Retail Case Study...
- Adam Edwards
- Jan 5
- 6 min read
I've had a lot of time on my hands over Christmas, so thought I'd look at some key stats of US retailers. I have a life. I absoluetly promise I do...
Cashflow
Key Take aways
Investment in Growth: All five companies are channeling significant portions of their operating cash flow into capital expenditures, underscoring their commitment to growth and adaptation in a competitive retail landscape.
Operational Efficiency: The positive operating cash flows across these retailers highlight effective management and strong revenue streams.
Strategic Allocation: The differences between operating and free cash flows shed light on each company's strategic priorities, whether in expansion, technological innovation, or market penetration.
Walmart Inc. (WMT):
Walmart exhibits robust operating cash flow, reflecting its strong revenue generation and efficient operations. The disparity between operating cash flow and free cash flow suggests substantial capital expenditures, likely directed towards technological advancements, e-commerce platforms, and store enhancements. Examples (from the news) are that Walmart is investing over $500 million to upgrade 117 stores, focusing on modernising its infrastructure to enhance the shopping experience (link here). Additionally, the retailer plans to build five new high-tech distribution centers to expedite the delivery of perishable goods, aiming to improve efficiency and customer satisfaction (link here)
Costco Wholesale Corporation (COST):
Costco maintains healthy operating and free cash flows, indicative of its effective business model and consistent consumer demand. The company's capital expenditures are primarily focused on expanding warehouse locations and enhancing supply chain efficiencies, supporting its growth trajectory. I beleive new warehouses are opening in six U.S. cities by March 2025, including locations in California, Texas, Michigan, and Massachusetts (link here). This growth strategy aims to alleviate congestion at existing locations and improve customer experience.
Dollar General Corporation (DG):
Dollar General's operating cash flow has experienced fluctuations, with a notable increase in the latest fiscal year. This improvement is attributed to strategic initiatives aimed at enhancing store formats and expanding product offerings. The company continues to invest in new store openings and infrastructure to capture a broader customer base. My understanding, is that the chain plans to open approximately 575 new stores in the United States in its fiscal year 2025, alongside 4,250 store remodels and 45 relocations (link here). This expansion is part of the company's strategy to increase market presence and enhance store infrastructure.
Liquidity Ratios
Walmart Inc.
Assets/Liabilities: This is strong, above 1.5, suggesting Walmart has more than enough assets to cover its liabilities.
Current Ratio: Below 1.0, indicating the company may not have sufficient current assets to cover short-term liabilities without relying on inventory or other long-term assets.
Quick Ratio: Very low, close to 0.2, reflecting that a significant portion of Walmart's current assets may be tied up in inventory. Walmart's quick ratio has fluctuated over the past five years, reaching 0.29 as of January 31, 2024, indicating a relatively low level of liquid assets excluding inventorym (source)
Costco Wholesale Corporation
Assets/Liabilities: Similar to Walmart, Costco demonstrates a strong ability to cover liabilities with assets.
Current Ratio: Slightly below 1.0, showing limited liquidity in terms of easily convertible current assets.
Quick Ratio: Low, likely due to heavy inventory reliance as part of its wholesale business model.
Dollar General Corporation
Assets/Liabilities: A strong figure, suggesting solid overall financial stability.
Current Ratio: Close to 1.0, indicating Dollar General is better positioned to meet short-term obligations compared to Walmart and Costco.
Quick Ratio: Slightly higher than the others, though still low, consistent with retail businesses relying on inventory.
There have been highlighted risks to Dollar General’s liquidity, including slower-than-expected shrinkage recovery, rising operational costs, and intensified competition from Walmart. These factors may strain margins and require higher sales growth, challenging the company’s ability to maintain strong cash flow and meet short-term financial obligations effectively (source).
Dollar Tree, Inc.
Assets/Liabilities: Above 1.5, showcasing strong financial stability.
Current Ratio: Slightly higher than Dollar General, indicating better short-term liquidity.
Quick Ratio: Still low but better compared to Walmart and Costco, suggesting some flexibility in meeting obligations without liquidating inventory.
