WALMART STORES INC Report Created Mar 30, 2020 Page 1 of 7 Walmart Is the World's Largest Retailer

NYSE: WMT WALMART STORES INC Report created Mar 30, 2020 Page 1 OF 7 Walmart is the world's largest retailer. In the fiscal year ended January 31, 2020, sales were $520 billion. Argus Recommendations The company has three segments: Walmart Stores, which accounted for about 66% of sales; Sam's Club, a membership warehouse chain, which comprised 11% of revenue; and the International segment, which generated 23% of sales. The company, based in Bentonville, Arkansas, ended fiscal 2020 with more than Twelve Month Rating SELL HOLD BUY 11,500 retail units in about 27 countries. Groceries are the largest produce category in the U.S. market, at approximately 56% of sales. E-commerce sales grew 37% in FY20 and management expects them to grow Five Year Rating SELL HOLD BUY about 30% in FY21. The fiscal year ends on January 31 for U.S. and Canadian operations. Other operations are generally consolidated using a one month lag on a calendar year basis. Under Market Over Sector Rating Weight Weight Weight

Analyst's Notes Argus assigns a 12-month BUY, HOLD, or SELL rating to each stock under coverage. Analysis by Christopher Graja, CFA, March 30, 2020 • BUY-rated stocks are expected to outperform the market (the benchmark S&P 500 Index) on a risk-adjusted basis over the ARGUS RATING: BUY next year. • HOLD-rated stocks are expected to perform in line with the • Maintaining BUY as WMT hires 150,000 to meet demand market. • In this turbulent environment, Argus is recommending that investors dollar-average into existing • SELL-rated stocks are expected to underperform the market long-term positions in the highest-quality stocks. on a risk-adjusted basis. The distribution of ratings across Argus' entire company • We believe that WMT, with excellent operating efficiency, AA credit ratings, and a record of raising its universe is: 65% Buy, 34% Hold, 1% Sell. dividend every year since 1974 is one of these companies. We are maintaining our $130 price target. • The company is hiring 150,000 temporary associates, to meet 'increased demand.' Key Statistics • WMT is paying special bonuses and paying regular bonuses early to help associates. Key Statistics pricing data reflects previous trading day's closing price. Other applicable data are trailing 12-months unless INVESTMENT THESIS otherwise specified We are reiterating our BUY recommendation on Walmart Inc. (NYSE: WMT) and Market Overview maintaining our target price at $130. While the coronavirus outbreak is devastating the Price $109.58 economy and large components of the retail market, we believe Walmart will be a survivor. Target Price $130.00 In this turbulent environment, Argus is recommending that investors dollar-average into 52 Week Price Range $96.53 to $128.08 existing long-term positions in the highest-quality stocks. Investors may also considering Shares Outstanding 2.83 Billion initiating new positions at discounted prices, while being aware of the risks of future Dividend $2.16 volatility in individual positions. Historically, periods of severe stock-market turbulence Sector Overview have proven to be good times for careful and disciplined stock selection, with a focus on Sector Consumer Staples the highest-quality and financially strongest names. Sector Rating UNDER WEIGHT We believe that WMT, with excellent operating efficiency, AA credit ratings, and a Total % of S&P 500 Market Cap. 7.00% record of raising its dividend every year since 1974 is one of these companies. Financial Strength While many other businesses are shutting their doors or laying off workers, WMT Financial Strength Rating MEDIUM-HIGH announced, on March 19, that it will pay a special $300 bonus to full-time hourly workers Debt/Capital Ratio 47.0% and $150 to part-time hourly associates to thank them for their dedication during the Return on Equity 18.8% crisis. The company will also accelerate regularly quarterly bonuses. The