July 30, 2003

WAL-MART STORES, INC. (WMT)

Part I Background Analysis:

Sector: RetailIndustry: Discount, Variety StoresEmployees: 1 MillionExchange Traded: NYSETicker Symbol: WMTStock Price: $57.32Daily Trading Volume: 8.042 Mil

COMPANY INFORMATION

Wal-Mart Stores, Inc., incorporated in 1969, is an international retailer. In the United States, the Company operated 1,568 discount stores, 1,258 Super centers, 525 SAM's CLUBs and 49 Neighborhood Markets as of January 31, 2003. Internationally, it operated units in Argentina (11), Brazil (22), Canada (213), Germany (94), South Korea (15), Mexico (597), Puerto Rico (52) and the United Kingdom (258), and, under joint venture agreements, in China (26). Additionally, it holds, on a fully diluted basis, a 35% interest in The Seiyu, Ltd., a Japanese retail chain. The Company operates in all 50 states in the United States.

The Company's mass merchandising operations serve its customers primarily through the operation of three segments. It identifies those segments based on management responsibility within the United States and geographically for all international units. The Wal-Mart Stores segment includes its discount stores, Super centers and Neighborhood Markets in the United

States. The SAM's CLUB segment includes the warehouse membership clubs in the United States. The International segment includes all of its operations in Argentina, Brazil, Canada, China, Japan, Germany, Korea, Mexico, Puerto Rico and the United Kingdom.

Wal-Mart StoresWal-Mart discount stores range in size from 30,000 square feet to 219,000 square feet, with the average size of a discount store being approximately 96,883 square feet. Wal-Mart Super centers are located in 43 states. Super centers range in size from 90,000 square feet to 261,000 square feet, with the average size of a Super center being approximately 186,495 square feet. It operates Neighborhood Market stores in Alabama, Arkansas, Florida, Kansas, Kentucky, Mississippi, Oklahoma, Tennessee, Texas and Utah. Neighborhood Market stores range in size from 40,000 square feet to 64,000 square feet, with the average size being 44,099 square feet.

Merchandise offered in Wal-Mart discount stores and the general merchandise areas of the Super centers is generally organized into 53 departments and offer a wide variety of merchandise. Each store carries apparel for women, girls, men, boys and infants, domestics, fabrics and notions, stationery and books, shoes, housewares, hardware, electronics, home furnishings, small appliances, automotive accessories, horticulture and accessories, sporting goods, toys, pet food and accessories, cameras and supplies, health and beauty aids, pharmaceuticals, jewelry and optical. In addition, the stores offer an assortment of grocery merchandise, with the grocery assortment in Super centers being broader and including meat, produce, deli, bakery, dairy, frozen foods and dry grocery. Neighborhood Markets are generally organized into 35 departments, and offer dry grocery, meat, produce, deli, bakery, dairy, frozen foods, pharmaceuticals, photo processing, health and beauty aids, household chemicals, paper goods and pet supplies.

SAM's CLUBThe Company operates SAM's CLUBs in 48 states. SAM's CLUBs facility sizes generally range between 90,000 and 160,000 square feet of building area, with the average SAM's CLUB facility being approximately 125,000 square feet.

SAM's CLUB offers bulk displays of name brand merchandise, including hardgoods, some softgoods, institutional-size grocery items and selected private label items under the Member's Mark brand. Generally, each SAM's CLUB also carries software, electronics, jewelry, floral, sporting goods, toys, tires, stationery and books. Most clubs have fresh departments, which include bakery, meat, produce and Sam's Cafe. Additionally, some clubs offer one-hour photo, pharmaceuticals, optical departments and gasoline stations.

InternationalThe Company's International segment is comprised of its operations through wholly owned subsidiaries in Argentina, Canada, Germany, South Korea, Puerto Rico and the United Kingdom; its operations through majority-owned subsidiaries in Brazil and Mexico; its operations through joint ventures in China, and, through a minority ownership interest, in Japan. Operating formats vary by country, but include Wal-Mart discount stores in Canada and Puerto Rico; Super centers in Argentina, Brazil, China, Germany, South Korea, Mexico, Puerto Rico and the United Kingdom; SAM's CLUBs in Brazil, China, Mexico and Puerto Rico; Superamas (traditional supermarket), Bodegas (discount store), Suburbias (specialty department store) and Vips (restaurant) in Mexico; Todo Dias (traditional supermarket) in Brazil; Neighborhood Markets (traditional supermarkets) in China; ASDA stores (combination grocery and apparel store) in the United Kingdom, and Amigo supermarkets in Puerto Rico.

