienced an increase in debt-to-equity ratio from 1.97 to 2.278, which indicates it raised its borrowing to access more funds (“Yahoo is part of the Yahoo family of brands,” 2022b). Similarly, Costco’s ROE is higher than Walmart’s and also improved from 21.4% in 2020 to 27.69% in 2021. Form the examination; the management of Costco is properly maximizing the available resource in the company to generate more profit.

I would invest in Walmart because its ROE is above the average rate, meaning that the company will utilize the resources to raise more profit leading to higher dividends. Some investing options include corporate and government bonds, mutual funds, and real estate. Among the options, I would choose to invest in real estate because it is not volatile and has a minimal variance. Furthermore, the market value of the property appreciates with time making it more convenient.

In summary, the retail industry is one of the most performing sectors of the economy. There are several firms in the market, making it to be more competitive. Walmart has formulated a proper business model to enable it to thrive in the industry. The advancement in technology has transformed the sector, and most organization is applying both physical and digital access to their stores. From 2020 to 2021, Walmart experienced a slight decline in its performance. Financial ratios are practical tools that enable a potential investor to analyze the performance of the business organization.

References

All Industrie., (n.d.) Web.

Hunt, I., Watts, A., & Bryant, S. K. (2018). Journal of Business Strategy 39(2). Web.

Jindal, R. P., Gauri, D. K., Li, W., & Ma, Y. (2021). Omnichannel battle between Amazon and Walmart: Is the focus on delivery the best strategy?. Journal of business research, 122, 270-280. Web.

Kremez, Z., Frazer, L., Weaven, S., & Quach, S. (2019). Asia Pacific Journal of Marketing and Logistics 33(6). Web.

Li, J., Huddleston, P., & Minahan, S. (2021). International retail format transfer: A comparison study of Australian and US warehouse club members. Journal of Retailing and Consumer Services, 59, 102358. Web.

Pantano, E., & Gandini, A. (2018). International Journal of Retail & Distribution Management 46(7). Web.

Phillips, L., & Rozworski, M. (2019). The people’s republic of Walmart: How the world’s biggest corporations are laying the foundation for socialism. Verso Books.

Yahoo is part of the Yahoo family of brands. Finance.yahoo.com. (2022a). Web.

Yahoo is part of the Yahoo family of brands. Finance.yahoo.com. (2022b). Web.

Youssef, M. A. E. A., Eid, R., & Agag, G. (2022). Journal of Retailing and Consumer Services, 64, 102827. Web.

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