Wal-Mart Stores (WMT-NYSE)

February 23, 2015 Wal-Mart Stores (WMT-NYSE) NEUTRAL Current Recommendation Prior Recommendation N/A Date of Last Change 04/07/2000 Current Price (02/20/15) $84.30 Target Price $89.00 SUMMARY Wal-Mart delivered better-than-expected earnings in both the fourth quarter and fiscal 2015 periods, while revenues missed for both. Fourth quarter adjusted earnings of $1.61 per share increased 0.6% from the year-ago earnings, driven by positive comps at Wal-Mart U.S. and higher operating income, improved performances in Sam's Club and the international business. Total revenue increased 1.4%, driven by improvements in Sam s Club and the International business, higher Neighborhood Market sales in the U.S. and strong e-commerce growth. The company also delivered positive comp sales driven by relatively balanced growth in traffic and ticket. Encouragingly, Wal- Mart also decided to raise wages of approximately 500,000 workers in the first half of fiscal 2016. However, the pay hike and increased investments in e-commerce initiatives would increase the costs of the company. Therefore, the company has lowered its earnings guidance for fiscal 2016. Currency is also expected to impact results significantly. SUMMARY DATA 52-Week High $90.47 52-Week Low $73.12 One-Year Return (%) 17.57 Beta 0.48 Average Daily Volume (sh) 7,073,261 Shares Outstanding (mil) 3,223 Market Capitalization ($mil) $271,700 Short Interest Ratio (days) 5.01 Institutional Ownership (%) 31 Insider Ownership (%) 51 Risk Level * Low, Type of Stock Large-Blend Industry Retail-Supermkt Zacks Industry Rank * 101 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Apr) (Jul) (Oct) (Jan) (Jan) Annual Cash Dividend $1.92 Dividend Yield (%) 2.28 5-Yr. Historical Growth Rates Sales (%) 3.7 Earnings Per Share (%) 7.2 Dividend (%) 13.1 P/E using TTM EPS 16.6 P/E using 2016 Estimate 17.3 P/E using 2017 Estimate 15.8 2014 114,187 A 116,945 A 115,688 A 129,706 A 476,294 A 2015 114,960 A 120,125 A 119,001 A 131,565 A 485,651 A 2016 116,534 E 121,419 E 120,395 E 134,465 E 494,252 E 2017 510,035 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Apr) (Jul) (Oct) (Jan) (Jan) 2014 $1.14 A $1.24 A $1.14 A $1.60 A $5.11 A 2015 $1.13 A $1.21 A $1.15 A $1.61 A $5.07 A 2016 $1.03 E $1.18 E $1.12 E $1.55 E $4.88 E 2017 $5.33 E Zacks Rank *: Short Term 1 3 months outlook 3 - Hold Projected EPS Growth - Next 5 Years % 6 * Definition / Disclosure on last page 2015 Zacks Investment Research, All Rights reserved. Quarterly www.zacks.com figs. may not add up 111 to North annual Canal ests due Street, to restatement. Chicago IL 60606

