Dear God, did someone actually do this?

I was looking around for something on Walmart. And found this piece at Fortune.

So without further ado, here’s my methodology: Start with Wal-Mart’s sales, and then subtract what it has to pay the suppliers that make all the stuff on its shelves. Last quarter that number was $28.7 billion.

What remains is Wal-Mart’s gross profit. Wal-Mart, like all companies, has to split that between three groups — bondholders, stockholders, and employees. How much should go to each? Bondholders are easy. They’ve agreed in advance to an interest rate. Last quarter, Wal-Mart’s interest payments were $553 million. That leaves us with $28.2 billion, based on last quarter, or $112.8 billion a year.

Confident enough in this analysis that he repeated it 8 months later:

As for my math, I ran through my calculations again to see if I had made an error. I didn’t find one.

Last year, Wal-Mart brought in a little over $118 billion in profits after it paid its suppliers but before it paid wages. Like all companies, it has to split that money three ways, between its stock owners, its lenders, and its employees. Wal-Mart paid about $2 billion in interest on its loans last year, leaving $116 billion.

From this he concludes that, even after paying the requisite dividend (which he is correct and generous about) that Walmart could therefore raise wages by 50% and not feel the pain.

Err, yes. But. If the dividend would only be marginally impacted by that pay raise, as he says, and bondholders won’t get it, and it’s not going in extra cost of goods, then, well, the money to pay that extra wages, where’s it going? Where in the accounts is that 50% potential pay raise piling up?

Because it ain’t. So we do know there’s an error here. What is it?

Actually, it’s Ritchie level of stupidity. Here’s the accounts for that period:

Revenues:
Net sales $466,114 $443,854 $418,952
Membership and other income 3,048 3,096 2,897
Total revenues 469,162 446,950 421,849
Costs and expenses:
Cost of sales 352,488 335,127 314,946
Operating, selling, general and administrative expenses 88,873 85,265 81,361
Operating income 27,801 26,558 25,542

What he’s done is think that the only three groups that get that gross margin, that amount after deduction of cost of goods from revenues, are the shareholders, bondholders and workers. And that’s not the way retail accounts work, is it?

Cost of sales:

Cost of Sales
Cost of sales includes actual product cost, the cost of transportation to
the Company’s warehouses, stores and clubs from suppliers, the cost of
transportation from the Company’s warehouses to the stores, clubs
and customers and the cost of warehousing for the Sam’s Club segment
and import distribution centers. Cost of sales is reduced by advertising
reimbursements received from vendors that are not directly related to
specifi c advertising activities.

Operating, Selling, General and Administrative Expenses
Operating, selling, general and administrative expenses include all
operating costs of the Company, except cost of sales, as described above.
As a result, the majority of the cost of warehousing and occupancy for
the Walmart U.S. and Walmart International segments’ distribution
facilities is included in operating, selling, general and administrative
expenses. Because the Company does not include most of the cost of its
Walmart U.S. and Walmart International segments’ distribution facilities
in cost of sales, its gross profi t and gross profi t as a percentage of net
sales (“gross profi t margin”) may not be comparable to those of other
retailers that may include all costs related to their distribution facilities
in cost of sales and in the calculation of gross profi t.

Sigh. Even just the ‘leccie bill for their refrigerators will make a dent in that operating expenses thing, won’t it?

17 thoughts on “Dear God, did someone actually do this?”

  1. WOW!!!! So, WalMart doesn’t pay any staff wages, everybody who works for WalMart is actually a shareholder? Wow! That’s taking the John Lewis model to extremes.

  2. The word “overheads” springs to mind. Is Walmart the only business that has no head office, premises, backroom staff?

  3. Disappointing.

    I was going to steal the guys research and start a rival chain. I was going to steal all their staff by offering an extra 10%.

    It did occur that if Walmart could give a 50% pay rise without noticing it, then someone else would have flattened them already, but I got over-excited.

  4. Bloke in North Dorset

    And there was me thinking Fortune was a grown-up’ magazine, writen by grown-ups for grown-ups.

    You live and learn.

  5. Arnie deserves credit for speaking with his own voice in the English-language versions of his films, unlike the peplum generation of movie musclemen (Steve Reeves, Reg Park, etc) who were dubbed in every version. Reeves’ natural voice was high and squeaky, or so I’m told.

  6. and then subtract what it has to pay the suppliers that make all the stuff on its shelves. Last quarter that number was $28.7 billion.

    What remains is Wal-Mart’s gross profit.

    I’m not all hep on the *technical* terminology here but he’s missing a few more deductions from that number.

    Things such as the property taxes that need to be paid, the utility bills that keep the lights on, maintenance costs. Depreciation. TAXES.

    http://amigobulls.com/stocks/WMT/income-statement/annual

    Once all that is figured in, *then* you can look at how much money is left for raises.

    Turns out their *net* profit – is about 14.7 billion. And that’s the number that’s important when trying to figure out who gets how much more (or less) this year).

  7. Using Fortune magazine’s method, even on my modest salary I can afford a Ferrari. And probably without even noticing the payments.

  8. ‘Last year, Wal-Mart brought in a little over $118 billion in profits after it paid its suppliers but before it paid wages.’

    Profits before you pay your employees? And deduct other costs? What a maroon.

    Why, Walmart can afford to paint all its stores green!

  9. Whoever wrote that is a fucking tool and should be shamed out of financial journalism. I wouldn’t employ him as as a trainee purchase ledger clerk never mind a management accountant.

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