Comprehensive financial Analysis
Background and Brief History of Walmart
Walmart’s history is synonymous with that of its founder Sam Walton to give consumers great value and exceptional customer service (Walmart.com). The founder was of the opinion that great customer service derived from leadership. The principle of willingness to serve through true leadership continues to be true in the business today and the bearing of the decisions the company has made in the last 50 years. The company believes Sam Walton’s principles will guide its journey into the future.
The founder Sam Walton was born in 1918 in Kingfisher, Oklahoma. He joined the military in 1942 and left in 1945. He moved to Iowa and eventually to Arkansas gaining useful retail experience through various variety stores he operated. Sam operated various stores throughout the 1950s opening the first Walmart store in 1962 at the age of 44 years. Sam was a trendsetter in the retail space with competitors believing that offering consumer lower prices and exceptional service could not work in the long-term.
The company went public in 1970 exceeding even Sam’s expectations. The result was a steady expansion plan of the company financed by the proceeds from going public. The company attributes its early rapid growth to large number of consumers attracted by the low prices and also to its partners. Sam considered the partners to Walmart important and they were instrumental in the success story of the company. The growth of Walmart throughout its existence goes beyond the stores the company has built, the partnership it has built, and the great customer service it has offered to its customers. The success story owes to the detailed view it adopts throughout its history. The growth and leadership has changed the retail industry forever.
The Assessment of the Current Macroeconomic Environment
The macroeconomic environment is the space in which retailers do their business. The future of the industry depends on the ability to acquire information about the environment and analyze it to make decisions on its future operating model. Hence, it is imperative for Walmart to understand the elements and trends in the retail environment to take advantage of the opportunities and navigate the threats. Scholars attribute failure of most retail businesses due to their lack of judging the macroeconomic environment. Recognizing the trends and elements in the industry can enable firms such as Walmart to take advantage of growth opportunities, thus avoiding failure as it is the norm currently.
Firstly, political factors such as government policies and regulations affects businesses in the retail industry. The political environment interrelates to other factors such as economic and supply chains. Operating in a politically stable environment means less disruptions of the selling process and the international supply chains. Walmart has to be careful not to go against anti-trust laws especially in the Trump presidency as seen by the problems encountered by online retailer Amazon. Walmart has ambitious plans to be a market leader in the online retail space as seen by its recent acquisitions.
Tiffany faces a similar macroeconomic environment as Walmart despite being a luxury jewelry and specialty retailer (Tiffany & Co, 2019). The economic factors such as inflation, foreign exchange rates, aggregate demand, savings rate, and aggregate investment affects both Tiffany and Walmart. However, Walmart offers low prices on its goods and services while Tiffany goes for the high-end market. In situations of an economic down turn, the company that likely to suffer more is Tiffany than Walmart that offers budget prices. However, in case of an economic down turn, Walmart may need to increase its production levels, and if it does not prices may rise leading consumers shifting to other low-budget retailers. The consumers will likely be buying necessities when the economy declines, so by Walmart raising prices will mean its products remaining on the shelves indefinitely. Walmart operates in many markets, therefore, it has to be aware of the interest rates and taxes that will affect its bottom-line. Tiffany, on the other hand, considers factors such as economic systems, government policies, financial market efficiencies, infrastructure quality of jewelry stores, education levels, labor costs, economic growth, comparative advantage among other factors in analyzing the economic environment it operates.
Both companies have to consider social factors in the macroeconomic environments they operate. Shared attitudes and beliefs impact how the companies operate by having a view of the customers they serve. The social factors will determine how the companies communicate their marketing messages. Tiffany considers the demographics, education, culture, entrepreneurial spirit, and leisure interests in analyzing the social environment. On the other hand, Walmart, in analyzing the social environment considers factors such as the interest of the target market. For instance, Walmart’s inability to recognize the differences of Germany market cost it a $1 billion dollars. Walmart did not adjust its marketing strategy from that of the American market to fit that of the Germany audience. There are markets that are health conscious and, hence, Walmart has had to introduce organic and healthy offerings in its products.