RECENT NEWS Wal-Mart Beats Q4 Earnings on Comps Gain, Fx Woes Persist February 19, 2015 Wal-Mart Stores delivered better-than-expected earnings in both the fourth quarter and fiscal 2015 periods, while revenues missed for both. Wal-Mart s fiscal fourth quarter 2015 adjusted earnings of $1.61 per share beat the Zacks Consensus Estimate of $1.54 by 4.5% and increased from the year-ago earnings of $1.60 per share by 0.6%. Earnings also exceeded management s guidance range of $1.49 and $1.59 per share. Positive comps at Wal-Mart U.S., higher operating income, improved performances in Sam's Club and the international business contributed to earnings. Total revenue of the retailer increased 1.4% to $131.6 billion (including membership and other income) but missed the Zacks Consensus Estimate of $132.2 billion. Currency depleted sales by approximately $2.6 billion. The year-over-year increase in sales can be attributed to improvements in Sam s Club and the International business, higher Neighborhood Market sales in the U.S. and strong e-commerce growth. Sales were also encouraging as the company delivered positive comp sales driven by relatively balanced growth in traffic and ticket. Total revenue comprised net sales of $130.7 billion (up 1.4% year over year or 3.5% on a constant currency basis) and membership and other income of $915 million (down 0.5% on a year over year). On a constant currency basis, operating income increased 10.4% to $8.1 billion in the fourth quarter. Currency negatively impacted operating income by $163 million. Fiscal 2015 Results In fiscal 2015, Wal-Mart reported adjusted earnings of $5.07 per share, which beat the Zacks Consensus Estimate of $4.99 by 1.6%. However, it declined 0.8% from the year-ago earnings of $5.11 per share. Total revenue increased 2% to $485.6 billion in fiscal 2015 but missed the Zacks Consensus Estimate of $486.2 billion. Segment Details Wal-Mart U.S.: The segment posted net sales growth of 4.1% to $79.6 billion in the quarter, including the impact of fuel sales. Operating income however declined 0.6% to $6.18 billion due to the negative impact of increased health care costs as a result of higher enrollment rates and medical cost inflation. U.S. same-store sales (comps) for the 13-week period ending Jan 30, 2015 increased 1.5% versus a decline of 0.4% in the prior-year quarter. Comp sales also exceeded the company s expectations of flat to 1% range. While comp traffic rose 1.4%, average ticket increased 0.1% in the quarter. This was the first instance of positive traffic comp since the third quarter of fiscal 2013. Wal-Mart U.S. witnessed increased traffic during the six-week holiday season, with strong sales in seasonal, toys, home and apparel. E-commerce sales positively impacted comp sales at Wal-Mart U.S. by 0.3% in the quarter. Comp sales for the Neighborhood Market format rose approximately 7.7%, which benefited U.S. comps. The increased sales in the neighborhood market signals that the company has been adding more smallformat stores to increase revenues. Equity Research WMT Page 2

Wal-Mart International: Segment net sales, including fuel sales, declined 3.9% year over year to $36.2 billion. It increased 3.6% on a constant currency basis. Currency fluctuations impacted international sales by $5.3 billion in the quarter. Operating income increased 66.4% to $2.05 billion. Sam s Club: The segment, which comprises membership warehouse clubs, posted net sales growth, including fuel impact, of 1.3% to $14.87 billion. Excluding fuel impact, sales increased 2.1% to $51.6 billion. Sam s Club operating income, excluding fuel, increased 19.4% to $0.456 billion in the quarter. Sam s Club comps, excluding the impact of fuel sales, increased 2% versus a decline of 0.1% in the prior-year quarter. Comp sales were at the higher end of the company s expectations of flat to 2% range. Sam s Club comp traffic was up 1.5%, while average ticket increased 0.5%. E-commerce sales positively impacted comp sales by approximately 0.4% in the quarter. Other Update During the quarter, Wal-Mart announced that it will provide pay raises to approximately 500,000 full-time and part-time associates at Wal-Mart U.S. stores and Sam's Clubs in the first half of fiscal 2016. Current associates can now earn at least $1.75 per hour more than the previous wage rate. Wal-Mart stated that it will start raising entry level wages to at least $9 an hour in Apr 2015 and to at least $10 an hour by Feb 2016. Wal-Mart paid $6.2 billion in dividends and repurchased approximately 13.4 million shares for $1 billion during fiscal 2015. Guidance Fiscal 2016 Outlook In fiscal 2016, Wal-Mart expects to invest in e-commerce initiatives and in associates through higher wages and training, which in turn would put pressure on operating income. These initiatives are expected to pull down fiscal 2015 earnings by around $0.26 to $0.29 per share. Including this, earnings per share for fiscal 2016 are expected in the range of $4.70 - $5.05. Last year, adjusted earnings per share were $5.07. Wal-Mart expects fiscal 2016 sales growth in the range of 1% to 2%, lower than 2% to 4% growth expected during Oct 2014 investor conference. Currency is likely to impact fiscal 2016 sales by $10 billion. In fiscal 2015, sales grew 2% on a year over year basis. First Quarter Fiscal 2016 Outlook In the first quarter of fiscal 2016, investments in the new wage structure will reduce earnings by 20 cents per share. Including this, earnings are expected in the range of $0.95 to $1.10 per share. Wal-Mart expects U.S. comp sales growth in the range of 1% to 2% for the 13-week period ending May 1, as against relatively flat comps last year. This signals that the company may benefit from falling gas prices and a drop in U.S. unemployment. Sam s Club comp sales, without the impact of fuel sales, are expected to rise in the range of 1% to 2% as against a decline of 0.5% last year. Equity Research WMT Page 3

