Introduction to Dollar General and Wal-Mart
The current report is based on the evaluation of the financial position of Dollar General Corporation and Wal-Mart. Wal-Mart Stores Inc is an American multinational retail company that functions as a chain of hypermarkets, discount department and grocery stores. Wal-Mart has it’s headquarter in Bentonville, Arkansas with more than eleven thousands stores and clubs in 28 countries under the 63 banners. Wal-Mart is the world’s largest company in terms of revenue with approximate revenue of $480 billion with 2.3 million employees around the world. Wal-Mart is also regarded as the world’s most valuable companies in terms of the market value and regarded as one of the largest grocery retailer in US. Figures report that during the year 2016 about 62.3 percentage of Wal-Mart’s US$478.614 billion sales generated from its US operations (Stock.walmart.com, 2017). Wal-Mart’s investment outside the territory of North America have experienced a mixed result as its operations in the United Kingdom, South America and China have been highly successful whereas ventures in Germany and South Korea have failed.
Dollar General Corporation on the other hand is an American chain of variety stores having it’s headquarter in Goodlettsville. As of August 2017, Dollar General operated over 13000 stores in all in USA. For several years, Dollar General has major sponsorships with motorsports, especially in NASCAR (Investor.shareholder.com, 2017). The company is presently the primary sponsor for Joe Gibbs Racing. Dollar General have partnered with Turner since 2008 with a team that have been previously sponsoring some racing cars in the Camping World Truck Series. During the year 2010, Dollar General was able to out bit the famous Italian Fashion House such as Dolce and Gabbana that sells expensive fashion products under the “DG” level. The domain DG.com was bought during the private sale from the EMC Corporation, the descendant to the non-operational Data General Computer manufacturer in June 2010 made Dollar General 107th largest company in the world.
Current Ratio:
The current ratio for Wal-Mart for the year 2017 represented 0.97 while Dollar General reported a current ratio of 1.40 for the year ended 2017. The strength and stability of Wal-Mart operations have historically supplied the company with sufficient source of liquidity (Deegan, 2013). The cash flow generated from its operating activities have been sufficient have supplemented the long term debt and short term borrowings which is sufficient to fund the operations that allows Wal-Mart to invest in the activities supporting the long term growth of its operations.
Current Ratio and Debt Ratio of Wal-Mart and Dollar General
Figure 1: Figure illustrating Current ratio of Wal-Mart and Dollar General
(Source: As Created by author)
The current ratio for Dollar General reported for the year 2017 is higher than the Wal-Mart. Though the scale of operations for Wal-Mart is larger than the Dollar General Group but the cash and cash equivalents of Dollar General comprises of higher investments with insignificant rate of risk (Williams, 2014). The payments due from the processors refer to the transactions that is classified as the cash and cash equivalents that totalled $73.9 million and $59.5 million in February 2017 respectively.
The debt ratio reported by Wal-Mart for the year 2017 stood 0.61 with total amount of outstanding long-term debt balanced fell by $4.7 billion for the year ended 2016. The falling debt ratio of Wal-Mart would mean that the company will reduced financing cost with greater amount of profit. Primarily due to the no significant new long-term debt issued in the current year that is offset by maturities of present long-term debt (Weil et al., 2013). The net cash flow provided by the Wal-Mart represented that the short term borrowings increased by $1.2 million in the financial year of 2016 and fell by 6.3 billion in the financial year of 2015. The company use the liquidity provided by the short term borrowing to fund its business operations capital expenditure and other cash requirement.
Figure 2: Figure illustrating debt ratio of Wal-Mart and Dollar General
(Source: As Created by author)
The Debt ratio for the Dollar General Corporation reported during the year 2017 stood 0.54 since the company accounts for investment in debt and marketable equity shares that are held for maturity or trading depending upon their classification. Dollar general has incurred a debt of $4.4 million of debt issuance cost that is associated with the issuance of 2025 senior notes (Edwards, 2013). The net proceeds generated by the Dollar General from the sale of 2025 senior notes was used along with the borrowings to repay its outstanding borrowings under the previous credit agreement and for general corporate purposes.
Overall, Wal-Mart is better placed than Dollar General because the increase in the net cash flows provided by the short-term borrowings helped in offsetting a large amount of $2 billion decrease in the long term debt that was due within one year. Furthermore, a large amount of cash generated from the operating activities in combination with less cash used for share repurchase and capital expenditure allowed Wal-Mart to reduce its short term borrowing. Wal-Mart also has several “undrawn committed lines of credit” that offers $15.0 billion of additional liquidity to the company (Henderson et al., 2015). Whereas, Dollar General capital expenditure for the year 2017 is anticipated to be in the range of $650 to $700 million with additional net borrowings of $490.5 million representing an outflow of cash from its operations. The interest expenses also increased by $10.9 million in the year 2016 to $97.8 million due to the greater instances of average debt outstanding with higher average rate of interest.