FINANCIAL RATIO ANALYSIS

Growth Rates %  Company  Industry S&P

500Company Industry

Sales (Qtr vs year ago qtr) 3.20 8.90 4.70 Bad GoodSales (5-Year Annual Avg.) 14.55 8.39 6.09 Excellent GoodEPS (5-Year Annual Avg.) 15.31 12.15 -5.77 Excellent ExcellentDividends (5-Year Annual Avg.) 14.97 13.00 -1.38 Good Good

Looking at the first quarter Wal-mart’s sales steadily grew at 3.20%, which is lower than the growth rate of the industry and S&P 500. EPS growth is considerably higher than the industry as well as the market. Average sales growth for Wal-mart for the past five years considerably exceeded the industry and S&P 500. The strong sales trend has helped Wal-mart emerge as a retail giant. STRENGTH

Price Ratios  Company  Industry S&P

500Company Industry

Current P/E Ratio 30.5 27.6 37.7 Fair FairP/E Ratio 5-Year High 56.2 53.9 65.1 Fair FairP/E Ratio 5-Year Low 20.3 19.8 25.7 Low LowPrice/Sales Ratio 1.01 0.87 1.49 Low LowPrice/Book Value 6.17 5.12 3.00 Fair FairPrice/Cash Flow Ratio 21.10 18.00 16.70 Good Fair

The P/E Ratio is higher than the industry and lower than the S&P 500. This shows that the price paid for the stock is backed by strong earnings. Price/Sales Ratio is in line with the industry and market. Price/Book Value is higher than the industry and the market. Wal-Mart has a strong and steady price. STRENGTH

Profit Margins %  Company  Industry S&P

500Company Industry

Gross Margin 23.2 24.2 48.1 Low LowPre-Tax Margin 5.3 5.1 7.7 Low LowNet Profit Margin 3.3 3.2 4.1 Fair Fair5Yr Gross Margin (5-Year Avg.) 22.8 23.6 47.5 Low Low5Yr PreTax Margin (5-Year Avg.) 5.2 4.7 9.0 Low Low5Yr Net Profit Margin (5-Year Avg.) 3.2 2.9 5.5 Fair Fair

Wal-mart has a lower gross margin compared to the market and industry. This is because Wal-mart believes in higher volume and low mark-ups. The Net Profit Margin is in line with the industry and market which shows their expenses are controlled. STRENGTH

 Financial Condition  Company  Industry S&P

500Company Industry

Debt/Equity Ratio 0.52 0.54 1.27 Fair FairCurrent Ratio 1.0 1.2 1.5 Good GoodQuick Ratio 0.1 0.3 1.1 Poor PoorInterest Coverage 13.4 11.3 2.4 Good GoodLeverage Ratio 2.4 2.4 6.3 Fair FairBook Value/Share 9.18 8.83 10.67 Good Good

The current ratio is lower than the industry and the market. However, Wal-mart has enough assets to cover their short- term debt. There is a major drop in the quick ratio. This is probably because Wal-Mart has money tied up in inventory. Wal-mart’s interest coverage ratio is above the industry as well as the market. This shows that lenders will be willing to finance major projects with lower interest rates. STRENGTH

Investment Returns %  Company  Industry S&P

500Company Industry

Return On Equity 20.5 18.9 8.2 Very Good GoodReturn On Assets 8.5 7.9 1.3 Good Good

Return On Capital 13.5 12.2 3.6 Very Good

Very Good

Return On Equity (5-Year Avg.) 20.3 17.5 12.1 Very Good GoodReturn On Assets (5-Year Avg.) 8.2 7.1 2.0 Good GoodReturn On Capital (5-Year Avg.) 13.3 11.8 5.8 Good Good