VALUATION Walmart s current trailing 12-month earnings multiple is 16.6x, a discount of 20.8% to the industry average of 20.2x. Over the last five years, Walmart s shares have traded in the range of 12.0x to 17.2x trailing 12-month earnings. Based on 2016 earnings estimate of $4.88, the stock is trading at 17.3x, representing a discount of 4.9% to the industry average of 18.2x. Our target price of $89.00 is based on approximately 18.2x our 2016 earnings estimate. At the end of the fourth quarter of fiscal 2015, the P/B multiple of the stock was approximately 3.3x, a 50% premium to the industry average of 2.2x. Overall, the stock is attractive given a trailing 12-month ROE of 20.1%, which is above the industry average of 7.7%. On a P/B basis, the price target of $89.00 is based on a P/B multiple of approximately 3.4x. Walmart holds a Zacks Rank #3 (Hold). Key Indicators P/E F1 P/E F2 Est. 5-Yr EPS Gr% P/CF P/E P/E 5-Yr High P/E 5-Yr Low WALMART STORES (WMT) 17.3 15.8 6.0 10.7 16.6 17.2 12.0 Industry Average 18.2 20.7 10.2 9.2 20.2 40.4 11.4 S&P 500 16.8 15.7 10.7 15.3 19.4 19.4 12.0 MARKS&SPENCER (MAKSY) 15.9 14.6 8.8 14.4 CARREFOUR SA (CRRFY) 17.3 15.7 12.6 7.5 KROGER CO (KR) 19.7 17.7 11.5 11.8 22.3 21.2 10.5 AHOLD N V ADR (AHONY) 15.7 17.2 5.0 7.5 17.0 20.7 9.5 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA WALMART STORES (WMT) 3.3 3.4 2.5 20.1 0.5 2.3 8.4 Industry Average 2.2 2.2 2.2 7.7 0.1 2.0 9.6 S&P 500 5.3 9.8 3.2 25.5 2.1 Equity Research WMT Page 4

Earnings Surprise and Estimate Revision History NOTE YET. THIS IS A NEWS-ONLY UPDATE; THE REST OF THIS REPORT HAS NOT BEEN UPDATED Equity Research WMT Page 5

OVERVIEW Based in Bentonville, AR and founded in 1945, Wal-Mart Stores, Inc. operates retail stores in various formats across the world. It operates retail stores, restaurants, discount stores, supermarkets, supercenters, hypermarkets, warehouse clubs, apparel stores, Sam s Clubs, and neighborhood markets, as well as the websites - walmart.com and samsclub.com. The company operates more than 11,300 retail units under 71 different banners in 26 countries, including the United States and Puerto Rico, Africa, Argentina, Brazil, Canada, Chile, China, India, Japan, Mexico, and the United Kingdom. The company operates as Walmart in the United States, including the 50 states, Washington D.C. and Puerto Rico. It operates in Mexico as Walmex, in the United Kingdom as Asda, in Japan as Seiyu, and in India as Best Price. Walmart s stores offer almost everything which is of day-to-day use, including grocery, health and beauty aids, household chemicals, electronics, stationery, automotive accessories, hardware and paint, sporting goods, fabrics and crafts, tobacco, software, entertainment products and home furnishings. In addition, the company s stores offer hard-goods, soft-goods, and selected private-label items under the Member s Mark, Artisan Fresh, Daily Chef, and Simply Right brands. Further, it operates banks that focus on consumer lending and provide financial services and products. The company conducts its businesses through three segments: Walmart US, Walmart International and Sam s Club. The Walmart US segment operates retail stores in different formats in the U.S. and also in Puerto Rico. The segment includes the company's mass merchant concept under the brand Walmart as well as the company s online retail operations, walmart.com. This segment accounted for 59% of the company s net sales in fiscal year 2014. The Walmart International segment consists of retail operations in 26 countries outside the US. This segment generated 29% of the company s sales in fiscal 2014. The Sam s Club comprises membership warehouse clubs in 48 states in the U.S. and Puerto Rico, as well as the segment's online retail operations, samsclub.com. This division contributed 12% of the company s sales in fiscal year 2014. Fiscal year at Walmart ends on Jan 31. REASONS TO BUY Operates On a Gigantic Scale: Walmart is a multinational retailer that runs large department stores and warehouse store chains. The company has more than 11,300 stores under 71 banners in 26 countries and has wholly-owned operations in Argentina, Brazil, and Canada. Walmart also has operations in the United Kingdom, South America and China. Being the biggest private employer in the world with over two million employees, Walmart has always been keen on expanding employment opportunities, be it in its stores or Sam s Club. The company plans to hire more than 100,000 veterans in the next five years and help its part-time workers move into full-time positions. In addition, the company has plans to open 115 supercenter stores and around 270-300 small-format stores in the U.S. in fiscal 2015. With retail operations in 26 countries, the company s international segment is now among the top three retailers in the world and has grown over the years through accretive acquisitions like Massmart and Netto in South Africa and controlling interest in Yihaodian in China. Equity Research WMT Page 6