company is hiring Net Margin 2.8% Payout Ratio 0.41 Market Data Pricing reflects previous trading week's closing price. Current Ratio 0.79 200-Day Moving Average Target Price: $130.00 52 Week High: $128.08 52 Week Low: $102.00 Closed at $109.58 on 3/27 Revenue $523.96 Billion Price After-Tax Income $14.88 Billion ($) Valuation 120 Current FY P/E 20.87 Prior FY P/E 22.23 100 Price/Sales 0.59 80 Price/Book 4.16 Book Value/Share $26.37 Market Capitalization $310.36 Billion Rating BUY HOLD SELL Forecasted Growth EPS 1 Year EPS Growth Forecast ($) 6.49% 5 Year EPS Growth Forecast 5.00% Quarterly 1.14 1.29 1.10 1.20 1.13 1.27 1.14 1.47 1.17 1.35 1.20 1.54 1.22 1.43 1.26 1.60 1 Year Dividend Growth Forecast Annual 4.72 4.93 5.25 ( Estimate) 5.50 ( Estimate) 1.89% Revenue ($ in Bil.) Risk Beta 0.61 Quarterly 122.7 128.0 124.9 138.8 123.9 130.4 128.0 141.7 127.6 134.5 131.8 145.9 131.5 138.6 135.8 150.3 Institutional Ownership 30.45% Annual 514.4 524.0 539.9 ( Estimate) 556.1 ( Estimate) FY ends Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Jan 31 2019 2020 2021 2022

Analyst's Notes...Continued 150,000 temporary associates through the end of May, to help ahead. Walmart better serve customers during this time of 'increased Recent news releases from Walmart headquarters suggest that demand.' Many of these temporary positions will convert to the retail giant is seeing strong sales. The company is racing to hire permanent positions over time. WMT has reached out to the 150,000 associates and reducing hiring times. These roles are restaurant and hotel industries in an effort to help employees who temporary, but many will become permanent. The company says have been furloughed. that candidates can apply online, get hired and begin working in a Our five-year rating remains BUY. Walmart is a survivor in the fulfillment center or distribution center in as little as 24 hours. very tumultuous retail sector. The company's finances are top tier These new hires will initially be paid $15 - $19 per hour. WMT within this sector, the store environment is improving, and will be paying $250 hiring bonuses after 90 days and they are e-commerce capabilities are growing. paying existing associates $250 if they refer someone who stays for RECENT DEVELOPMENTS 90 days. We believe these initiatives reflect management's confidence in the business over the next few months. In this turbulent environment, Argus is recommending that A March 29 article published by Barron's provided data on investors dollar-average into existing long-term positions in the retail traffic. While traffic to malls has plunged, in early March, highest-quality stocks. Investors may also considering initiating traffic at grocery stores and discounters like Walmart and Costco new positions at discounted prices, while being aware of the risks has increased. of future volatility in individual positions. Historically, periods of severe stock-market turbulence have proven to be good times for EARNINGS & GROWTH ANALYSIS careful and disciplined stock selection, with a focus on the We are maintaining our FY21 EPS estimate of $5.25, up 6% highest-quality and financially strongest names. from $4.93 per share in FY20. This estimate could prove to be We have downgraded numerous stocks in recent weeks, conservative in the near term. The company's Executive Vice particularly for companies with weaker balance sheets that could President of Corporate Affairs suggested in a recent CNBC have a long recovery time due to an extended revenue shortfall. But interview, that one reason the company was accelerating the for investors with a longer-term time horizon, we expect stocks to regular bonus to store employees was because of the volume they recover and recommend companies with strong business models are seeing. Mr. Bartlett stated in a call with The Wall Street Journal and balance sheets that will not only survive but thrive in the years during the week of March 16, 'There's just so much demand.'

