Walmart 1998 Annual Report Download - page 22

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MANAGEMENT’S DISCUSSION AND ANALYSIS
Net Sales
The Company sales growth of 12% in fiscal 1998, when
compared to fiscal 1997, was attributable to our expansion
program and comparative store sales increases of 6%.
Expansion for fiscal 1998 included the opening of 37
Wal-Mart stores, 97 Supercenters (including the conversion
of 75 Wal-Mart stores), eight SAM’S Club units and the
opening or acquisition of 289 international units.
International sales accounted for approximately 6.4% of total
sales in fiscal 1998 compared with 4.8% in fiscal 1997.
The growth in International is partially due to the acquisition
of controlling interest in Cifra, S.A de C.V. during the third
quarter. See Note 6 of Notes to Consolidated Financial
Statements for additional information on our acquisitions.
SAM’S Club sales, as a percentage of total sales, decreased
from 18.9% in fiscal 1997 to 17.5% in fiscal 1998.
The sales increase in fiscal 1997 when compared to fiscal
1996 was attributable to our expansion program and comparative
store sales increases of 5%. Expansion for fiscal 1997 included
the opening of 59 Wal-Mart stores, 105 Supercenters (including
the conversion of 92 Wal-Mart stores), nine SAM’S Club units and
38 international units. The majority of the sales increase resulted
from Wal-Mart stores and Supercenters while international sales
grew to approximately 4.8% of the total sales in fiscal 1997 from
4.0% in fiscal 1996. SAM’S Club sales, as a percentage of total
sales, decreased from 20.4% in fiscal 1996 to 18.9% in fiscal 1997.
Costs and Expenses
Cost of sales, as a percentage of sales, decreased .4% in fiscal
1998 when compared to fiscal 1997 and increased .1% in fis-
cal 1997, when compared with fiscal 1996. The decrease in
fiscal 1998 resulted from improvements in the mix of mer-
chandise sold and from better inventory management.
Operating efficiencies and the strong emphasis placed on
inventory management has reduced markdowns and shrink-
age. Approximately .1% of the decrease in cost of sales was a
result of the sales contribution of SAM’S Club. As its sales
became a smaller percentage of total Company sales, the cost
of sales is positively impacted since their gross margin contri-
bution is lower than the stores. The increase in fiscal 1997
when compared to fiscal 1996 is due in part to one-time
markdowns in the third quarter resulting from a strategic
decision to reduce the merchandise assortment in selected
categories. Cost of sales also increased approximately .3%
due to a larger percentage of consolidated sales from
departments within Wal-Mart stores which have lower
markon percents, and to our continuing commitment of always
providing low prices. These increases were offset by
approximately .2% because SAM’S Club comprised a lower
percentage of consolidated sales in 1997 at a lower
contribution to gross margin than Wal-Mart stores.
Operating, selling, general and administrative expenses
increased .3%, as a percentage of sales, in fiscal 1998 when
compared with fiscal 1997, and were flat in fiscal 1997 when
compared to fiscal 1996. Approximately .2% of the increase in
fiscal 1998 was due to increases in payroll and related benefit
costs. Additionally, a contributing factor in the increase for
the year is a charge of $50 million for closing the majority of
the Bud’s Discount City stores during the second quarter of
fiscal 1998. This charge was reflected in operating income
due to its immateriality to our results of operations and
because we continue to operate eight Bud’s Discount City
stores. In fiscal 1997, operating, selling, general and
administrative expenses increased approximately .1% due to
a lower expense to sales percentage at SAM’S Club compared
to Wal-Mart Stores. This increase was offset through expense
control in all of the operating formats.
Historically, computer software has been programmed to make
assumptions about the century when given a date that only uses
two digits to represent the year. Although these assumptions have
been perfectly acceptable the past few decades, they are potential
cause for concern for software used in the year 2000 and
beyond. Specifically,this abbreviated date format makes it
difficult for an application or computer user to distinguish
between dates starting with 19xx and 20xx. The Company
has initiated a project to address the year 2000 compliance
issue for technology hardware, software and equipment.
The assessment phase of our project is substantially complete.
The majority of the compliance is expected to be performed
by Company associates. Approximately 67% of the required
conversions have occurred. We anticipate completing all remaining
conversions during fiscal 1999. The total estimated cost of the
conversion is $12 million, which is being expensed as
incurred. The cost of the conversions and the completion
dates are based on management’s best estimates and may be
updated as additional information becomes available. In addition,
communications are ongoing with other companies with which
our systems interface or rely on to determine the extent to which
those companies are addressing their year 2000 compliance.
Interest Costs
Interest costs decreased in fiscal 1998 compared to fiscal
1997 due primarily to lower short-term borrowings.
Enhanced operating cash flows and lower capital spending
enabled the Company to meet cash requirements without
short-term borrowings throughout most of fiscal 1998.
Interest costs decreased in fiscal 1997 compared to fiscal 1996
due to lower average daily short-term borrowings and
through retirement of maturing debt. See Note 2 of Notes to
Consolidated Financial Statements for additional information
on interest and debt.
Sales (in millions) by operating segment for the three fiscal years ended January 31, are as follows:
Fiscal Year Wal-Mart Stores SAM’S Club International Other(McLane) Total Company Total Company Increase
1998 $ 83,820 $ 20,668 $ 7,517 $ 5,953 $ 117,958 12%
1997 74,840 19,785 5,002 5,232 104,859 12%
1996 66,271 19,068 3,712 4,576 93,627 13%