Initiatives to Boost Sales: Amid the weak macroeconomic scenario, the company is making efforts to understand the evolving needs of its customers to re-gain their confidence. The company is therefore making several initiatives to boost its sluggish sales. One such initiative taken up during the third quarter fiscal 2015 conference call was to begin pricematching in its stores with selected online retailers including Amazon.com, Inc. and Best Buy Co., Inc. This implied that if anyone could find an identical product with any online retailer at a lower advertised price, Walmart will match the price in its store. The initiative was started to combat show rooming, where consumers checked out prices at a brick and mortar store and picked them up online at a cheaper rate. Also, this was a step taken to remain competitive in an extremely promotional shopping environment. Another step taken up by Walmart was in Oct 2014 to improve its grocery offerings to provide its customers with quality fresh food and meat products at affordable prices. In April, Walmart teamed up with the Wild Oats brand to offer organic food products at the same price as conventional foods and at least 25% cheaper than other organic brands, which will be available only at Walmart stores. Walmart also announced lucrative deals for Christmas, Cyber Monday and Black Friday in order to attract shoppers. We believe these initiatives will surely going to increase traffic at its stores. It is also encouraging that gas prices have reduced, which should increase consumer spending power a bit and may benefit the company and other retailers in the upcoming holiday season. International Expansion to Combat Declining U.S. Sales: Amid sluggish economic scenario and currency headwinds, a major portion of Walmart's future revenue growth is expected to come from international markets. In fact, Walmart s greatest potential area of growth is located internationally, especially in China and India, which represents close to one third of the world's population. Over the last decade, China and India have developed a sizeable middle class which have shown an increasing level of consumption. In 2013, Walmart's international sales accounted for 28.9% of total sales, which was significantly higher than 19.2% of total sales in 2005. China is a strategic market for Walmart, as the company is facing a difficult retail environment in the U.S. following the recent slowdown of the economy. Walmart is also geared to expand its Sam s Club stores in China. Walmart currently has 405 stores in China and has plans to add as many as 110 stores by 2016, as the company expects China's food and grocery market to be worth $1.5 trillion by 2016. Walmart has also decided to increase its investment in food safety measures in the country to 300 million yuan ($48.32 million) over three years through 2015, up from 100 million yuan in the same period, announced last year. In India, Walmart currently operates through 20 Best Price Modern stores in 8 Indian cities where it has a 100% holding. Moreover, the company has plans to open 50 more wholesale stores in India under its Best Price Modern Wholesale banner over the next four to five years. These stores will sell directly to small retailers rather than to individuals. In June, Walmart launched its e-commerce platform in two Indian cities, and expects to roll out the service in other cities after Jan 2015. Through this service, only registered members can make online purchases from the cash-and-carry locations of Walmart s Best Price Modern Wholesale stores. In fact, Walmart has valued the cash-and-carry business of India at around $50 billion by 2020. Global Expansion in E-Commerce: Walmart s e-commerce business has been performing quite well owing to its rising demand. Walmart has developed pricing optimization tools, improved its mobile applications and developed a new search engine for its websites. E-commerce sales grew over 30% Equity Research WMT Page 7