Growth & Valuation Analysis Financial & Risk Analysis GROWTH ANALYSIS ($ in Millions, except per share data) 2016 2017 2018 2019 2020 FINANCIAL STRENGTH 2018 2019 2020 Revenue 482,130 485,873 500,343 514,405 523,964 Cash ($ in Millions) 6,756 7,722 9,465 COGS 360,984 361,256 373,396 385,301 394,605 Working Capital ($ in Millions) -18,857 -15,580 -15,984 Gross Profit 121,146 124,617 126,947 129,104 129,359 Current Ratio 0.76 0.80 0.79 SG&A 97,041 101,853 106,510 107,147 108,791 LT Debt/Equity Ratio (%) 47.3 69.2 86.0 R&D ————— Total Debt/Equity Ratio (%) 59.7 80.0 97.0 Operating Income 24,105 22,764 20,437 21,957 20,568 Interest Expense 2,467 2,267 2,178 2,129 2,410 RATIOS (%) Pretax Income 21,638 20,497 15,123 11,460 20,116 Gross Profit Margin 25.4 25.1 24.7 Income Taxes 6,558 6,204 4,600 4,281 4,915 Operating Margin 4.1 4.3 3.9 Tax Rate (%) 30 30 30 37 24 Net Margin 2.0 1.3 2.8 Net Income 14,694 13,643 9,862 6,670 14,881 Return On Assets 4.9 3.1 6.5 Diluted Shares Outstanding 3,217 3,112 3,010 2,945 2,868 Return On Equity 12.7 8.9 20.2 EPS 4.57 4.38 3.28 2.26 5.19 RISK ANALYSIS Dividend 1.96 2.00 2.04 2.08 2.12 Cash Cycle (days) 3.8 1.8 1.9 GROWTH RATES (%) Cash Flow/Cap Ex 2.8 2.7 2.4 Revenue -0.7 0.6 3.0 2.9 1.9 Oper. Income/Int. Exp. (ratio) 7.5 5.9 8.7 Operating Income -11.2 -5.6 -10.2 7.4 -6.3 Payout Ratio 54.0 119.0 42.3 Net Income -10.2 -7.2 -27.7 -32.4 123.1 EPS -8.4 -4.2 -25.1 -31.1 — The data contained on this page of this report has been Dividend 2.1 2.0 2.0 2.0 — provided by Morningstar, Inc. (© 2020 Morningstar, Inc. Sustainable Growth Rate 10.4 6.9 -1.3 11.6 12.0 All Rights Reserved). This data (1) is proprietary to VALUATION ANALYSIS Morningstar and/or its content providers; (2) may not be Price: High $75.19 $100.13 $109.98 $125.38 — copied or distributed; and (3) is not warranted to be Price: Low $60.20 $65.28 $81.78 $91.64 — accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or Price/Sales: High-Low 0.5 - 0.4 0.6 - 0.4 0.7 - 0.5 0.7 - 0.5 — - — losses arising from any use of this information. Past P/E: High-Low 16.5 - 13.2 22.9 - 14.9 33.5 - 24.9 55.5 - 40.5 — - — performance is no guarantee of future results. This data Price/Cash Flow: High-Low 7.4 - 5.9 10.5 - 6.9 11.4 - 8.5 14.5 - 10.6 — - — is set forth herein for historical reference only and is not necessarily used in Argus’ analysis of the stock set forth on this page of this report or any other stock or other security. All earnings figures are in GAAP.

Analyst's Notes...Continued While sales of groceries and consumer staples seem to be strong, measure of credit risk, Walmart has historically been one of the it is unclear whether shoppers have also been buying higher margin least risky companies in our retail universe along with Home discretionary products like clothing and housewares. Our estimate Depot, Costco, Target, Lowe's and Coca-Cola. Procter & Gamble does not include the amount or timing of bonus payments. The often trades at a slightly lower default spread, but P&G has company's guidance is $5.00 - $5.15. First-quarter consensus has significantly higher margins than WMT. increased by approximately $0.02 to $1.16 per share. WMT had $9.5 billion in cash and equivalents on the balance We are initiating a FY22 EPS estimate of $5.50 per share. This sheet at the end of the fourth quarter, above prior-year levels. Total represents about a 5% increase driven by a 3% increase in sales, debt/capital was about 47% at the end of 4Q, above the prior-year share repurchases and a very small increase in operating margin level of about 42% partly because operating leases are now resulting from a lower expense rate. included on the balance sheet. WMT borrowed $16 billion in June Our five-year earnings growth rate estimate is currently 5%, but of 2018 to fund the planned purchase of a 77% stake in Flipkart, we could potentially raise it to 6% due to ongoing market share India's biggest online retailer. gains and the potential for additional growth from e-commerce WMT's market position, earnings stability and real estate investments. The current consensus is approximately 5%. ownership are all very solid, even allowing for a couple of difficult FINANCIAL STRENGTH & DIVIDEND years of e-commerce investments and wage increases. Moreover, we think the company's sales of food and medicine, which tend to Our financial strength rating for Walmart remains depress margins, add to earnings stability as well as inventory Medium-High, the second-highest rank on our five-point scale. The turnover and store traffic. That should be particularly true during credit agencies give the company very strong ratings in the AAs. the current COVID-19 crisis. In our opinion, it might be difficult The outlook for Moody's Aa2 rating is stable. S&P now has a for a competitor to topple a low-cost, high-volume retailer like stable outlook on its AA rating. The company's commercial paper WMT or Costco because it is so hard to get the inventory ratings are top tier, A1/P1. We believe this is a real advantage at management and logistics right. It also takes considerable capital to times like the present when the credit market is jittery, although we build the necessary computer systems, distribution centers, don't think Walmart is likely to have any difficulty borrowing transportation and stores. Amazon is primed for the challenge, but money, especially with its stores open. we believe that Walmart is a survivor and there are a lot of retailers Based on credit default spreads, which are a market-based that will get squeezed before Walmart does.