Investors get a higher return on their equity investing in Wal-mart as opposed to the industry or market. Wal-mart utilizes assets efficiently and has a healthier ratio. Looking at the ratios Wal-mart generates higher returns for investors. STRENGTH

Management Efficiency  Company  Industry S&P

500Company Industry

Income/Employee 6,000 6,000 12,000 Bad BadRevenue/Employee 176,000 182,000 289,000 Bad BadReceivable Turnover 184.9 59.0 5.8 Poor PoorInventory Turnover 7.6 7.3 7.6 Good GoodAsset Turnover 2.7 2.6 0.3 Good Good

Wal-marts revenue per employee efficiency is lower than the industry. Wal-mart can try to do a better job in employee efficiency. Wal-mart takes longer to collect on it’s receivables compared to the industry which signifies that they have a moderate credit policy. If wal-mart were to collect these receivables faster it would have a good cash flow to invest in other places. Inventory turnover is in line with the market and industry. This shows that they are doing a good job moving their inventory. WEAKNESS

Market Capitalization = 245.9 Bil# shares outstanding * Current Stock Price

Holding Period Return (HPR):Year-Ended Jan 31

2003 2002 2001Stock Price $62.32 $59.98 $56.80Dividend $0.36 $0.30 $0.28HPR** 0.0450 0.0613 **Note: HPR = (Ending Price – Beginning Price + Distributions) / Beginning Price

The company’s share price has been increasing steadily over the last few years. The daily trading volume is about 8.042 million which is near the average within the retail industry. The industry doesn’t compare to Wal-Mart in regard to their 245.9 billion-market capitalization. The closest company in the retail industry is Home Depot with a market capitalization of 72.9 billion. The market capitalization shows the influence of Wal-Mart over the industry. The company has increased their dividend payout since 2001 also, showing more proof of financial prosperity. The expected HPR for 2003 of 0.0450 still suggests that the company is strong and investors should buy or hold. STRENGTH.

Wal-Mart 5 Year Chart

1 Year Chart Comparing Wal-Mart to the S&P 500 and the Retail Industry

BOARD OF DIRECTORS AND OFFICERS

Name AgeOfficer Since Current Position

Breyer, James W.

41 2001 Director

Burns, M. Michele

45 2003 Director

Coughlin, Thomas M.

53 — Vice Chairman of the Board, Executive Vice President

Duke, Michael T.

53 2000 Executive Vice President and President and CEO of the Wal-Mart Stores Division

Gault, Stanley C.

77 1996 Director

Glass, David D. 67 — Chairman of the Executive Committee, DirectorHernandez, Roland A.

45 1998 Director

Holley, Jr., Charles M.

46 2003 Senior Vice President, Chief Accounting Officer, Controller

Hyde, Thomas D.

54 2001 Executive Vice President, Legal and Corporate Affairs

Lepore, Dawn G.

49 2001 Director

Menzer, John B. 52 — Executive Vice President and President and Chief Executive Officer, Wal-Mart International Division

Reason, J. Paul 62 2001 DirectorSchoewe, Thomas M.

50 2000 Chief Financial Officer, Executive Vice President

Scott, Jr., H. Lee 54 — President, Chief Executive Officer, DirectorShewmaker, Jack C.

65 1977 Director

Turner, B. Kevin

37 2000 Executive Vice President; President and CEO of SAM'S CLUB

Villarreal, Jose H.

49 1998 Director

Walton, John T. 56 1992 DirectorWalton, S. Robson

58 — Chairman of the Board

Ownership InformationShares Outstanding 4.38 BilInstitutional Ownership (%) 38.10

