Wal-Mart (NYSE: WMT) and Target (NYSE: TGT) draw frequent comparisons as two of the most prominent big-box retailers. Wal-Mart’s low-cost focus has helped it outmuscle its archrival during the current economic downturn, but Target is showing signs of life as consumers begin to open their wallets and buy more discretionary items. Below is a comparison of their cash flows for the most recently completed fiscal year, highlighting the main items on the three key categories in the cash flow statements and how these stack up against other more stodgy industry players. (To learn about analyzing the cash flow statement, read The Essentials Of Cash Flow.)
Operating Cash Flows
The first thing that stands out is Wal-Mart is considerably larger and generated four times more cash flow than Target for the most recently completed fiscal year. Wal-Mart threw off an astounding $23.1 billion in cash from its operations, which consists primarily of selling household goods, apparel and related merchandise. Target also took a big hit from bad debt provisions as it runs its own credit card portfolio and extends credit to customers. Wal-Mart simply states that it uses a third party to extend this credit. Target took a $1.3 billion hit to earnings to cover future bad debts, which was added back to operating cash flows as it represents a non-cash charge.
Both firms did a decent job in managing their working capital. They saw an increase in accounts receivable, meaning they collected less cash from customers, but Target was able to reduce net inventories during the year. Both also saw cash drained slightly by increasing accounts payable, but Wal-Mart saw a large increase in accrued liabilities, such as wages and self insurance that it had yet to pay for as of year end.
Investing Cash Flows
Wal-Mart and Target continued to expand their operations last year. As a result, capital expenditures were large and included spending for new store openings and maintaining existing ones. In Target’s case, capex ate up the majority of operating cash flow. Wal-Mart spent a hefty $11.5 billion in capex, but this represented only half of operating cash generation and left room for other purposes as will be seen below. Wal-Mart spent another $1.6 billion investing in its international operations, while Target saw an $823 million cash outflow related to its credit card financing program.
Financing Cash Flows
Cash flows from financing activities relates to raising and retiring capital. Both Wal-Mart and Target utilized large amounts of short-term and long-term debt to finance their operations over the near term and long haul, respectively. Both also used excess cash flow to pay a dividend and repurchase shares, but Wal-Mart again was able to outmuscle Target by utilizing more than $7 billion to do so.
From investigating the cash flow statements, Wal-Mart is clearly a much more prodigious cash generator, both in absolute terms and in the efficiency with which it uses its clout for leverage over its suppliers and generates operating capital by offering low costs to its customers. Target will see improved cash generation if bad loans come in less than expected. The company also recently announced plans to slow new store growth and use capex to spruce up its existing store base.
Wal-Mart and Target also remained firmly profitable during last year’s recession and continue to grow sales and cash flow generation. Older-line rivals including Sears (Nasdaq: SHLD), Macy’s (NYSE: M) and Dillard’s (NYSE: DDS) have much murkier growth trends and should look to these two rivals for lessons on how to keep store concepts fresh and efficiently utilize their cash. (Learn how the CFS relates to the balance sheet and income statement as a part of a company’s financial reports. Read What Is A Cash Flow Statement?)
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