Walmart 1999 Annual Report Download - page 20

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MANAGEMENT’S DISCUSSION AND ANALYSIS
The Company’s sales growth of 17% in fiscal 1999, when compared
to fiscal 1998, was attributable to our expansion program and a
domestic comparative store sales increase of 9%. Expansion for fis-
cal 1999 included the opening of 37 Wal-Mart stores, 123
Supercenters (including the conversion of 88 existing Wal-Mart
stores), eight SAM’S Club units, and the opening or acquisition of
114 international units. International sales accounted for approxi-
mately 8.9% of total Company sales in fiscal 1999 compared with
6.4% in fiscal 1998. The growth in International is partially due to
acquisitions during 1999 and 1998. In the third quarter of fiscal
1998, the Company acquired a controlling interest of Cifra, S.A de
C.V. (Cifra) which at acquisition date included 250 units in varying
formats including Aurreras, Bodegas, Suburbias, Superamas, and
Vips. In the fourth quarter of fiscal 1998, the Company acquired
the 21 units of the Wertkauf hypermarket chain in Germany. In fis-
cal 1999, the Company acquired four units in South Korea which
were previously operated by Korea Makro. See Note 6 of Notes to
Consolidated Financial Statements for additional information on
acquisitions. SAM’S Club sales, as a percentage of total Company
sales, decreased from 17.5% in fiscal 1998 to 16.6% in fiscal 1999.
The sales increase 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 con-
version of 75 existing Wal-Mart stores), eight SAM’S Clubs, and the
opening or acquisition of 289 international units, including the
various Cifra formats. International sales accounted for approxi-
mately 6.4% of total Company sales in fiscal 1998 compared with
4.8% in fiscal 1997. The growth in International is partially due to
the acquisition of controlling interest of Cifra during the third
quarter. SAM’S Club sales, as a percentage of total Company sales,
decreased from 18.9% in fiscal 1997 to 17.5% in fiscal 1998.
Costs and Expenses
Cost of sales, as a percentage of sales, decreased, resulting in
increases in gross margin of .2% and .4% in fiscal 1999 and fiscal
1998, respectively. These improvements in gross margin occurred
even with continued price rollbacks and our continuing commit-
ment to always providing low prices. Lower inventory levels result-
ed in reduced markdowns and decreased shrink and generated a
sustainable improvement in profitability without raising prices.
The improvement in gross margin also occurred despite higher
food department and International sales, which generally have
lower gross margins than domestic general merchandise. This
effect is partially offset by the slower growth of SAM’S Club, which
is our lowest gross margin retail operation.
Operating, selling, general and administrative expenses decreased
.2% as a percentage of sales in fiscal 1999 when compared with fis-
cal 1998. The strong sales increase along with lower inventory lev-
els combined to reduce expenses as a percentage of sales. The
expense leverage was mitigated in the consolidated results due to
the percentage of the total volume decreasing in the SAM’S Club
segment, which has lower expenses as a percentage of sales, while
the percentage of total volume increased in the International seg-
ment, which has higher expenses as a percentage of sales than the
other operating segments. Every operating segment was flat or
down in expenses as a percent of sales in fiscal 1999 when com-
pared with fiscal 1998.
Operating, selling, general and administrative expenses increased
.3% as a percentage of sales in fiscal 1998 when compared with
fiscal 1997. 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 was the one-time
pre-tax charge of $50 million for closing the majority of the Bud’s
Discount City stores during the second quarter of fiscal 1998.
Interest Costs
Interest costs decreased .1% as a percentage of sales in fiscal 1999
when compared with fiscal 1998. This marks the third consecutive
year that interest costs relating to debt have declined. The
Company was able to meet cash requirements without short-term
borrowings throughout most of fiscal 1999 due to enhanced oper-
ating cash flows. The interest on the Company’s capital leases
increased over fiscal 1998 due to continuing expansion. Interest
costs decreased in fiscal 1998 compared to fiscal 1997 due primar-
ily 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. See Note 3 of Notes to Consolidated Financial
Statements for additional information on interest and debt.
Market Risk
Market risks relating to the Company’s operations result primarily
from changes in interest rates and changes in foreign exchange
rates.
The Company enters into interest rate swaps to minimize the risk
and costs associated with financing activities. The swap agree-
ments are contracts to exchange fixed or variable rates for variable
or fixed interest rate payments periodically over the life of the
instruments. The following tables provide information about the
Company’s derivative financial instruments and other financial
instruments that are sensitive to changes in interest rates. For
debt obligations, the table presents principal cash flows and relat-
ed weighted-average interest rates by expected maturity dates. For
interest rate swaps, the table presents notional amounts and inter-
est rates by contractual maturity dates. The applicable floating
rate index is included for variable rate instruments. All amounts
are stated in United States dollar equivalents.
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
1999 $ 95,395 $ 22,881 $ 12,247 $ 7,111 $ 137,634 17%
1998 83,820 20,668 7,517 5,953 117,958 12%
1997 74,840 19,785 5,002 5,232 104,859 12%
Net Sales