Top 10 Institutions (%) 16.16Mutual Fund Ownership (%) 13.89

5%/Insider Ownership (%) 38.95Float (%) 61.05

The board constitutes of officers and Directors who own 38.10% of Wal-Mart stocks. Son of Wal-Mart founder Sam Walton, S. Robson Walton is chairman of the board of Wal-Mart Stores, Inc., a position he has held since 1992. Besides Sam Walton there are no other relations among the Board of officers. Most of these officers and Directors were members of other corporation before being part of Wal-Mart Inc., such as Jack C. Shewmaker has been President of J-COM, Inc., a consulting company, Jose H. Villarreal has been a Partner in the San Antonio office of the law firm of Akin, John T. Walton has been Chairman of True North Partners, L.L.C., which holds investments in technology companies. Roland A. Hernandez served as President and Chief Executive Officer of Telemundo Group, Inc. He is also a director of MGM Mirage; The Ryland Group, Inc.; and Vail Resorts, Inc. According to the member’s profile, each officer have a strong education background and several years of experience before being part of Wal-Mart and most of the officers have worked their way up to the position they hold currently. Since being a worldwide Corporation Wal-Mart is extremely diversified. Most Wal-Mart store managers and senior managers are natives of the countries where they operate. Many began their Wal-Mart careers as hourly Associates, giving them a solid understanding of the business and the customers. Most of the higher positions held by the board member in United States are not that vigorously diversified. But it balances out if you look at the entire members of this corporation worldwide. The Board of Directors of Wal-Mart Stores, Inc. has approved an increase in the annual dividend to $0.36 per share. The Board also declared a quarterly cash dividend on the common stock of nine cents ($0.09) per share, payable April 7, 2003 to shareholders of record on March 21, 2003. Based upon this announced increase, the Company plans to return more than $1.5 billion to its shareholders this year. Wal-Mart has increased its dividend every year since its first declared dividend in March 1974. This concludes that there should not be any changes among the members. According to the chart above since year 2000, several members were promoted and assigned new positions which brought enormous changes and great output overall for Wal-Mart. In my opinion the board is doing great job by assigning the best members and at the same time offering other members a chance to build their vocation with Wal-Mart.

  WAL-MART STORES INC.        2003 2002 2001 2000

1.Background Analysis: . HPR = Ending Price – Beginning Price + Distributions 0.045015005 0.061267606

Beginning Price

Dividend 0.36 0.3 0.28 0.24 0.2Price 62.32 59.98 56.8 54.75 86HPR 0.045015005 0.061267606    

(expected)

2.Free Cash Flow and Cost of Equity:.FCFE

2002 2001 2000 1999NI 8,039 6,671 6295 5377(+)Deprecitaion 3,432 3290 2868 2375(-)Capital Expenditures 9,810 8714 8326 6183(-)∆ in working capital -2,730 2,990 -947 -1447(+) ∆ in long-term debt   920 3,186 -1,171 6764FCFE 5,311 1,443 613 9,780

(Mil)Note:Capital Expenditures 9,810 8,714 8,326 Additions to property, plant, and equipment 9,355 8383 8042(-) Disposition of property and equipment 455 331 284

∆ in working capital = [(CA 02)-(CA01)]-[(CL02)-(CL01)] -2,730 2,990 -947 -1,447CA 30,483 27,878 26555 24356CL 32,617 27,282 28949 25803

∆ in long-term debt =LTD02-LTD01 920 3,186 -1,171 6,764LTD 16,607 15,687 12,501 13,672 6908

.K (Discounted cash flow (DCF) model)P=(FCFE/Shares)/K-G FCFE 5311000000 5311000000 1443000000 613000000k=[(FCFE/shares)/P] +G shares outstanding 4,395,000,000 4,395,000,000 4,453,000,000 4,470,000,000

G (2003) 0.0906 2.680526681 1.353996737 -0.937321063P 62.32 59.98 56.8 54.75K(required return on equity) 0.109990543 2.700673707 1.359701864 -0.934816288

Po=D1/(ke-G)=>Ke=(D1/Po) +G 0.076430239 0.171596244 0.204383562

While the backed out estimate of the discount rate can be useful in Wal-Mart’s analysis, there are two

considerable fallacies with this estimation. First, the factors that determine this estimate: growth rate, free

cash flow, and interest rate are not entirely precise. For example, while the interest rate, ke, is a constant,

the growth rate, g, is not. In the equation, the growth rate is assumed to be a constant, when in fact, it is

not, and this invalid assumption causes the results from the equation to be somewhat unrealistic. The

second invalid factor with the backed out estimate of the discount rates is timing of the information used

in the equation. In order to determine the free cash flow, the free cash flows from 2002 and 2001 are

used. However, the cash flow from 2002 is used in the equation with the growth rate from 2003. This

year difference also causes a problem in the equation, because in order for the results to be realistic, the

information would have to be retrieved from the same year. These two factors: the constant growth rate

and timing problem cause the backed out estimate of the discount rate to be unrealistic.

