Case study of Amazon and Wal-Mart-Financial Statement & Data Analysis

Question

Select two companies operating in the same sector and download their latest annual reports (minimum year ending 2014). You must not select Thorntons plc.Financial statements must be prepared using International Financial Reporting Standard IFRS.References should follow the APA 6th Edition referencing system.

Sample paper

A comparative case study of Amazon and Wal-Mart-Financial Statement & Data Analysis

Introduction

Walmart and Amazon have been two competitive retail business company over the years. An analysis of the two companies over a ten-year horizon highlights Walmart on a better provision of value on its stocks than Amazon. It is in attribute to the uniform dividend payout and growth on its share price.

Over the forty years, Walmart has been in operation; its dividend payout has been increasing. Currently, its dividend yield is at 3.03 %. Its price earnings ratio which ranges between 13.3 -18.2 over past decades highlight share worth investing in the long term. Over the next two years, Walmart plans to put $2.5 B investment in employment and $ 2 B in the electronic commerce industry. The investment will have an adverse impact on it earning, although it will yield significant returns after the two years of operation. Walmart is highly resourceful not only on infrastructure but also capital. The customer outreach gets support from the buyer`s power and a management team that’s fully focused to grow the firm into a model combining brick-and-mortar store with the electronic commerce.

Amazon.inc has had incomparable triumph over the years, over the past decade the company has its share of ups and downs. From an investment perspective, the current investment strategies on international market investment and expansions programs such as Prime Now and Logistics have placed it in an attractive position on the market. The launch of Prime will cushion Amazon on its less yielding products such as Fire Phone and Amazon Destination. By the year 2020, Amazon is estimated to grow up to $46 B from its current position of $ 7B.

  1. BUSINESS MODEL

2.1 Walmart

 Walmart is placed in the market as a discounting retailing company operating chains of stores, supermarkets, warehouse and the famous Sam’s Club it also runs websites such as samsclub.com and Walmart.com. Its operations within the 27 countries are under different names, in the U.S it operates as Walmart and Asda in the UK, forming the major markets. On the minority market it operates in Seiyu located in Japan and India has Best Price. Operating over 11000 retail units and e-commerce platform it operates big within the retailer industry and employees a large group, a recognition earned over a long period in operation.

Its core strategy is to be a price leader, invest in differentiating on access, be competitive on assortment and deliver a great experience. Under the leadership of Doug McMillon as the current president Walmart upholds on its mission statement as a move for improving people live through enabling saving of money. It strategies on bringing its stores together, passing its everyday low cost to its customers as a control on its expenses

2.2 Amazon Inc.

Amazon has grown within the retail industry to become the world largest online retailer. The growth is attributed to its extension in the global presence and not only focusing its operation in North America. Within the marketplace, it operates websites such as amazon.com, in the UK as Amazon co.uk, Amazon.inc, amazon co.jp and Amazon de (Research, 2016). Amazon Company started as a book retailer operating online, diversifying into sale of other products and sales categories over the years and developing its business model along with its growth. Its inventory is maintained and sold through two platforms commission based platform on third party retailers and its online platform. Subscription within Amazon is through prime services as well as a small electronic product line. Prime offers a variety of content such as music, web series, and videos. It has also expanded its Logistics; it is in an aim to shrink its dependency on some operations

First trading shares in 1996 after establishment in the year 1994 by Jeff Bezos who is the current board chair and CEO of the company, later reincorporated in 1996. It holds a mission to become Earth`s most client-centric company. It is guided by its four core principles and aims at becoming a consumer-centric company. To achieve this, it improves its principles: a customer obsession, a passion for invention, an excellence commitment to its operations and thinking on the long term goal.

  1. Operating characteristics

    3.1     Revenue Outlook

Just marked its 20th anniversary Amazon has strategically gained a market share within the United States and in the UK and India as minority share contributors. Most of its investments go towards growth through raising of debt and utilization of retained earnings. The company since inspection has never released any dividends as it fails to focus its growth strategy on profits. In the fiscal year 2015 it generated $107.0 billion in sales. Of total revenue generated the North America share was $ 63.7 billion representing 59% of the total. The International market generated $35.4 billion at 33% of the total. The rest $7.9 billion a 7% share of the total was contributed by the Amazon Web Service (AWS) division. 2015 thus became the first year for Amazon to split its revenue segment share (Amazon., 2015).