Gross Profit Margin of Wal-Mart and Dollar General
The gross profit reported by Wal-Mart stood 0.26 for the year ended 2017. The gross profit rate increased by 29 points in comparison to the financial year of 2016 for Wal-Mart due to its improved margins in food, general merchandise and consumables (Hoskin et al., 2014). The Wal-Mart segment of USA significantly impacted the gross profit rate with alterations in merchandise mix in the overseas segment of Wal-Mart. In addition to this, the reduction in low margin fuel sales in the segment of Sam’s Club has positively created an impact on the gross profit rate.
Figure 3: Figure illustrating Gross Profit Margin of Wal-Mart and Dollar General
(Source: As Created by author)
The home products and seasonal categories generally accounts for higher amount of Dollar General gross profit margin while the consumables category usually accounts for lower amount of gross profit margin. Furthermore, the efforts of Dollar General of merchandising in the areas of consumables might not generate growth in net sales and increased customer traffic is required to offset the lower margins generated by the sale of consumables (May, 2013). The Dollar general gross profit rate decreased by 11 points and this was largely due to the higher markdowns with greater proportion of shrinkage in the sales of consumables and greater inventory decline.
The operating profit increased by 6.3% to $2.06% or 9.4% of sales in comparison to $1.94 billion or 9.5% of the sales in the year 2015. The decrease in the performance of the Dollar General operating profit rate reflects an 11 basis points decrease in its gross profit rate. The nature of Dollar General Business is somewhat seasonal and this is because the Christmas related merchandise sales in its fourth quarter have historically been higher than the sales that were attained in each of the four quarters of the financial year (Weygandt et al., 2015). The operating profit to greater extent varies by quarter.
Figure 4: Figure illustrating operating profit percentage of Wal-Mart and Dollar General
(Source: As Created by author)
The operating profit as the percentage of net sales grew by 4.69% for the financial year of 2017. The company reported an increase of 6 points for the year ended 2016 and 2015 in comparison to the previous financial year. For the financial year of 2016, the increase in the operating expenditure as the percentage of net sales was largely due to the increase in the wages for its new wage structure (Warren et al., 2013). The impact created by these factors was primarily offset as the percentage of net sales from the aggregated expenditure incurred in financial year of 2016.
Operating Profit Percentage of Wal-Mart and Dollar General
Overall, the operating income reported by Wal-Mart is greater than the Dollar General Corporations however, the fluctuations in the currency exchange rates have negatively created an impact on the operating profit. The increase in the cash provided by the operating activities in comparison to the previous financial year of 2016 was largely due to the timing of payments for accounts payable and accrued liabilities. The operating expenditure as the percentage of segment net sales for Wal-Mart have increased by 67 points and decreased by 16 for the financial year of 2016 in comparison to the previous year (Needles et al., 2013). As reported earlier that the business of Dollar General is seasonal and to greater extent the operating profit varies by quarter and might not be indicative of results that is anticipated for the entire year. The falling of operating profit highlights a decrease in the gross profit rate for Dollar General Corporation.
Investment Valuation Ratios:
The management of Wal-Mart believes that the return on investment is one of purposeful metric of sharing with the investors since this provides the investors to assess the effectiveness of the company’s asset utilization. The trend of return on investment fluctuates over the time since management balances long-term potential strategic initiatives with possible short-term impacts (Narayanaswamy, 2014). The return on investment for the financial year ended 2017 stood 26% which is an increase from the fiscal year of 2016. During 2016 the declining ROI was largely due to the decrease in the operating income along with its continuous capital investments. The price earnings ratio for Wal-Mart stood 17.27 for the financial year of 2017 with dividend yield ratio standing 2.64 respectively.
Figure 5: Figure illustrating Price Earnings ratio of Wal-Mart and Dollar General
(Source: As Created by author)
Wal-Mart uses the available cash fund to fund its dividends on their common stock and share repurchase program. The sources of liquidity are adequate to pay dividends to its shareholders and fund its share purchase program for the foreseeable future. Furthermore, the total dividend payments were made $6.3 billion, $6.2 billion and $6.1 billion for fiscal 2016, 2015 and 2014, respectively (Gassen, 2014). The board of directors have approved an annual dividend of $2.00 per share for the financial year of 2017, representing an increase from the fiscal year of 2016.
The price earnings on the other hand for Dollar General stood 16.21 as Dollar General identifies compensations expenditure for share-based compensation depending upon the fair value of the awards on the grant date (Bodie, 2013). The share based awards that remained outstanding following the end of the respective periods however these were not included in the computations of the diluted earnings per share.
