to Wal-Mart’s annual report, will continue into the future. Growth
in international stores was substantial as well. At the end of fiscal
2003, Wal-Mart reported 1,288 international units compared with
only 276 at the end of 1996: a 467% growth rate over seven years.
Confirmation to Test the Reliability
of the Numbers
Referring again to the example of Wal-Mart, we can use confirmation
to test the reliability of the information we are receiving. To the skep-
tical mind, the consistency of the numbers as reported by Wal-Mart
might raise the question, Are the results being manipulated to create
the very consistency that is so desirable?
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CHAPTER 4•CONFIRMATION
2000
1800
1600
1400
1200
1000
800
600
400
200
100
0
N
U
M
B
E
R
O
F
S
T
O
R
E
S
1996 1997 1998 1999 2000 2001 2002 2003
Domestic stores
Supercenters
Figure 4.3 Wal-Mart, changes in store composition.
Investors like consistency and predictability. It strengthens our
belief that current trends will continue into the future. Wal-Mart’s
remarkable consistency is a good example of the fundamental out-
come that investors and analysts like to see. At the same time, we
need to look further to ensure that the indicated trend holds up
under a more critical review. The purpose in this further investiga-
tion is to ensure that we are not being misled as a result of inflated
numbers, accounting gimmicks, or timing of the booking of rev-
enues or expenses.
We can study a number of relevant factors, including capital-
ization trends, core earnings adjustments, gross margin and net re-
turn, dividend payments per share, and current ratio. If these
secondary trends confirm what is indicated in the analysis of sales
and trends in store openings, then we can proceed with confidence
that the numbers are valid. Were numbers being manipulated, one
or more of these trends would be inconsistent. For example, in the
case of Motorola, the apparent strength of working capital was cre-
ated by an increase in debt capitalization, which creates a permanent
pressure on earnings far into the future.
A study of Wal-Mart’s numbers reveals the following:
Capitalization trends: We want to ensure that Wal-Mart is not
financing its strong growth with ever-growing dependence on
long-term debt. An analysis of the company’s debt ratio shows
that for 2001 through 2003, the debt ratio changed from 28.5%
to 30.9% and then to 29.7%. Wal-Mart is not changing its mix
of capitalization, which is a strong and positive trend.
Core earnings: Wal-Mart has restated its earnings to expense
employee stock option expenses. As a result, the reported earn-
ings include employee stock options. No other significant
106
STOCK PROFITS:GETTING TO THE CORE
adjustments are necessary in this case; there was no reported
pro-forma estimate of income on pension assets, and sales of
long-term assets were minor for the years involved. Thus, the
financial results as reported do not require any substantial core
earnings adjustments.
Table 4.1 summarizes the remaining key trends since 1996.
All of these related trends confirm the apparent trend seen in the
sales and earnings as reported. Because core earnings adjustments
are not a material factor (as Wal-Mart has restated its earnings to
expense options), the reported numbers are essentially post-core earn-
ings. The consistency in gross margin and net return is reassuring for
investors in terms of likely future trends. The further consistency in
capitalization ensures us that Wal-Mart is not financing its growth
with long-term debt. Given the established policy of replacing do-
mestic stores with Supercenters, it is also likely that the profitable
trend toward long-term growth is going to continue. Dividends per
share have increased 300% over the period in study. The only decline
is found in the current ratio. Considering that inventories represent
more than 82% of total current assets at the end of fiscal 2003 (and
have always represented the majority of current assets), the decline in
current ratio is not a negative indicator: it would be expected during
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CHAPTER 4•CONFIRMATION
Year 1996 1997 1998
1999
2000 2001 2002 2003
Gross margin
(%)
20.4 20.4 20.8
21.0
21.4 21.5 21.2 21.5
Net return 2.9 2.9 3.0
3.2
3.3 3.3 3.1 3.3
Dividends per
share
.10 .11 .14
.16
.20 .24 .28 .30
Current ratio 1.5 1.6 1.3
1.3
0.9 0.9 1.0 0.9
Table 4.1 Key Financial Trends, Wal-Mart

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