Walmart-the world`s largest retailer during the fiscal year of 2015 with a revenue of $485.7 billion, comprising mainly of $482.23 billion net sales. The sales distributed among its major three segments: Walmart United States, Sam`s Club and the Walmart International, The U.S segment had net sales of $288.0 billion, Walmart International segment operating in 26 countries outside U.S has net sales worth $136.2 billion. The Sam`s club operating as a membership-only warehouse club and as samsclub.com contributed $58.0 billion of the net sales. The major segment contributing to its revenue includes Grocery at 56%, Health and Wellness segment at 11%, the Entertainment stood at 10%, Hardline and Apparel were at 16% and Home was at 7%. (Walmart, 2015) The company trades as “WMT.” at the (NYSE) New York Stock Exchange.

    3.2 Competitive factor

The two companies have grown within the years to a competitive market but still manage to be the two leading giants. Its brick and motor stores allows Walmart to stand out among competition and will continuously be the most preferential retail store for most homes.  There store to provide an attribute that beats Amazon in its retail market as customers get a physical experience permitting them to have a feel and touch of the products, immersed in brand experiences and sales contacts engagement. Moreover to the physical distribution through stores, Walmart is aggressively investing in e-commerce platforms and better customer experience through sales improvement, operations, and customer services. Through programs such as EDLP focusing commitment to price leadership and price philosophy which lowers prices to customers on a daily basis.  EDLC controls expenses thus saving on costs and passed to customers. Walmart distribution facilities consist of 102 operational self-owned, two under by third party operator’s ownership, six leased properties, and 24 under third party lease.

Amazon acknowledges competition from single entrance company to alliances. Walmart as a competitor falls on the online, offline and multichannel retailer. As on Amazon competitive edge are publishes on its online store, the web search engine along with social networks. In an aim to beat the competition, it’s in adoption of new and improved technologies which include search, web attributes and computing services infrastructure. Thus Amazon can lock in customers with potential and with restrictive terms, devote its technological resource on, structure, fulfillment, and adverse marketing.

3.3. Risk factor

The number one and most common factor faced by the two companies is on exchange loss. With both companies trading on the international market, the loss is inevitable. The retail industry is not limited to the local economic and political risk. Other risks within the industry include government regulation, business licensing and limited fulfillment and technology infrastructure. Walmart further in its 2015 report acknowledges that data and privacy risk, as well as supply chain and third party risk, may also affect the retail business operations.

4 Employees

Due to the seasonal factor Amazon employee’s dropped to 230,800 on full time during the 2015 financial year. To curb the falling employee number Amazon opted for independently contracted contractors and temporary personnel to supplement its workforce (Amazon., 2015). Employee relation with the company is maintained at a suitable level. Walmart has approximately 2.2 million employees worldwide. It also maintains a large number of associates in each operational year. The company maintains its relationship with its associates is good (Walmart, 2015).

  1. Investment strategies

Over the 2015 financial year, Walmart investors faced a dilemma due to the short-term investment strategy and adoption to environmental changes within the retail industry. On the same year, the company issued a negative guidance, highlighting unpredictable business performance merits, revenue was low as operational cost rose. The expenses increase was forecasted to be by $1.2 B and $1.5B in the fiscal year 2016 and 2017 respectively. Further disappointment on the Walmart investor was due to its additional capital expenditures of $ 23.4B on store improvement and a $2 B electronic commerce investment over the coming years since 2015. The investors got skeptic about the company’s future low-cost over the 2015 financial year selling the stocks they held causing a 40% stock loss of its value over the past years. Its strong basics and statement of financial position along with an enduring strategy well laid out by the management has enabled the company to become a compelling factor on a ten-year investment horizon. Currently, the company offers existing permission allowing value investors to purchase a premium dividend thus paying stock at a very lucrative price (Walmart, 2016).

Investments within Amazon are directed towards technological advancement.  The company believes that technological progress improves their customer interaction on the internet as speeds have improved as well as cutting down on processing costs.  To gain a larger market share the Amazon digital platform has provided a membership service with the inclusion of more than video streaming. The platform is a multi-product incorporating free shipping and two free delivery.