Figure 6: Figure illustrating Dividend Yeild of Wal-Mart and Dollar General
(Source: As Created by author)
On March 2017, the board of directors have declared a quarterly cash dividend of $0.26 per share to its shareholders holding common stock. Prior to March 2015, Dollar General had not paid dividend or recurring dividends to its shareholders (Babalola & Abiola, 2013). Even though the board of directors intends to regularly pay the cash dividends, the earning performance, financial conditions, capital needs depends on the discretion of the board when they deem relevant.
Overall, Wal-Mart reviews its share repurchase program to constantly provide returns to the shareholders through dividends. The Dividends and the share repurchase meets the cash needs to funds its domestic operations. Dollar general has violated the federal securities by misrepresenting the impact to sales due to the change in the certain federal programs (Jordan, 2014). The litigations bought in by shareholder represents that the shareholders are not satisfied with Dollar General Corporations. Furthermore, investing in Dollar General is better than investing in Wal-Mart as the dividends offered to the shareholders of is better which is more likely to lead to shareholder satisfaction.
Cash flow is regarded as the Non-GAAP financial measure since the management of the Wal-Mart believes that cash measures the ability of the organization to generate extra amount of cash from its business operations (Delen et al., 2013). The cash flow ratio for the company stood 6.49% for the year ended 2017 since the company generated a cash flow of $15.9 for the year. The decrease in the cash flow for the financial year of 2016 from the financial year of 2015 was largely due to the lower amount of income from continuing operations. The asset efficiency ratio for Wal-Mart stood 0.16 with current liability coverage ratio stood 0.48. The cash flow generated from the operations has supplemented the long term and short-term borrowings. Wal-Mart anticipates financing its growth activities with the help of the cash flows generated by its operating activities to finance its future debts.
The cash flow ratio for Dollar General stood 7.30 for the year ended 2017 with asset efficiency ratio standing 0.14. Dollar General reported that the cash flow from the operations was $16 billion representing an increase of 15% from the financial year of 2016. However, the cash flow from operations for Dollar General is negatively effected due to the shrinkage in the inventories (McCall, 2017). The company is forced to undertake unanticipated markdowns for disposing off its surplus inventory that adversely creates an impact on the financial results of the organization. The cash flow from operations is negatively impacted due to the unsuccessful management of inventories.
Figure 7: Figure illustrating Cash Flow Ratio of Wal-Mart and Dollar General
(Source: As Created by author)
Overall, the net cash flow from the financing activities of Wal-Mart is better placed than the Dollar General since cash flow increased by $1.1 billion and $4.3 billion for the financial year of 2016 and 2015 in comparison to the similar period from the previous financial year. The cash flow from continuing operations represents a strong position for Wal-Mart than Dollar General because of its better access to capital markets to meet the required operating cash needs (Wahlen et al., 2014). This includes merchandise inventories; capital expenditure, dividend payments and share repurchase programs.
As of June 2017, the forecast of consensus advised the investors of Wal-Mart to hold their position in the company. Investing in Wal-Mart is would be a better option since the consensus has forecasted that the company would outperform the market. The rationale for the decision is that Wal-Mart stores have a maiden target of 80.08 with a higher estimate of 92.00 and a lower estimate of 58.00 (Frias et al., 2014). According to the analysis, the median estimate states an increase of 6.26% from the last price of 75.36. In terms of the dividend Wal-Mart have reported a dividend of 2.00 USD that alone represents an increase of 2.04% increase over the last year figure.
The analyst have expectations that dividends of 2.07 USD will be offered for the upcoming financial year representing an increase of 3.55%. On the other hand, the dollar general reported a fall of 9.4% since its last earnings report. More than a month has passed from the company last report as their shares have lost around 9.4% and the shares of the company have been underperforming in the market (Bonsall et al., 2014). Furthermore, Dollar General operating profit declined by 1.4% to $473.8 million while the operating margin have also decreased 68 bps to 8.5%. Market estimates have been widely trending downward for the stock with magnitude indicating a downward shift. Therefore, it would be wise to invest in Wal-Mart since the analyst have forecasted an increase in dividend in the upcoming quarter.
Conclusion:
In selecting the investment criteria, non-financial metrics such as goodwill is considered at the time of making investment in Wal-Mart. Furthermore, Wal-Mart have offered annual cash dividend to its shareholders by paying them on quarterly basis. The company has increased the earnings per share by 59% and its free cash flow by 123%. At the same time, Wal-Mart has returned more than $60 billion to the shareholders in the form of dividends and share repurchases. In fact, Wal-Mart has also increased the annual cash dividend and share repurchase as well. Wal-Mart is experiencing impressive exponential growth with outstanding dividend growth. The goodwill of Wal-Mart forms the important considerations of making investment in the company.
Reference List:
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