Market Efficiency

Wal-Mart is one of the most well known and largest companies in the world. Therefore, the Wal-Mart stock is and investor confidence stays fairly stable. People feel comfortable and safe investing in Wal-Mart. Because of the conditions of this company, and the successful way it conducts business, Wal-Mart has been able to stabilize itself enough to where market news and conditions do not affect the company’s stock as much as most other companies. In the past 52 weeks, Wal-Mart’s stock price has stayed between $45.19 and $58.03 per share. Below are some news/events that have in some way affected Wal-Mart’s stock.

Wal-Marts stock begins it rise after the company announces record sales and earnings.

Feb 18, 2003 /PRNewswire-FirstCall via COMTEX/ -- Wal-Mart Stores, Inc. (WMT) reported record sales and earnings for the quarter ended January 31, 2003. Total sales were $71.073 billion, an increase of 10.7 percent over the similar prior year quarter. Net income for the quarter was $2.529 billion, up from $2.189 billion for the similar prior year quarter. Earnings per share were $0.57, up 16.3 percent from the $0.49 per share reported in the same prior year quarter. Adjusted for the change in accounting for goodwill, basic earnings per share would have been up 14.0%.

Net sales for the year ended January 31, 2003, were $244.524 billion, an increase of 12.3 percent over the similar prior year period of $217.799 billion. Net income for the year was $8.039 billion, up from $6.671 billion for the similar prior year. Earnings per share were $1.81, up 21.5 percent from the $1.49 per share reported in the same prior year. Adjusted for the change in accounting for goodwill, basic earnings per share would have been up 16.8%.

Lee Scott, President and CEO said, "In a challenging retail environment with slowing comparable sales growth, we achieved another year of record sales and earnings. Net income exceeded $8 billion for the year for the first time and sales grew by almost $27 billion."

Conclusion: Wal-Mart’s stock began rising in price after the announcement of its record sales and is still much higher than it was then. Wal-Mart is able to keep improving its business plan and therefore able to maintain its constant success. FORM: CANNOT DECIDE

Wal-Mart’s stock is affected by Seiyu, Ltd., it’s Japanese affiliates net loss.

TOKYO, April 22 (Reuters) - Seiyu Ltd, a Japanese affiliate of Wal-Mart Stores Inc (WMT) , said on Tuesday it fell into the red in the business year that just ended, hit by sluggish sales and a flopped department store investment.

Japan's fourth-largest supermarket chain posted a group net loss of 90.84 billion yen ($754 million) for the year that ended on March 31 after a net profit of 5.2 billion yen the year before.

Revenue edged up 2.8 percent to 1.14 trillion yen.

The net loss was higher than the company's forecast of 83 billion yen and an identical consensus estimate compiled by Reuters Research, a unit of Reuters Group Plc (UK:RTR) .

Seiyu said earlier this year that it would book more than 85 billion yen in special losses, including a 35.49 billion yen charge on its investment in unlisted Seibu Department Stores.

U.S.-based Wal-Mart, the world's biggest retailer, recently raised its stake in Seiyu to 37.7 percent and aims to use Seiyu's 400 stores nationwide as a springboard into Japan's notoriously difficult but huge retail market.

Seiyu shares closed up 2.04 percent at 300 yen before the announcement, compared with a 2.24 percent fall in the Nikkei average (65599W10) .

Conclusion: Wal-Mart is such a large and powerful company in the U.S. that its international ties are often the ways its stock is more greatly affected. The company takes more risk when investing in these international affiliates and Wal-Mart’s investors are less forgiving when more risk is involved. FORM: WEAK.

