Question

Walmart Says Amazon, Wage Hikes Causing Decrease in ProfiT

LESTER HOLT, anchor:

Don't look now, but the holiday shopping season isn't that far off and pricing wars begin as stores fight for your business. Tonight, there's big news about the biggest retailer of all. Walmart stunning Wall Street by announcing and anticipates disappointing earnings this year and next. And NBC's Tom Costello tells us part of the reason is competition from Amazon as more Americans change the way they shop.

WOMAN: Hi, welcome to Walmart. How are you?

TOM COSTELLO, reporting:

With 5,000 stores in the U.S. alone, Walmart has been the country's largest retailer. But its stock is suddenly in a nosedive, down 10% today, down 29% for the year.

MAN: We're going to show a chart comparing the Dow with Walmart today, which was its biggest drag but it just skews the-- the-- the chart so much.

COSTELLO: Walmart's blamed part of the selloff on the cost of paying its workers more.

HOLT (February 19th): The nation's largest retailer Walmart announced today that it's giving a pay raise to hundreds of thousands of its employees.

COSTELLO: Earlier this year, Walmart raised the minimum wage for its employees. Today, the company said higher wages and stiff internet competition are taking a big bite out of its earnings and warned profits will drop in 2017 and '18.

DOUG MCMILLON (Walmart CEO): We've got to be thoughtful about what we do, and not everything will happen overnight. But we're clear that we have to win in some certain areas.

COSTELLO: Among its biggest competitors, internet giant Amazon.com, now worth more than Walmart on Wall Street. Amazon is forcing Walmart to spend billions on its e-commerce website just to compete.

COURTNEY REAGAN (CNBC Retail Correspondent): Walmart is just now trying to play catch-up, to get up to where it needs to be to really compete with Amazon when it comes to online shopping.

COSTELLO: Amazon, Walmart, rather, is also announcing plans to clean up and spruce up its existing stores and build out 50 to 60 supercenters. Meanwhile, retail analysts are telling us we should expect really tough competition, pricing competition, over the holiday season with Amazon, with Walmart and the other internet retailers. Lester.

HOLT: All right. Tom, thank you.

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What do you think?

1. Which of the four financial statements comes to mind when you watch the Walmart video? Why?

2. The reporter indicates that two different things are primary causes of concern for Walmart during the time of the video. What are they? Give one or two sentences of specific details.

3. Which of the categories of financial ratios would you say are most related to the story in this video? Why did you choose this category for your answer (that is, what about the story makes you choose it)?

Answer 1

1. The four financial statements which are being referred to in the transcript of the video are as following

a. Statement of Financial Position( Balance sheet)

b. Statement of Profit and Loss.

. Statement of Cash flows

D. Statement of changes in Equity

2. The two primary cause of concern for Walmart is falling stock price, decreasing profits

a. One of the reason is that Walmart is facing stiff competition from e-commerce giant Amazon which is gaining more worth at the Wallstreet. The reason is that Americans are changing the way they shop from offline stores to online stores. If the company is able to build it's online infrastructure competitive relative to Amazon then this factor might phase out soon.

b. Another reason cited by many people from the company is the rise in minimum wages and high salaries paid by Walmart which has reduced the bottom line of the profit & loss statement (Reduced Profitability).

3. The financial ratios which are relevant to analyse in this story are

a. Gross profit margin: It reveals the proportion of money left after the expenditure (Cost of Goods Sold) is deducted from the revenues.

Gross Profit Margin = (Revenue - Cost of Goods Sold) / Revenue

This is an important ratio because it can instantly tell us whether the revenue is being increased at the cost of losing out the profits which is the key reason being discussed in the story about the losses faced by Walmart.

b. Cost of customer acquisition : It tells about the average money spent to acquire a new customer. It is an important ratio for companies dealing directly with consumers. In the story above this ratio will help Walmart to calculate the amount it needs to spend to acquire more customers.

CAC = Total marketing expenditure/ Number of new customers acquired

c. Inventory Turnover ratio: It is a very critical ratio for any e-commerce company or offline retailer company. It tells us about how well is the inventory being managed. For a company which is able to manage the inventory well , cost of holding the inventory reduces hence increasing the profits.

Inventory Turnover Ratio = Cost of Goods Sold / Average inventory period