Peer & Industry Analysis The graphics in this section are designed to P/E allow investors to compare WMT versus its Growth industry peers, the broader sector, and the WMT vs. Market market as a whole, as defined by the Argus COST Universe of Coverage. WMT vs. 30 Sector • The scatterplot shows how WMT stacks More Value More Growth up versus its peers on two key characteristics: long-term growth and Price/Sales value. In general, companies in the lower WMT vs. left-hand corner are more value-oriented, Market while those in the upper right-hand corner 25 WMT vs. are more growth-oriented. Sector More Value More Growth • The table builds on the scatterplot by displaying more financial information. Price/Book • The bar charts on the right take the WMTWMTWMT 20 WMT vs. analysis two steps further, by broadening Market the comparison groups into the sector WMT vs. level and the market as a whole. This tool Sector is designed to help investors understand More Value More Growth how WMT might fit into or modify a Value 6 8 10 12 PEG diversified portfolio. P/E 5-yr Growth Rate(%) WMT vs. Market 5-yr Net 1-yr EPS WMT vs. Market Cap Growth Current Margin Growth Argus Sector Ticker Company ($ in Millions) Rate (%) FY P/E (%) (%) Rating More Value More Growth WMT Walmart Inc 310,361 5.0 20.9 2.8 4.8 BUY 5 Year Growth COST Costco Wholesale Corp 125,554 12.0 31.5 2.4 10.2 BUY WMT vs. Peer Average 217,958 8.5 26.2 2.6 7.5 Market WMT vs. Sector More Value More Growth Debt/Capital WMT vs. Market WMT vs. Sector More Value More Growth

Analyst's Notes...Continued Margins at WMT are lower than we would normally look for in estimate. a company with a High financial strength rating, and WMT's debt After repurchasing $5.7 billion of its stock in FY20, Walmart is not exceptionally low when we consider operating leases. had about $5.7 billion remaining under a $20 billion buyback Amazon is certainly making a move to grab more grocery and program that was approved in October 2017. general merchandise business, but WMT is fighting back. It will MANAGEMENT & RISKS take time - and money -- for WMT to earn (or acquire) the confidence that AMZN has deservedly won as an online seller, but Even Walmart faces intense competition from Amazon and there is a convenience to being able to place an online order and online retailers. But Walmart's size, distribution capabilities, focus pick it up in a local store, and there is certainly a benefit to being on low prices and emphasis on food and other low-margin able to do an in-store return. To be sure, it isn't that hard to drop a consumer products leave it better positioned than most retailers as package off at the UPS store, and Kohl's and Whole Foods also we are seeing during the current COVID-19 crisis. take Amazon returns. Walmart has said in its annual report that WMT and other retailers have recently been under pressure 90% of the U.S. population lives within 10 miles of a Walmart because of fear that Amazon's purchase of Whole Foods and store. That statistic would even be higher if the company had stores reported ambitions to open an additional brick-and-mortar chain in New York City. will hurt grocery margins and move Amazon even closer to Walmart owns about 85% of its domestic discount stores, customers. Amazon is a powerful competitor that is willing to supercenters and neighborhood markets and 86% of Sam's Clubs operate at very low margins if it sees the ability to gain market locations. This is a high percentage relative to many other retailers share, win business in other sections of the site or leverage its fixed we follow. In some additional cases, WMT owns the building and warehouse costs. AMZN's interest in the groceries is somewhat leases the land. The company has a combination of owned and unconventional. We'd normally expect a big player to enter a leased properties outside the U.S. We believe that approximately fragmented, high margin sector like local pet shops, or small-town one-third of those properties are owned. hardware stores. Amazon has entered an industry with razor-thin The balance sheet lists the value of property and equipment at margins that is served by three very efficient competitors in WMT, about $105 billion net of depreciation, up slightly, from a year Kroger and Costco as well as Target and Safeway on the national earlier. We believe that about 70% of the pre-depreciation value is level, regional powerhouses including Wegman's, Publix and HEB, in land and buildings. and the innovative Trader Joe's whose parent Aldi is a growing In the first quarter of FY20, WMT included operating-lease competitor. Lidl has a smaller U.S. presence, but the German assets and liabilities on the balance sheet in compliance with new market is known for its low prices. While it is clearly desirable for accounting guidelines. From