Wal-Mart By The Numbers

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Although some stockholders seem concerned about stagnant prices, analysts say stock in Wal-Mart Stores Inc. is poised to reach an all-time high by the end of the year.

With cheers and chants still echoing in their heads, some 18,000 people filed out of Bud Walton Arena in Fayetteville after the annual Wal-Mart shareholders meeting June 6, and a handful of stockholders stayed behind to ask executives how things are really going.

The main concern: a stock price that, although it’s up 36 percent (to $31 per share) since December, is still $3 per share below the March 1993 high.

One shareholder said after the question-and-answer session that he was primarily concerned because shareholders were “getting nothing for their investment.”

“The fact is, the stock is $3 below its high four years ago,” he says. In the meantime, the Dow Jones industrial average has climbed steadily.

But analysts say the stock price was “adjusting” after phenomenal growth in 1991, when it almost doubled in value from $15 to $29 per share.

A prediction also came from the hour-long session. John Menzer, executive vice president and chief financial officer for Wal-Mart, says the company “has the potential” to double its size in the next 20 years “just by opportunities in the Asian market.”

Last year, Wal-Mart opened two stores in China and one in Indonesia.

“Five years from now, China will have a larger spending power than Europe,” he says. “There’s a real infrastructure problem in China just finding vendors to supply our couple of units. Maybe five years from now I can tell you if we’re ready to roll out more units in China.”

Here’s a summary of shareholders’ questions and responses from Wal-Mart executives during the session. Afterwards, the Northwest Arkansas Business Journal polled two retail analysts – Daniel Barry of Merril Lynch & Co. in New York City and Asma Usmani of Edward Jones & Co. in St. Louis – about the executives’ comments.

Wal-Mart: Menzer: Our stock has increased 36 percent since December to $31.38 per share.

Shareholder: The stock was at $34 per share four years ago. It has been dropping steadily since then as the Dow Jones industrial average continues to rise.

Wal-Mart: Jay Fitzsimmons, senior vice president for finance: “The fact of the matter is the stock was probably a little bit ahead of itself on the price at that point in time. During those years, we had good years at Wal-Mart. We had good increases in both sales and income. We had a lot of shareholders at that time that were what you call momentum players. …

“The portfolio managers who own our stock today are the right portfolio managers. They’re looking at quality growth companies, companies that we peer ourselves against, but not retailers because we’re bigger than our peers in retailing. We’re looking at Coke, Proctor & Gamble, Rubbermaid, companies like that. We now have a growth rate, the analysts say, that is consistent with the growth rate that we can sustain. We put out a 15 percent shareholder return target and believe we can reach it.”

Barry: Shareholders should ride out the slump.

“The stock peaked out at 34 1/8 in March 1993 [just after a stock split that drove the price up]. A lot of shareholders are invested in the company. A lot of them have pension plans with company stock. This [drop] had made people upset.

“I have a strong buy on it. I think it’s coming back. I think it’ll hit a new high before the end of the year, barring a market adjustment.

“The company is very healthy. I was impressed with the information I gleaned at the analysts meeting.”

Usmani: “I have Wal-Mart listed as a buy, and it could hit an all-time high of more than $34 per share by the end of the year.”

Wal-Mart’s stock value had phenomenal growth during the early part of the decade. It increased by 35 percent in 1990, 90 percent in 1991 and 8.7 percent in 1993 [still ahead of the Dow that year]. From 1993 to 1996, the price was “adjusting” to make up for the years it was overvalued.

“Basically, the stock price got ahead of itself.”

From Jan. 1 until closing June 9, the stock value increased by 39 percent. At the same time, the Dow Jones average was up by 16 percent, so during 1997, Wal-Mart stock has grown at twice the rate of the Dow.

Stock prices reflect company earnings. In 1991, Wal-Mart’s earnings increased by 23 percent. Investors saw a good thing and aggressively bought up the company’s stock.