2003 2002 2001 20004. Risk Analysis: Beta Walmart 0.8157 0.902 0.9035 0.8942

Beta= COV(RWalmart, RS&P500)/VAR(RS&P500)

Unlevered Beta 0.550821288

[Equity/(Equity +((1-T)Debt))]* BetaEquity=Beta_unleveredEquity 39,337 35102 31343Debt 52,225 46014 44604Income from continuing operations before income taxes

12,719 10751 10116

Provision for income tax 4,487 3897 3692Tax rate 0.35277930

70.36247790

90.36496639

2003 2002 2001 2000.K (CAPM) Rf 0.01 0.0163 0.0386 0.0588K= Rf + Beta(Rm-Rf) Rm-Rf 0.0137 -0.2249 -0.1495 -0.1685

Beta 0.8157 0.902 0.9035 0.8942http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html

K(required return on equity) 0.02117509 -0.1865598The company is currently underpriced because K( DCF model) > K(CAPM); 0.109990543 > 0.02117509

Wal-Mart has a beta of 0.8157. Every 1 percent movement in the S&P 500 market, Wal-Mart is expected to move 0.8157 percent in the same direction. Wal-Mart continuously stays fairly close to the market movements.

5. Cost of Capital and Optimal Capital Structure: 2002 2001 2000.WACC=We*Ke + Wd*kd*(1-T)+ Wp* KpWe= Equity/(Equity+Debt+Preferred Stock) 0.429621459 0.432738301 0.412695696Wd=Debt/(Equity+Debt+Preferred Stock) 0.570378541 0.567261699 0.587304304Wp=Preferrd stock/(Equity+Debt+Preferred Stock) 0 0 0Ke 0.076430239 0.171596244 0.204383562Kd 0.0650209 0.072328 0.073269Kp 0 0WACC 0.056839238 0.1004131 0.111674474

2002 2001 200042.96% 43.27%41.27%57.04% 56.73%56.73%

5. COST OF CAPITAL AND OPTIMAL CAPITAL STRUCTURE:

Wal-Mart’s capital structure consists of 57% debt and 43% equity. Wal-Mart relies relatively higher on debt financing. In 2001 the weight of debt to equity was 56% versus 44% and 59% versus 41% in 2000. This shows that the optimal capital structure of Wal-Mart has remained relatively stable for the past 3 years. This Distribution can be seen in the Bar Graph above.

M&M theory has three models. Model 1 is the no tax proposition. Model 2 takes tax into consideration and has complete debt as capital structure. In Model 3, the market value of the firm is found by including taxes, financial distress costs, and agency costs. Wal-Mart has an optimal capital structure, which is similar to Model 3 of the Modigliani and Miller proposition as shown in the graph below. Furthermore, the capital structure is comprised of debt and equity, exactly like the capital structure of Wal-Mart.

M&M PropositionWACC D/TA

2002 0.056839 0.5703782001 0.100413 0.5672612000 0.111674 0.587304

6. Conclusion:In recent times, Wal-Mart is known for providing quality products, including clothes, household

items, personal care items, jewelry, hardware, pharmaceuticals, auto products, electronics and groceries, among other things, for the lowest price. While Sam’s Club is the leading membership warehouse retailer that primarily sells in bulk to small businesses and individual customers that are trying to take advantage of bulk prices. Wal-Mart Stores, INC. is in the industry sector of discount retailer/department stores. They have dominated competitors like Target/Super Target, Kmart, and Costco by maintaining low prices through executing 3-3.5% net margins with high inventory turnover and by sheer number of stores and locations.

Wal-Mart’s greatest advantage is having great bargaining power with suppliers to get the lowest price so they can pass it on to the customer. To further this, Wal-Mart is continuing to lower prices, offer newer and up to date products through their global suppliers’ sourcing network. A good example of this the “Banana Program”. By using three global suppliers for bananas, they have lowered the price of them by 12%. This one program shows how Wal-Mart can harness its purchasing power and bring “Every Day Low Prices” to all customers regardless of their location.

Sales have been increasing; FY 2003 revenues grew 12.3%, despite the weak overall economy. This has been due too expanded product line, quality upgrades, global sourcing, the closing of approx. 300 Kmart’s stores last fiscal year, aggressive international growth (115 openings), and strong focus on Super centers. However, FY 2004 1st quarter sales were only up 9.7% that lagged plans but operating income grew by 16.3%. Operating income growth in each segment was greater than sales percentage growth in each segment after accounting changes. EPS for Q1 FY ‘04 was also up $0.42 or 16.7%, after a $0.02 negative accounting impact of the timing of the recording of vendor money and $0.01 profit from McLane, which exceeded most analysts’ expectations. Wal-Mart stores segment is the most profitable and accounted for 64.3% of sales vs. 63.9 % FY03, with Sam’s Club at 13.0% vs. 13.5% FY03, international segment at 16.7% vs. 16.3% FY03, and other (McLane) at 6.1% vs. 6.3% FY03.

