Wal-Mart is subject to different forms of transaction exposure. These are but not limited to:
Purchasing or selling goods internationally
Borrowing money to build stores (internationally)
Acquisition of foreign companies
Although the fluctuations in currency exchange market has positively affected the international sales segment by an aggregate of $47 million in the year 2003 Wal-Mart want to diminish these fluctuations. Because in the fiscal year 2002 foreign currency exchange rates accounted for a negative aggregate of $1.1 billion. The weakening of the US$ against the United Kingdom pound and Canadian $ are the main contributors to this effect.
Wal-Mart minimizes exposure to the risk of devaluation of foreign currencies by operating in local currencies and through buying forward currency contracts, where feasible, for certain known funding requirements. The also use derivative financial instruments for purposes to reduce their exposure to fluctuations in foreign currencies and to minimize the risk and cost associated with financial and global operating activities. Generally, the contract terms of hedge instruments closely mirror those of the item being hedged, providing a high degree of risk reduction and correlation. Contracts that are highly effective at meeting the risk reduction and correlation criteria are recorded using hedge accounting.
Wal-mart routinely enters into forward currency exchange contracts in the regular course of business to manage their exposure against foreign currency fluctuations on cross-border purchases of inventory. These contracts are generally for durations of six months or less. At January 31, 2003 and 2002, they held contracts to purchase and sell various currencies with notional amounts of $185 million and $117 million, respectively, and net fair values of less than $1 million at either fiscal year. The fair values of the currency swap agreements are recorded in the consolidated balance sheets within the line "other assets and deferred charges." (See Appendix 4). The consolidated balance sheet shows an increase of $1.444 million in fair value currency swap agreements. This indicates that Wal-Mart is increasing their protection in relation to the increase of international sales. They might also be able to more accurate determine their need in foreign currency at any given time.
Wal-Mart is also vulnerable to foreign currency translation. Because they operate in many countries they have to “translate” the foreign currency into US$ for reporting purposes. The assets and liabilities of all foreign subsidiaries are translated at current exchange rates. Related translation adjustments are recorded as a component of other accumulated comprehensive income (see Appendix 5). The ineffective portion of an instrument’s change in fair value will be immediately recognized in earnings.
On the same note changes in Wal-Mart’s the International segment goodwill are the result of foreign currency exchange rate fluctuations and the addition of $197 million of goodwill resulting from the company’s Amigo acquisition. This means that foreign currency exchange rate fluctuations account for $760 million 2003 (see Appendix 6).
Besides income from sales and cost from COGS and investment Internationally Wal-Mart also has income from their suppliers. The most common of which are as follows:
Warehousing allowances – allowances provided by suppliers to compensate the Company for distributing their product through our distribution systems which are more efficient than most other available supply chains. These allowances are reflected in cost of sales when earned.
Volume discounts – certain suppliers provide incentives for purchasing certain volumes of merchandise. These funds are recognized as a reduction of cost of sales at the time the incentive target is earned.
Other reimbursements and promotional allowances – suppliers may provide funds for specific programs including markdown protection, margin protection, new product lines, special promotions, specific advertising and other specified programs. These funds are recognized at the time the program occurs and the funds are earned.
At January 31, 2003 and 2002, the Company had $286 million and $279 million respectively, in accounts receivable associated with supplier funded programs. Further, the Company had $185 million and $178 million in unearned revenue included in accrued liabilities for unearned vendor programs at January 31, 2003 and 2002, respectively.
If these suppliers are international suppliers and the products are used for the US market there is again transaction exposure. If they are supplying a local market (within the country) it might end up as translation exposure.
Wal-Mart uses derivative financial instruments for hedging and non-trading purposes to manage its exposure to interest and foreign exchange rates. Use of derivative financial instruments in hedging programs subjects Wal-Mart to certain risks, most noticeable as market and credit risks. Market risk represents the possibility that the value of the derivative instrument will change. In a hedging relationship, the change in the value of the derivative is offset to a great extent by the change in the value of the underlying hedged item. Credit risk related to derivatives represents the possibility that the counterparty will not fulfill the terms of the contract. Credit risk is monitored through established approval procedures, including setting concentration limits by counterparty, reviewing credit ratings and requiring collateral (generally cash) when appropriate. The majority of the Company’s transactions are with counterparties rated A or better by nationally recognized credit rating agencies.
It is clear from this analysis that Wal-Mart is exposed to many forms of foreign currency exposure. Within the organization it seems that they have done as much as possible to prevent changes in currencies to affect the financials of the organization. Although they have implemented many protective measures it is also clear that the will not be able to protect themselves for 100% as we could see in the 2003 annual report. We have also seen in the 2004 exchange rates that the US$ is weakening against all the currencies except the Mexican Pesos and Chinese Yuan. This means that there is a likelihood that the International segment will record more sales (in $), on the other hand the COGS might be higher as well (depending on the relationship between US / International suppliers).
I have omitted the cost associated with the different protective measures, because I was not able to derive these cost from the annual report or other information. The expansion in the international market will increase the vulnerability to changes in exchange rates, but on the other hand it might help Wal-Mart to increase the use of natural hedging, currency diversification, Multinational netting, leading and/or lagging. These tools are less costly than external protection.
Appendix 1, Net Sales per segment
Appendix 2, Growth per sq ft in International markets
Appendix 3, Exchange rate of the International markets
The straight line indicates the end of fiscal year 2003 (January 31st, 2003)
Appendix 4, Consolidated Balance Sheets
Appendix 4, Consolidated Statement of Shareholders’ Equity
Appendix 5, Goodwill as it is recorded on the balance sheet
Management’s Discussion and Analysis, Wal-Mart Sores Inc. Annual Report 2003
Wal-Mart Annual report 2003, EX-13 6 ex13final.htm,