the periods where leases were not AMZN to have a brick-and-mortar presence in the busy included on the balance sheet and we estimate that lease-adjusted high-income cities and suburbs where Whole Foods operates, and debt was about 2-times EBIT plus depreciation and rent at the end the urban areas where the Wall Street Journal says that it is of FY12 and FY13. It was about 1.9-times in FY11. This is a very contemplating stores under a different banner, we believe that solid level relative to other retailers. Adjusted debt was Amazon will need to significantly lower prices and continue to approximately 2.1-times in FY14 and 1.8-times in FY15 and FY16. improve the supply chain at Whole Foods. We think AMZN's The ratio was also approximately 1.8-times for FY17, 1.9-times in ownership has been good for core Whole Foods shoppers. A FY18. This increased to about 2.3-times in FY19 because the challenge for Amazon will be that margins on dry groceries are Flipkart-related debt is on the balance sheet, but it will take time already very thin and Whole Foods gets about two thirds of its from the completion of the deal for EBITDA to increase. We sales from fresh and prepared foods which involve a different kind currently estimate that debt (including the leases on the balance of supply chain than the one Amazon operates so well. Whole sheet) is about 2-times adjusted operating income (plus Foods has recently been offering specials and discounts for Prime depreciation and rent) for the trailing 12-month period through members. There was a Prime Day deal where members who spent January 31, 2020. $10 at Whole Foods got $10 to spend on Amazon. While some We believe that investors are going to hold management's feet shoppers were excited, others, who spend more than $500 a month to the fire to make sure that the company uses its capital as at Whole Foods, saw it as a gimmick. While we'd never productively as possible. Trailing ROI was flat at 14.2% in FY19 underestimate Amazon it is important to keep the perspective that after declining steadily, to 14.2% in FY18 from 15.2% in FY17, Whole Foods is concentrated in urban areas and very affluent 15.5% in FY16, 16.9% in FY15, 17% in FY14, 18.1% in FY13, suburbs, while Walmart's presence is more suburban and rural. A 18.6% in FY12 and 19.2% in FY11. In FY20, ROI decreased to new chain of stores may benefit from technology that doesn't 13.4% from 14.4% a year earlier. In the annual report, WMT require checkout lines, but some shoppers will want to pay with attributed the decline to restructuring charges and to pressure on cash, and based on visits to superb grocery stores, like Wegman's, operating income from Flipkart. maintaining a first rate offering of produce and prepared foods is According to management, Walmart has increased its payout extremely labor-intensive with grocers constantly checking every year since it first declared a dividend in 1974. WMT paid tomatoes, avocados and the temperature of the salad bar. FY18 dividends of $2.04 per share and FY19 dividends of $2.08. In late June 2010, Bill Simon became president and CEO of FY20 dividends totaled $2.12. We are reducing our FY21 estimate Wal-Mart U.S. He had a number of accomplishments at the to $2.16 from $2.20 per share. We are initiating a FY22 estimate company, including the $4 generic program. In July of calendar of $2.20 per share. WMT has increased the dividend at an annual 2014, Mr. Simon was replaced by Greg Foran who had been rate of about 2% over the last five years. The dividend yield is 2% President and CEO of Wal-Mart Asia. Mr. Foran devoted a lot of and the dividend payout is a modest 41% of our FY21 EPS attention to 'Shopkeeping 101,' or the very basics of running a retail store, which we commend. Based on a lot of store visits, we

Analyst's Notes...Continued believe he was very successful. In October, of 2019, the company We have previously been critical of the company's store announced that Mr. Foran was leaving and being replaced by John environment, which can be cluttered. It appears that customers Furner. We regard this as a significant loss. Mr. Furner started with liked the stores with less merchandise in the aisles, but they don't the company as an associate in 1993 and has run marketing and necessarily buy more. We still believe that WMT as a whole has merchandising in China and became head of Sam's Club 2017. room to improve if it is to reach the level of in-store execution as Press reports say that Mr. Foran is returning to his native New the Target stores we visit. We recently watched a store manager Zealand to run an airline. who was trying, with some difficulty, to find an associate to clean The change is something we will watch very closely because we up a spill. We visited another store on the edge of a city and saw believe that Mr. Foran