The Wal-Mart segment sees considerable domestic growth opportunities and is capitalizing on them with focus on Supercenters (conversion/opening of 210 supercenters) and further diversification into food, pharmaceuticals, and gasoline. WMT is focusing on shifting its majority of store to supercenters because supercenters draw consumers from a larger radius than just the traditional discount store. Consumers are more likely to cross-shop the general merchandise and grocery sections of a supercenter thereby reducing their stops and increasing the average ticket sales. Supercenters have double the sales volume of traditional discount stores. Also by integrating grocery into the mix, the average trips to the supercenter will increase further increasing tickets. With the additional focus on grocery, by WMT, margins will typically be lower because food traditionally carries lower margins than general merchandise. This in turn should partially be offset by increasing inventory turnover and WMT’s introduction of the hugely successful apparel line from the UK, George and other apparels (higher margin items). Overall, gross margins should stay the same or get better through better sourcing and product mix despite lower food margins. Currently WMT has a higher inventory level than usual up 13.4% on lower than expected sale growth of 9.7%.

Internationally WMT has done very well and sees considerable growth opportunities (second leading growth driver behind Supercenters), and is slowly capitalizing on them through acquisitions (Amigo in Puerto Rico and ASDA in UK), new constructions, and joint ventures (China and Japan). In Japan, the world second largest retail market, WMT owns approximately 35% of the Seiyu chain, which has 400 stores in Japan. This is seen as the next great opportunity in which WMT has the option to own up to 66.7% of the chain. They have already started to implement their store formats, distributional operations, and supply chain links in three test stores.

WMT’s price will appreciate to bring it back to its historical P/E of 30x based on WMT’s strong international and supercenter growth coupled with good comps and better global sourcing. Their increased global base will continue to generate strong revenue growth. Currently WMT is making great capital expenditures and this will surly decline in the future, as markets become saturated and WMT will reaches a truly stable growth as a global company.WMT has increased dividends every year since the 1st dividend in 1974. FCF has increased due to an increase in accounts payable, decrease in receivables, and issuance of LT debt. WMT with only 2.5% of assets in cash is by no means hoarding. In fact, they have increased stock buyback program to $5 billion shares, with YTD purchases at $1.7B. The biggest fear of the retail sector currently is the prospect of war causing weak consumer confidence and spending, and the west coast port closures. WMT has not lowered expected EPS for FY 2003 because of lower than expected September sales and weak Back to School sales. With a weak economy and job market consumers will become more price sensitive and shop at the store with "Every Day Low Values". Of course, WMT, not being immune to macro-economic conditions, is hedging itself by diversifying into SuperCenters and Neighborhood Markets, by providing groceries(non-discretionary) at low cost. They are also diversifying abroad to further hedge against US economic downturns. WMT has an AA rated credit rating. This affects intrinsic value and estimated returns because any temporary financial problem Wal-Mart might come across could be offset by debt. WMT is also diversifying into consumables like food, drug and gasoline. These are typical low margin products but this is where WMT shines. When we exit the recession, WMT should have strong sales momentum, and will continue steal market share from competitors. WMT is in a rapid growth phase, they are building a huge capital base, and this opens them up to saturation of markets, up to a point where opening new stores will just cause more customer diversion than customer creation. In the future Neighborhood Markets might be competing with Super centers. Also in recent times, there has been a lot of volatility in the price of gas. This directly affects WMT's sales because gas consumes a greater part of the consumers’ disposable income. If oil prices continue to remain high in key month, then sales will be lower than expected.War in any country that WMT operates in could cause adverse effects on is sales. Historically wars cause weak consumer confidence and spending. Also, WMT’s sector, discount retailer, is populated by few, mainly WMT and Target. If Target were to follow Kmart’ s path, nothing would stand in WMTs way. This could cause concern with government officials and consumers. Our recommendation for WMT is a buy/hold.