Technologically, Walmart has had to introduce robots and automations to better serve its customers. The multinational has had to do this to respond to the digital transformation necessary in today’s operating environment. Additionally, going online has immense benefits by reaching more customers. Nothing less is expected of a big brand such as Walmart than automation of its business processes. Tiffany, on the other hand, in its analysis of the technological environment it has had to consider a number of factors such as technological developments, its impact on the products it offers, cost structure of stores, value chain, and rate of technological diffusion.
Companies such as Walmart have had to respond to the different environmental standards and standards in various jurisdictions they operate. Different countries have differing laws and liabilities that can affect the companies’ profitability. For example, environmental laws in the United States differ from those in the European Union. Before establishing base in a given country, it is important to evaluate the environmental standards required to operate. Finally, the companies should consider the legal factor in order to abide by various laws and regulations. The laws include labor laws, safety laws, and data protection laws. For example, Walmart had to settle $65 million to 1,000 former employees who sued the company for not providing seating accommodation.
Industry Analysis
The current analysis will use Porter’s Five Forces to understand the industry and underlying factors that determine profitability of both companies. First is the threat of new entrants for new jewelry stores bring innovation putting pressure on Tiffany. The company responds to this threat by innovating on products and services it offers, building economies of scale, and building capacity in research and development. On the other hand, Walmart responds to this threat by being aggressive to remain competitive because of the strong competition it faces. There many firms offering similar products and services of different sizes. In its strategy the company considers the large number of firms, larger variety of retail firms, and their high aggressiveness.
Walmart experiences weak intensity of consumer bargaining power in the retail sector. The large number of customers makes it difficult for them to impose pressure on Walmart. The weak forces include large population of buyers, high diversity, and small size of buyer purchases. On the other hand, Tiffany experiences buyer pressure because of their demand to buy the best products at the minimum price possible. the buyers are demanding because of the small customer base and, thus seek often seek bargains and discounts.
The bargaining power of suppliers is a weak force for Walmart. There are many suppliers who face tough competition and high availability. They, thus cannot affect the strategic growth of the retailer impacting their bargaining power. The retailer manages supplier influence on the business through its corporate social responsibility strategy. Compared to Walmart, Tiffany has relatively fewer suppliers who use their position to negotiate and extract higher prices. Tiffany responds to this force by building efficient supply chains, experimenting on product designs, and developing loyal supply base who depend on the company.
The threat of substitutes is a weak force in Walmart. The retailer offers a wide variety of products and services that have few or no substitutes. The substitutes are readily available, however, the low variety makes it difficult for buyers to shift as they are more expensive. Tiffany responds to the threat, on the other hand, by being service oriented rather than product oriented, understanding the unique needs of the customer, and increasing the switching costs for the buyers. The company has to respond this way because the threat of substitution is high because other stores offer value propositions different from those offered by the firm.
Walmart’s strategic plan must consider the threat of competition and entry of retailers offering similar products and value propositions as the firm. The strategy is generic and must continually grow to keep it competitive. The company should invest more in automation of its processes such as its supply chain to remain competitive into the future. The other aspect the company should emphasize to remain competitive in the industry is its human resource management strategy. The strategy can help build workforce competencies to support its ambitious growth strategy. On the other hand, the implication of the five forces on Tiffany is that it should gain a complete picture of the industry. They should be able to stay ahead of the curve by studying industry trends to swiftly exploit any emerging trends. Both companies can shape the forces in their favor by learning and responding to them early unlike macroeconomic forces that are out of their hands.
