Company Background: Walmart Inc
Walmart Inc which is popularly referred to as Walmart is a multinational retail organization based in the United States and headquartered in Bentonville, Arkansas. Walmart is well recognized for operating a chain of hypermarkets, grocery stores and discount department stores and at present possesses 10,593 stores in 24 different countries (Corporate Walmart, 2022). Further, the company has recorded the world’s largest revenue in the financial year 2020 and is also credited for being the largest private employer worldwide. The company is publically listed on the New York Stock Exchange also forming a part of the DJIA component, S&P 100 component and S&P 500 component (Reuters, 2022).
Popularly referred to as Target, the company is another key player in the retail industry based in the United States having its headquarters in Minneapolis, Minnesota. In fact, Target is considered as the eighth largest retailer based in the United States. Similar to Walmart, Target also has multiple store formats such as hypermarkets, discount stores and small format stores (Target Corporate, 2022). The company has found most of their success as a cheap-chic player when it comes to the retail industry. Target just like Walmart is also publically listed on the New York Stock exchange and is a constituent of the S&P 100 component and the S&P 500 component (Fortune, 2022).
The retail industry in the United States has witnessed an exponential growth in revenue from $3.81 trillion in the year 2019 to $4.06 trillion in the year 2020. However, a significant decline in revenue is estimated at 10.7% for the period 2020-21 as a result of the Covid-19 pandemic coupled with temporary store closures (Ibisworld.com, 2022). There are several forms of retail establishments in the country with the overall industry being quite competitive. Some of the key players in the industry are Walmart, Amazon, Kroger, Target and Costco (Statista, 2022).
Financial statements are prepared and presented by corporate organizations with intent to communicate their financial performance to all stakeholders interested in the financial information concerning the company (Warren, Jonick & Schneider, 2020). However, financial statements let alone cannot communicate every detail concerning the company’s performance such as its strengths and weaknesses. Hence, the interested stakeholders have to rely upon certain analysis tools which can help interpret the numbers reported in the financial statement (Robinson, 2020). Trend analysis and financial ratio analysis are quite popular and common analytical tools which help in analyzing the financial statements of an entity. Trend analysis also referred to as Horizontal analysis is an analytical tool which helps compare line items in financial statements with prior years to understand performance trends, whether positive or negative (Yhip & Alagheband, 2020). Further, financial ratio analysis is another quantitative tool which helps in interpreting the firm’s position of profitability, liquidity, efficiency, solvency and market prospects with the help of relying upon financial numbers in the financial statements (Jackson, 2021). The sections hereunder discuss the findings about the financial performance of both companies with the help of application of the aforesaid tools in an attempt to analyze the financial statements and interpret the financial performance.
Company Background: Target Corporation
Walmart has quite a strong balance sheet. Their total current assets in current year have increased by 46% in an effort to improve their liquidity position. This is further supported by the fact that the closing balance of cash and equivalents has increased by 87% by $8,276 million in current year. Despite a surge in sales, the company managed to maintain their inventory and receivables level as well. The total asset base of Walmart is quite significant as well with an impressive $252,496 million worth of resources that have increased by 7% when compared to the previous year. The company’s current liabilities have also witnessed an exponential surge by 19% which is mainly credited to increase in accrued liabilities by 70%. Further, the company has also managed to redeem their long term debts and lease obligations in an attempt to reduce the financial leverage. The total shareholder’s equity has increased by 7% owing to a 6% increase in retain reserves and so has the debt position of the company increasing by 6%.
Although Target may not have as superior a balance sheet when compared to Walmart, there is no denying their growth since last year. The total current assets of the business has increased by a significant surge of 61% with their cash reserves getting replenished by 230% from $2,577 million in previous year to $8,511 million in current year. The total asset base of the company has also seen an exponential increase by 20% which reflects upon a high potential of growth. This is also validated because of their capital investments incurred when it comes to fixed assets such as land, buildings, computer equipments and construction progress. The current liabilities of the company has also increased dramatically by 39% which is because of significant dues concerning accounts payable, accrued expenses and short term loans. Further, long term debt has also increased by 2% and the overall total debt has increased by 19% when compared to previous year. There are no issue of common stock throughout the year and with a 37% increase in retained earnings, the company’s total shareholder’s equity increased by 22%.
The total revenue generated for the financial year has increased by 7% because of an overall 7% increase in the net sales of the company. However, the revenue stream of membership & other income has declined by 3%. An increase in total costs and expenses such as direct expenses (cost of sales) and indirect expenses (operating overheads) by 7% is justified owing to an increase in revenue by the same proportion. The operating income of the company has also increased by 10% as a consequence. A minor decline in debt service costs (net interest expense) by 2% is also observed because of a decline in interest bearing debts. The company has however created an additional 40% provision for income tax expense because of which the net income of the company has deteriorated by 10%. Lastly, the net earnings per share of the company have also declined by 9%.