to more than $10 billion, including acquisitions in fiscal 2014. Walmart is thus focused on continued enhancements to its e-commerce platform through improved apps. It is also focused on developing its fulfillment centers to deliver U.S. online orders at a lower cost. The company has three fulfillment centers (one in Texas, Pennsylvania and another one in Brazil) and is hopeful that these distribution centers will boost online sales and expand product selection at Walmart.com. Moreover, Walmart s dot com division @WalmartLabs has been expanding through acquisitions. In the year 2013, Walmart acquired four companies Torbit, OneOps, Tasty Labs and Inkiru that build tools to compress data and speed up websites. Walmart s acquisition of a 51% interest in Newheight Holdings Ltd, a holding company that owns Chinese Internet retailer Yihaodian in Aug 2012 has strengthened its presence in the Chinese e-commerce market. Walmart expects to grow global ecommerce sales to over $13 billion in fiscal 2015, with continued focus on the U.S., U.K., China and Brazil. The websites in Canada and Mexico are doing well and the company continues to invest in Pangaea, its global technology platform, in order to drive sales across the retail websites in the U.S., the U.K. and Brazil. Consistent Growth in Shareholder Value: Walmart regularly returns value through higher dividends and share buybacks. In fiscal 2014 and fiscal 2013, the company returned a total of $12.8 billion and $13 billion, respectively, through share repurchases and dividends. Walmart has increased dividend for 41 consecutive years including the latest increases of 2% for fiscal 2015 and 18% for fiscal 2014. Also, it bought back shares worth $6.7 billion in fiscal 2014 and $3.2 billion in fiscal 2013. REASONS TO SELL Higher Health Costs and Increased Online Investment; Fiscal Guidance Narrowed: The medical cost inflation and increased health care enrollments in the U.S. have increased the health care costs of the company. During the second quarter, management stated that more and more U.S. employees and their families were enrolling in its healthcare plan than it expected. As a result, the company raised its estimate for U.S. healthcare costs this fiscal year to $500 million from $330 million, previously anticipated. In addition, the company expects to make incremental investments in e-commerce business, as it has been focusing to compete with other online retailers like Amazon. Walmart's focus on e-commerce will in turn lower profit margin potential because of shipping costs and price competition involved in it. Walmart thus narrowed its fiscal 2015 earnings guidance to a range of $4.92 to $5.02 per share from the previous range of $4.90 to $5.15 in the anticipation of higher investments in e-commerce and higher U.S. health-care costs, apart from incremental investments in Sam s Club and fluctuation in tax rates. Sluggish Comps Owing to Difficult Retail Sales Environment: Walmart has been witnessing sluggish comps in the past few quarters as a result of weak spending by lower- and middle-income segment consumers and a reduction in government food benefits. Amid a weak economic scenario and currency headwinds, Wal-Mart is also grappling with slower sales and tough price competition in Asia. In China, the company has long been dealing with food safety scandals, even after trying to maintain high food safety standards in China. Wal-Mart China also has been facing significant pressure from government austerity measures and deflation. The company also faces problems in understanding Equity Research WMT Page 8

discerning Chinese consumers as their buying decisions aren t always price driven. That is why the company has only 405 stores in China even after 18 years of operation. Besides China, Wal-Mart is experiencing weakness in Mexico and Brazil due to ongoing macro-economic headwinds, as a result of which Walmart s international revenues grew by a mere 1% in fiscal 2014. Walmart anticipates macro-economic headwinds like reductions in government benefits, higher taxes, tighter credit and higher group health care costs to impact fiscal 2015 results as well. During the second quarter of fiscal 2015, the company had guided sales growth to be at the lower end of a 3% to 5% range. The company expects net sales to increase 2% to 4% for fiscal 2016. Loss of Investor Confidence Due to Increased Media Scrutiny: Walmart has always remained under media scrutiny due to its size and scale of operations. Recently, labor unions in China sought higher compensation from the company after the retailer closed a store in Changde, Nunan, China. Not only labor disputes, the company was found to breach food safety measures in China earlier in Jan 2014 and had to recall donkey meat products after fox DNA was identified in samples. The sources stated that the company had encountered similar issues in China earlier too when it mislabeled its pork products in 2011. Walmart is also facing bribery allegations and lobbying charges in Mexico, China, India and Brazil. The company spent approximately $173 million in fiscal 2014 on expenses associated with the ongoing inquiries and investigations. Such huge expenses significantly impact the company s margins. Moreover, the allegations severely hurt investor confidence. Walmart was also accused of violating India s Foreign Exchange Management Act regulations in relation to the company s plan to set up stores in India. In Oct 2013, Walmart decided to terminate the joint venture with Indian partner Bharti Enterprises. Moreover, Walmart had to suspend its chief executive officer of the joint venture amid lobbying and bribing charges against the company. Walmart could not open a single store in India in 2013, despite plans to open eight during the year. DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of WMT. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1028 companies covered: Outperform - 15.5%, Neutral - 77.1%, Underperform 6.2%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research WMT Page 9

Research Analyst Lead Analyst QCA Copy Editor Content Ed. Reason for Update Sneha Nahata Sneha Nahata Kinjel Shah 4Q15 Note Equity Research WMT Page 10