Analysis of the Income Statements and Cash Flows
The revenues of Walmart grew 2.8% in financial year 2019 from 2018. The revenues were $514,405 million and $500,343 million in 2019 and 2018 respectively. The percentage change in net sales in 2019 from fiscal year 2018 was 2.9%. the percentage change in the US market was 3.7% compared to Sam’s Club, which was 5.4%. The company recorded a gross profit margin of 24.5% in 2019 from the previous year. The US sales of the company grew at the highest rate in 2019 as compared to the last 10 years (Walmart, 2019). The ecommerce sales nearly doubled those of the US market. The operating cash flows of the company remained healthy at $27.8 billion. The financial priorities of the company continue to be strong through emphasizing an efficient growth strategy, managing operating cash prudently, and allocating capital strategically.
The net sales of Tiffany were $4,424 million in 2019 same as in 2018 showing a 0% increase. The net earnings were $541.1 million in 2019 compared to 2018 when they were $586.4 million. The net earnings decreased in 2019 compared to the financial year 2018 due to a difficult operating environment. The cash flows from operating activities were $670.9 million in 2019 compared to 2018 when they were $531.8.
Balance Sheet Analysis
The balance sheets of both companies remain healthy despite the aggressive expansionary plan of Walmart and the mergers pursued by Tiffany. The total assets of Tiffany in 2019 were $6,660.1 million. The shareholder equity was worth $3,335.4 million as in the books of the company in 2019 (Tiffany & Co, 2019). Comparison of the company’s five-year total return shows that the company’s stock performed below that of the S&P 500 stock index and the S&P 500 consumer discretionary index.
The five-year cumulative total shareholder return for Walmart shows that company stock performed below that of the S&P 500 index and S&P 500 Retailing Index in the period 2014 to 2019. The total assets of the company were $219,295 billion compared to $204,522 billion in 2018 (Walmart, 2019). The accrued liabilities were $22,159 billion in 2019 a slight increase from 2019 when they were $22,122.
Recommendations
Walmart acknowledges that its ambitious growth strategy comes with risks. The company’s wage bill continues to grow. It has also invested heavily in its partners, ecommerce, and its pricing models. The company’s aggressive acquisition plan such as in businesses FlipKart and Jet means its growth trajectory. The company also sees growth prospects in markets such as Japan and China. The company’s good results in ecommerce means its good place for investors to put their money. However, the company’s stock has been performing poorly compared to the market indices. However, through improved discipline in their operating models and strategic allocation of capital to ensure a good return on investor funds. The unique assets and financial strength position will ensure long-term growth and a bright future for the company. In the short-term the company should be flexible and capability to meet its financial objectives.
Tiffany’s stock has also been operating below the market indices though slightly. As the case for any retailer, the company faces a number of hurdles in achieving its objectives and expectations. However, there are a number of risk factors that are specific to the company. The risk factors may impair the company operating model in the future though they may be immaterial now. However, the strong management coupled with its strong position and recognizable brand means it is a good by for the investor. I would advise an investor to buy Tiffany’s stock in the short-term, but not in the long-term. This is because the market is prone to new entrants who are innovative and economic down-turns that are likely to see the consumers cut back on luxury spending. Contrary, I would advise the investor to buy Walmart shares in the short and long-term because of its focus on low prices and aggressive expansionary plan.
References
https://corporate.walmart.com/our-story/our-history#:~:text=In%201950%2C%20the%20Waltons%20left,5%2610%20on%20the%20downtown%20square.&text=Inspired%20by%20the%20early%20success,of%2044%20in%20Rogers%2C%20Arkansas.
Tiffany & Co, (2019). Annual Report On Form 10-K for the Year Ended January 31, 2020 Notice of 2020 Annual Meeting And Proxy Statement. https://investor.tiffany.com/static-files/31f6f35f-4107-4943-aa6e-a2010e6f551a
Walmart, (2019). 2019 Annual Report: Defining the Future of Retail. https://s2.q4cdn.com/056532643/files/doc_financials/2019/annual/Walmart-2019-AR-Final.pdf
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