Dollar Tree’s liquidity faces pressure from rising SG&A costs, driven by labour-intensive multi-price strategy rollout. While this approach shows potential, it hasn't delivered anticipated gains, impacting margins and cash flow. Improved execution and margin recovery are essential to strengthen liquidity and support the company’s financial stability (source).
The Kroger Co.
Assets/Liabilities: Strong ratio, indicating good financial health.
Current Ratio: Over 1.0, making Kroger the best among the five in terms of meeting short-term liabilities.
Quick Ratio: Higher than the other companies, though still moderate, suggesting a balance between inventory reliance and liquid assets.
Kroger Co has been in talks to acquire Albertsons Companies in a deal worth approximately $25 billion, potentially adding up to 2,200 new stores to its portfolio (source).
If Kroger Co acquires Albertsons for $25 billion, its balance sheet will see a significant increase in assets, particularly inventory, property, and goodwill. However, its liquidity may be strained due to the funding structure of the deal, potentially increasing liabilities like debt or reducing cash reserves. This could pressure Kroger’s current ratio and quick ratio, impacting its short-term ability to meet financial obligations unless offset by efficient integration and revenue growth.
Revenue growth
Observations:
Walmart Inc.: Moderate growth in all metrics, with revenue and operating income growth being the most consistent.
Costco Wholesale Corporation: The strongest performer across all metrics, showcasing robust growth in revenue, operating income, net income, and EPS. Consistent double-digit growth across all metrics highlights its competitive edge.
Market Dominance of Major Retailers: Recent reports highlight that large retailers like Costco, Walmart, and Amazon have increased their market share from 11% in 2014 to about 17% in recent quarters. This expansion has posed challenges for smaller retailers, including dollar stores, which struggle to compete with the extensive capital expenditures and competitive pricing of these giants.
Dollar General Corporation: Relatively steady growth, but operating income shows a slight decline, possibly indicating cost pressures. Dollar General's dip in operating income growth warrants attention for potential operational challenges.
Dollar Tree, Inc.: Balanced growth with no significant outliers.
Problems facing Dollar Stores: Dollar stores such as Dollar General and Dollar Tree are encountering significant challenges due to rising inflation, increasing interest rates, and changing consumer behavior. These economic pressures have led to a decline in spending by lower-income households, impacting the core customer base of these retailers. (source)
Despite experiencing declining sales and profits, Dollar General and Dollar Tree are aggressively expanding by opening over 1,300 new locations this fiscal year. This strategy aims to boost sales and increase market share amidst growing competition from other discount retailers and challenges in e-commerce. (source)
The Kroger Co.: Strong operating income and EPS growth, which may indicate good cost management or efficiency improvements. Kroger's operating and EPS growth suggest it has been effectively managing profitability.
How efficient are these companies
Observations:
Walmart Inc.: Strong ROE and ROIC metrics but relatively lower ROA, suggesting efficient use of equity and invested capital despite lower asset efficiency. Strong ROE and ROIC, indicating effective utilisation of shareholder equity and invested capital. However, a relatively lower ROA suggests room for improvement in asset utilisation efficiency.
Walmart has been investing in automation within its distribution centers, achieving double the throughput with half the staff in automated centers. This fourfold increase in efficiency is expected to boost productivity and profit margins. (source)
Costco Wholesale Corporation: Shows excellent ROE and ROIC metrics, indicating high efficiency in generating returns for both equity and invested capital. Demonstrates exceptional efficiency across all metrics, with particularly high ROE and ROIC, reflecting superior operational performance and strategic investment decisions.
Dollar General Corporation: Displays robust ROE and a decent ROIC, showing good shareholder returns and invested capital efficiency. Robust ROE, indicates strong returns to shareholders. However, a decline in ROIC may point to challenges in effectively deploying invested capital.
Dollar Tree, Inc.: ROE and ROIC values are weaker compared to peers, with a negative ROA (5Y), possibly indicating inefficiencies in asset use and profitability challenges.
The Kroger Co.: Solid ROE and ROIC metrics, with moderate ROA, indicating consistent returns to shareholders and efficient use of invested capital.