was instrumental in a turnaround that some good merchandising for the local market. Shoppers compare preceded our most recent upgrade. We believe that stores generally any experience with that available from a range of best-in-class look cleaner and the shelves appear better stocked, before Covid-19 companies. For Walmart, these may include, Amazon, Zappos, lead to a run on toilet paper, cleaning supplies and bottled water. L.L. Bean and Whole Foods. That said, we shop WMT regularly and we believe that there are A risk related to international expansion is that the company far too many instances where checkout times are unacceptably long may not be embraced warmly in some overseas markets; it may because there are not enough registers open. Self-checkout lines do also have to deal with unfamiliar regulations and is likely to face help, but they should not be a reason for the store managers to volatile currency fluctuations. We believe have just two or three lines open. And self-check is inconvenient for MANAGEMENT & RISKS many types of products and there are often back-ups because shoppers need assistance from the one associate covering a half that there is also a risk that the company may not be able to dozen or more scanners. gain the scope to maximize profits in some markets. The counter Over the last few years, Walmart has made a significant effort point is that everyone likes to save money and WMT has the to improve its image in the U.S., which was somewhat marred by potential to use its buying power and logistical expertise to offer the allegations of bribery in Mexico that were published by the low prices on items that are relevant and desired in markets outside New York Times. Then CEO Mike Duke said that the company the U.S. was working to determine what happened and would take Currency fluctuation is an ongoing risk. A strong dollar hurts aggressive action if violations of the law or company policies earnings as foreign profits are translated into fewer dollars. A weak occurred. The company is also aware of allegations related to dollar might be a bigger long-term threat because it could cost violations of the Foreign Corrupt Practices that may have occurred Walmart more to purchase the large number of items it imports in Brazil, China and India. WMT incurred $157 million of costs in from Asia. FY13, $282 million in FCPA expenses in FY14 and $173 million in The economy is a risk for all retailers because of their sensitivity FY15. Management does not believe that the issue will have a to changes in consumer discretionary spending. Walmart has often material adverse impact on the business. Materiality is obviously a been somewhat insulated from downturns in consumer spending, high bar for a company with over $500 billion in annual sales, over given its low-price leader status and the growing number of food $9 billion of cash, and $235 billion of assets. That said, FCPA and items that it sells. However, the discounters have historically been compliance costs were down to $99 million in FY17 and $40 hit harder by price hikes for gasoline and other commodities, which million in FY18. In June 2019, WMT settled issues related to the disproportionately affect the discretionary income of lower-income Foreign Corrupt Practices Act with the U.S. Department of Justice consumers. Deflation can also be a challenge as it can reduce unit and the Securities and Exchange Commission. revenue on selected products such as groceries. Doug McMillon replaced Mr. Duke as CEO. Mr. McMillon An additional risk is that management may simply stumble in started as an hourly associate in 1984 and subsequently served as executing one or more of its various strategies, from real-estate CEO of Sam's and the International business. acquisition to cost control, product mix and employment practices. We believe that the company's response to natural disasters, the Despite a range of risk factors, we don't think Walmart is initiative to cut medicine prices, programs to be more affected by a very important risk for retailers - irrelevance. A great environmentally conscious, the settlement of class-action lawsuits, many retailers could easily be replaced or vanish completely, but and a new plan to hire military veterans are all steps toward we believe that there is a need for Walmart. It plays an important improving the company's image. WMT also took a very active role role in the economy. Its buying power, inventory management and following the earthquake and tsunami in Japan. Walmart has taken logistical prowess represent a real barrier to entry. very visible steps to improve healthcare for its employees and to The Walton family controls approximately half of the become more environmentally friendly. The recent initiative to company's outstanding shares. increase training and wages