Industry Overview: Retail Industry
The overall operating performance of Target has been praiseworthy for the current financial year because of a 20% increase in total revenue which is triggered by a 20% increase in net sales and 18% increase in other source of operating revenue. As a result, the direct expenses of the company have also increased by 21% while the operating expenses have just increased by 15%. Consequently, the operating income of the company has increased by 40%. However, a noticeable increase in financial expenses have been observed such as the net interest expense increasing by 105% owing to an increase in the debt position of the company as well as a 28% increase in provision for income taxes. The net income of the company has although increased by 33% when compared to previous year which increases the earnings per share metric as well by an overall 36%.
The net operating cash flows of Walmart has increased by 43% in current year because of the impact of the global health crisis resulting in an accelerated inventory sell-through as well as an acceleration of payments for inventory purchases. The net investing cash flows used by the company has increased by 10% in current year because of payments for business acquisitions, technological investments, supply chain investments, remodelling of old stores, addition of new stores and increasing the e-commerce presence. The net cash used in financing cash flows have also increased by 13% owing to higher dividend payments, stock repurchases, financing obligations and transactions pertaining to debt finances. The company’s operating cash flows were significantly high to fund their investment and financing activities resulting in an increase in cash earned throughout the year by 475% and replenishing the closing balance by an increase of 87% (Stock Walmart, 2022).
The cash position of the business as reflected upon by the statement of cash flows is significantly favourable. The operating cash flows of the company increased by 48% in current year because of a strong operating performance during the year. This is further leveraged by an increase in payables which is driven by an increase in inventory turnover due to strong sales. The company has also spent significantly towards acquiring of property and equipment this year but the overall cash used in investing activities is 12% less when compared to previous year. This is because the company modified certain strategic plans of store remodels and new store openings. The financing strategy of the company is with the intent of supporting the liquidity position as the net cash used in financing activities has declined by 37% in comparison to last year. Although there was no compromise upon dividend payments, the company issued new loans during the year and have also held back on certain share repurchase programmes (Investors Target, 2022). The operating cash flows generated by the company were ample to meet the investing and financing commitments resulting in a generation of cash which increased by 481% when compared to last year. The total cash replenishment was 230% for the company.
A summary of certain important accounting policies and estimates which Walmart makes use of in order to prepare and present its financial statements are mentioned as follows:
- The company’s operations have three reporting segments which are Walmart US, Walmart International and Sam’s Club.
- Any investments which are purchased by a company that has a maturity period of three months or less is classified as cash equivalents. Further, transactions involving electronic transfer that processes within seven days are also classified as cash and cash equivalents.
- Inventory valuation methods differ among the three reporting segments with Walmart US using the LIFO method, Walmart International using the FIFO method and Sam’s club using the weighted average cost method.
- Property, plant and equipment of the company are recorded at cost and depreciated using the straight line method over the estimated useful life of the respective asset (Stock Walmart, 2022).
Likewise, some of the accounting policies and estimates used by Target Corporation to in preparing and presenting their financials have also been outlined as follows:
- The company operates only through a single reporting segment which consists of continuing operations of the company based in the US which allows customers to shop from stores or digitally.
- Highly liquid investments having an original maturity of three or less months forms a part of cash and cash equivalents. Also, electronic transactions which typically settle within five or less days are also included in the same.
- Inventory valuation is done solely on the basis of LIFO method for valuing stocks under the retail inventory accounting method.
- All fixed assets under property, plant and equipment are depreciated using the straight line technique over the estimated useful life of the asset (Investors Target, 2022).
Despite both companies reflecting upon a positive trend with respect to revenue, Target Corporation is better with managing their cost and expenses as a result of which they enjoy a superior profitability position. The operating profit margin ratio of Target is higher 6.99% when compared to 4.03% of Walmart. This means that Target is better at managing their direct expenses and operating expenses (Weygandt, Kimmel, & Kieso, 2018). Further, the net profit margin shows the ultimate bottom line profit performance of a company. The margin has deteriorated for Walmart from 2.90% to 2.45% while Target enjoys a higher profitability at 4.67% which has increased from 4.20%.
The liquidity performance of an organization shows the availability of short term resources of an organization for meeting the short term requirements. Although both companies have stressed improving their overall liquidity position which is validated by their individual improvement in current ratios, it is Target which has a higher current ratio at 1.03 times when compared to 0.97 times of Walmart. Since the current ratio of Target exceeds 1, it is better positioned in meeting all of its current liabilities when compared to Walmart whose current ratio is less than 1 (Kimmel, Weygandt & Kieso, 2020). Since these companies pertain to the retail industry which is inventory intensive, their acid test ratios ought to be low. However, the acid test ratio of Target is almost double at 0.49 times when compared to 0.26 times.
