Wal-Mart Stores Inc. international exchange exposure.

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Wal-Mart Stores Inc. international exchange exposure.

Wal-Mart Stores Inc. is the largest retailer in the world. They operate in the US and International market. Even if they did not have an international segment, they would be exposed to fluctuations in international exchange rates. More and more Wal-Mart is buying there products internationally. Their strategy as low price supplier forces them to buy products from countries that have a lower cost structure. The following is an extract from the management discussion of Annual report of 2003:

“Wal-Mart is in the business of serving customers. In the United States, our operations are centered on operating retail stores and membership warehouse clubs. Internationally, our operations are centered on retail stores, warehouse clubs and restaurants. We have built our business by offering our customers quality merchandise at low prices.”

It is important to note that Wal-Mart is offering quality merchandise, not the highest quality, at the low prices, not the lowest prices. It is interesting to know that often the larger quantity packages offered by Wal-Mart are more expensive (per item) than the lower quantity packages. In other stores that is generally not the case, but consumers are generally unaware of this fact and think it is cheaper to buy lager quantity packages.

Because of Wal-Marts strategy, offering our customers quality merchandise at low prices, it is essential for Wal-Mart to control their cost. In the international market that means that Wal-Mart need to be aware of the foreign exchange rate exposure. As mentioned earlier they are exposed at the buying of goods in the international market, but also at selling in the international market. In Appendix 1 there is an overview of the sales of Wal-Mart per segment. It is clear that their International sales are the fasted growing of all the segments in the last 4 years. While the total percentage of sales stays at about 17% of the total sales. Since 1999 the International segment has grown 2.5 times in square foot (Appendix 2). All of this indicates that the foreign exchange volatility is very important to Wal-Mart Stores Inc. If we combine this with the historical interbank exchange rates (Appendix 3) we understand the challenge of Wal-Mart. The annual report does not report where Wal-Mart buys their products, neither does it reveal if they take any measures to protect itself from currency fluctuations at the buying site.

An additional challenge for Wal-mart is that management also expects downward pressure on our gross margins as food sales continue to increase as a percentage of total Company sales both domestically and internationally. This trend results from the Company’s program to convert many of our Wal-Mart discount stores to Supercenters, which have full-line food departments, the opening of additional Supercenters and the opening of additional Neighborhood Markets all of which result in increases in food sales as a percentage of our total net sales. Food products generally carry lower margins than general merchandise. This is a strategic decision with consequences for the cost control. If the margins get slimmer it is getting more important to control your cost and diminish fluctuations.

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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 ...

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