should also help. Ernst & Young has been the company's auditor since 1969. We believe that the banking and financial crisis probably COMPANY DESCRIPTION improved WMT's image. The company created jobs as other Walmart is the world's largest retailer. In the fiscal year ended companies fired workers and it continued to grow as financial January 31, 2020, sales were $520 billion. The company has three firms went bankrupt or required billions in public money. segments: Walmart Stores, which accounted for about 66% of As the company continues to expand, market saturation and sales; Sam's Club, a membership warehouse chain, which ongoing cannibalization within and among Walmart's various comprised 11% of revenue; and the International segment, which formats in its main U.S. market pose significant risks. That said, we generated 23% of sales. The company, based in Bentonville, believe that the company will be much more disciplined in opening Arkansas, ended fiscal 2020 with more than 11,500 retail units in stores. about 27 countries. Groceries are the largest produce category in

Analyst's Notes...Continued the U.S. market, at approximately 56% of sales. E-commerce sales grew 37% in FY20 and management expects them to grow about 30% in FY21. The fiscal year ends on January 31 for U.S. and Canadian operations. Other operations are generally consolidated using a one month lag on a calendar year basis. VALUATION This year, Walmart shares have slipped 7.8% versus a 21% decline for the S&P 500. The shares are currently trading at about 21.0-times our FY21 forecast. We believe this is fair to attractive. Walmart is a mature business and is facing earnings pressure as it invests in e-commerce capabilities. It is also a very relevant and dominant business with a strong balance sheet and solid cash flow. WMT trades at a discount to Costco, which has been delivering strong traffic and very consistent earnings from its membership-fee income. WMT has raised its dividend every year since it initiated a payout in 1974. Over the last five years, the company has raised the dividend at an annual rate of about 2%. WMT's indicated dividend yield is 2%. We view this as attractive based on the company's financial strength and prospects for future dividend increases. The 10-year Treasury yields 0.7%. Based on scenario analysis with our multistage DDM, the shares would be worth $130. While the Flipkart investment and other e-commerce initiatives have reduced near-term earnings, they have the potential to slightly raise and extend the company's growth profile. The magnitude is relatively small, however, because the core business is so large. We are using a cost of equity of about 7% that declines slightly as the payout increases. This is consistent with the rate that we use for other high quality consumer companies. This is below the 9% we use for most retailers. We think this is well justified by the consistency of WMT's cash flow generation, dividend payouts, and AA credit ratings. We are modeling a five-year growth rate of 6% declining to a stable growth rate of 3%. We are maintaining our price target at $130. On March 30 at midday, BUY-rated WMT traded at $113.08, up $3.50.

About Argus

Argus Research, founded by Economist Harold Dorsey in 1934, And finally, Argus’ Valuation Analysis model integrates a has built a top-down, fundamental system that is used by Argus historical ratio matrix, discounted cash flow modeling, and peer analysts. This six-point system includes Industry Analysis, Growth comparison. Analysis, Financial Strength Analysis, Management Assessment, THE ARGUS RESEARCH RATING SYSTEM Risk Analysis and Valuation Analysis. Argus uses three ratings for stocks: BUY, HOLD, and SELL. Utilizing forecasts from Argus’ Economist, the Industry Analysis Stocks are rated relative to a benchmark, the S&P 500. identifies industries expected to perform well over the next • A BUY-rated stock is expected to outperform the S&P 500 on one-to-two years. a risk-adjusted basis over a 12-month period. To make this The Growth Analysis generates proprietary estimates for determination, Argus Analysts set target prices, use beta as the companies under coverage. measure of risk, and compare expected risk-adjusted stock In the Financial Strength Analysis, analysts study ratios to returns to the S&P 500 forecasts set by the Argus Market understand profitability, liquidity and capital structure. Strategist. During the Management Assessment, analysts meet with and • A HOLD-rated stock is expected to perform in line with the familiarize themselves with the processes of corporate management S&P 500. teams. • A SELL-rated stock is expected to underperform the S&P 500. Quantitative trends and qualitative threats are assessed under the Risk Analysis.

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