The asset turnover ratio reflects upon the efficiency of an organization to make use of their resources and asset base for generating revenue. Walmart has a higher asset turnover at 2.21 times when compared to Target at 1.83 times. This is because of Walmart having their operations not just restricted to the United States but also having significant international operations which provides it a much higher asset & revenue base and global market share when compared to Target whose operations are limited to the United States. The day’s inventory outstanding ratio is another activity ratio which measures the total time an organization holds on its average inventory which before it is sold to customers and replenished by newer inventory levels (Edmonds et al., 2021). This metric is again much more favourable for Walmart at 38.81 days in comparison to 54.18 days of Target. Although both companies have witnessed increased demand for sales for which they have to maintain higher inventory levels, Walmart are much more efficient with their inventory management.
Walmart has a lower debt to equity ratio when it comes to their capital structure at 1.88 times while Target has a higher proportion of debt to equity at 2.55 times. The gearing of Target is much higher which increases its exposure to financial leverage (Garbowski et al., 2019). However, significant reliance upon debt is because of cheaper interest rates and the company’s attempt to maintaining a high level of liquidity to withstand exposure to liquidity risk as a result of the Covid19 pandemic. Further, the interest coverage ratio of Walmart is also higher at 14.56 times when compared to 9.24 times of Target. This means that not only Walmart has a lower financial risk but is also in a position to better service their debts which is because of higher dollar value of EBITDA.
Conclusion and Recommendation
Based on the discussions presented in this report and the financial statement analysis conducted for both, Walmart & Target for the recent financial years, it can be concluded upon that both companies have their individual sources of strengths and weaknesses. Target as a company has a superior profitability & liquidity position when compared to Walmart that has a much more favourable position of efficiency and solvency. It is recommended that Target should plan for growing their international presence beyond United States to further increase revenue and asset base. Further, the company can consider reducing their debt dependency gradually to decrease their financial risks. On the contrary, it is recommended that Walmart improves its cost efficiency to report better profit margins and should try paying off their short term debts to improve their liquidity position. Lastly, the potential for growth for Target is much higher and an investor at this point of time is recommended investing in Target Corporation.
References
Corporate Walmart. (2022). Retrieved 8 March 2022, from https://corporate.walmart.com/about
Edmonds, T. P., Edmonds, C. T., Edmonds, M. A., McNair, F. M., & Olds, P. R. (2021). Fundamental financial accounting concepts. McGraw-Hill.
Fortune. (2022). Target Company Profile | Fortune. Retrieved 8 March 2022, from https://fortune.com/company/target/
Garbowski, M., Drobyazko, S., Matveeva, V., Kyiashko, O., & Dmytrovska, V. (2019). Financial accounting of E-business enterprises. Academy of Accounting and Financial Studies Journal, 23, 1-5.
Ibisworld.com. (2022). IBISWorld – Industry Market Research, Reports, and Statistics. Retrieved 8 March 2022, from https://www.ibisworld.com/united-states/market-research-reports/retail-sector/
Investors Target. (2022). annual reports | Target Corporation. Retrieved 8 March 2022, from https://investors.target.com/annual-reports
Jackson, A. B. (2021). Financial statement analysis: a review and current issues. China Finance Review International.
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2020). Financial accounting: tools for business decision-making. John Wiley & Sons.
Reuters. (2022). Retrieved 8 March 2022, from https://www.reuters.com/companies/WMT.N
Robinson, T. R. (2020). International financial statement analysis. John Wiley & Sons.
Statista. (2022). Historic retail industry sales U.S. 2021 | Statista. Retrieved 8 March 2022, from https://www.statista.com/statistics/243448/holiday-retail-industry-sales-in-the-united-states/#:~:text=Total%20retail%20sales%20in%20the,establishments%20in%20the%20United%20States.
Stock Walmart. (2022). Retrieved 8 March 2022, from https://stock.walmart.com/investors/financial-information/annual-reports-and-proxies/default.aspx
Target Corporate. (2022). About Target Corporation. Retrieved 8 March 2022, from https://corporate.target.com/about
Warren, C. S., Jonick, C., & Schneider, J. (2020). Financial accounting. Cengage Learning.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018). Financial Accounting with International Financial Reporting Standards. John Wiley & Sons.
Yhip, T. M., & Alagheband, B. (2020). Financial Statement Analysis. In The Practice of Lending (pp. 47-94). Palgrave Macmillan, Cham.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