“Shareholder: “I noticed eight or 10 years ago, your bottom-line return on sales was around 4.2 percent, and that’s dropped down to like 2.9 percent. … Will we see an increase in that over the next few years?”

Wal-Mart: Menzer: “Over the last five years, we’ve made long-term investments in Supercenters – our opening costs for Supercenters – our Cifra joint venture, our acquisition of Woolco, which is now part of our Canada operations. So, I think that has affected our return on assets and our return on equity. And this year, our return on assets actually increased after seven consecutive down years. So we’re really focused on it.”

Fitzsimmons: “The second question is on why the percentage of sales is going down. That’s what we would refer to as a business-mix issue. We have a mix of businesses [discount stores, Supercenters, Sam’s Clubs and international ventures]. The key is we’re producing more for the dollar for the shareholder. As we go into businesses like grocery, where the growth is, the percentage will be less, but we build market share and we return more dollars to the bottom line. So if we focus on the return on assets and the return on equity, the stock will go up. The percentage will continue to go down as the business mix changes.”

Barry: The new ventures won’t make as much money in the beginning simply because they’re new. But as the company gains experience in operating these outlets, more profits will be forthcoming.

Although less net profit is being earned per item in the Supercenters, Wal-Mart is reaping more benefits because of higher volume sales.

“I estimate they get a better return on investments with the Supercenters because the Supercenters turn over inventory faster. … They’re moving into lower margin areas. The important thing is return on investment.”

Usmani: The return on sales will continue to come down because of higher operating expenses associated with building Supercenters and going into international markets.

Increased volume in sales will bring in more money to the bottom line.

Shareholder: Wal-Mart isn’t paying much in dividends. The rumor is Supercenters will be going into smaller and smaller towns. Will people keep buying the stock?

Wal-Mart: Fitzsimmons: “This year, we did increase the dividend by 29 percent, buying back $2 billion worth of the shares. The shares this year, if you look at USA Today’s list of the 10 most widely held stocks, Wal-Mart is up more than any other stock at over 30 percent. So, I think, in terms of returnings to the shareholders, the things we are doing now, including going into the small towns with the Supercenters … should be a win for the shareholder and should be a win for us in terms of shareholder value.”

Barry: “A growth company [which uses profit to grow rather than paying dividends] generally doesn’t pay out much in dividends.”

Last year, Wal-Mart paid 21 cents per share of stock in annual dividends. In the first quarter of 1997, they increased that amount by 29 percent to 27 cents per share.

Usmani: “Last year, cash flow from operations more than funded capital expenditures, working capital needs and dividend payments. We expect that to continue going forward. The shareholders will be the ultimate beneficiaries.

“The company will continue to buy back stock and increase dividends. … They are basically becoming a cash cow.”

In 1996, the company paid about 16 percent of its annual profits to shareholders in dividends.

“It’s fair for a growth company. It’s reasonable.”

Shareholder: David Glass, Wal-Mart’s chief executive officer, received a $300,000 raise last year, while associates in some stores, such as one in Topeka, Kan., had their hours cut back.

“They asked me to ask you, ?When will we get a full week? When is our income going to be up? When will we be truly able to support our families by full employment in our jobs?'”

‘In past years, relatively low hourly wages for store employees were offset by stock that was growing at a healthy rate. But that’s not true now.

Wal-Mart: Kendall Schwindt, senior vice president for operations for Wal-Mart Stores Division: “When we do have a payroll budget to meet, and as volume changes you know you do have to adjust accordingly, and we do have flex hours in that schedule. Sometimes, instead of doing the right thing, the manager takes the short-term approach and is cutting everybody’s hours instead of having the right number of associates.”

Menzer: “When we look at the Fortune 500, David was 284th in compensation at the fourth-largest company. I personally think he’s well worth this and more.”

Barry: Compared to his peers, Glass isn’t making that much money.

“Seems to be a justifiable raise, particularly since he’s a shareholder and he’s not doing well either [with the stock].”

Usmani: Agrees with Barry and Menzer.