  1. Ratio Analysis

Profitability ratios

Measures the ability of the business to generate considerable profits from its shareholders, communicating the financial performance of the business. The gross profit margin ratio highlights the revenue as a percentage available to cover not only operations but also other expenditures, Amazon Gross profit stood at 33.04 % an improvement from 2014, while Walmart was at 24.58% which was a deterioration from 2014 financial year. Operating profit margin is calculated as operating income divided by revenue; Walmart had a higher operating profit at 5 .04% a drop from 2014 compared to 2 % for Amazon which was a growth from 2014 that was less than 1%. The Net profit margin is calculated as the net income as a factor of revenue, Amazon stood 0.56 % while Walmart was at 3.07% highlighting an almost stable margin on the net profit margin. The Return of Equity after tax stood at 18.24% for Walmart and 4.45% for Amazon, highlighting a wide margin between the two companies. Although Walmart had dropped 2% from the previous year, Amazon grew with the 2% from 2% on the previous year. The return on asset for Amazon stood at 0.91% while that of Walmart stood at 7.36%.

Conclusion

Walmart has potential to develop distribution centers and small integrated store hybrids reducing its costs on operations over coming years. Enabling Walmart competes against Amazon supply channel and vast networks on delivery providing closeness to clients. Amazon earning continue to shrink against Walmart’s revenue as it spends more on capital expenditure. Walmart further utilizes scale and price competitiveness to ease its transition into the multi-channel distribution. Defiantly Amazon needs to replicate Walmart model, transforming itself into a multi-channel retail distributor. As the two companies invest within the market will see a change in its profitability ratio as they grow their sales and revenues.

References

Amazon. (2015). Annual Report . . SEC Form 10-K, 1-78.

https://www.sec.gov/Archives/edgar/data/1018724/000101872416000172/amzn-20151231x10k.htm

Research, Z. I. (2016, Octomber 28). AMZN: AMAZON.COM INC Stock Quote & Analysis – Zacks.com. Retrieved from Zacks: http://www.zacks.com/stock/quote/AMZN

Walmart. (2015). Annual Report . S. E. C. form 10K, 14-16.

https://www.sec.gov/Archives/edgar/data/104169/000010416915000011/wmtform10-kx13115.htm

Walmart, I. (2016, Octomber 28). Walmart strategy drives growth and sustainable returns, Plans $20 billion share. Retrieved from Walmart, Inc., : http://news.walmart.com/news-archive/2015/10/14/walmart-strategy-drives-growth-andsustainable-returns-plans-20-billion-share-repurchase-program-over-two-years.

 

Appendices

Amazon Ratio calculation

Gross profit margin = 100 × Gross profit ÷ Net sales
= 100 × 35,355 ÷ 107,006 = 33.04%

Operating profit margin = 100 × Income from operations ÷ Net sales
= 100 × 2,233 ÷ 107,006 = 2.09%

Net profit margin = 100 × Net income (loss) ÷ Net sales
= 100 × 596 ÷ 107,006 = 0.56%

ROE = 100 × Net income (loss) ÷ Total stockholders’ equity
= 100 × 596 ÷ 13,384 = 4.45%

ROA = 100 × Net income (loss) ÷ Total assets
= 100 × 596 ÷ 65,444 = 0.91%

Walmart ratio calculations

Gross profit margin = 100 × Gross profit ÷ Net sales
= 100 × 117,630 ÷ 478,614 = 24.58%

Operating profit margin = 100 × Operating income ÷ Net sales
= 100 × 24,105 ÷ 478,614 = 5.04%

Net profit margin = 100 × Consolidated net income attributable to Walmart ÷ Net sales
= 100 × 14,694 ÷ 478,614 = 3.07%

ROE = 100 × Consolidated net income attributable to Walmart ÷ Total Walmart shareholders’ equity
= 100 × 14,694 ÷ 80,546 = 18.24%

ROA = 100 × Consolidated net income attributable to Walmart ÷ Total assets
= 100 × 14,694 ÷ 199,581 = 7.36%

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