story by Kim Souza
ksouza@thecitywire.com
Much like an iceberg, the part of Wal-Mart visible to most is a small part of what makes up the global retailer based in the small Arkansas town of Bentonville.
During this week of events related to Friday’s (June 5) Wal-Mart shareholders meeting in Fayetteville, the Northwest Arkansas population will receive a brief influx of more than 5,000 visitors. But the annual gathering again reminds us that culture concerns, carbon footprints and corruption costs are just many of the angles to the business gamble made decades ago by Helen and Sam Walton.
CULTURE CLUB
The closed-type culture embodied by Wal-Mart Stores and its founding family is most likely tied to the co-founder and matriarch Helen Walton. A woman of means herself and a banker’s daughter, Helen Walton never wanted Sam to take the company public.
“I realized before we went public that I didn’t want it to happen. I guess if I were going to be mad at Sam about anything it would be over the fact that I always felt we could have gotten by without going public. Nothing about the company ever affected me as deeply and it was at that point I decided to pursue my other interests out the company. I just hated the idea that we were going to put all our financial interests out there for everybody to see. When you go public, they can ask you all kinds of questions, and the family gets involved. We just became an open book and I hated it,” Helen Walton noted in her husband’s biography, “Sam Walton: Made in America.”
BANKING TIES
Sam Walton said in his biography that he purchased the Bank of Bentonville in the late 1960s for a mere $300,000. The bank had $3.5 million in deposits at the time. He said purchasing the bank helped to give him a better understanding of how to finance debt and it introduced him to big city bankers who could better finance the company’s growth prior to going public.
The banking interest acquired by Walton has morphed into Arvest Bank, the largest in the state today in terms of deposit marketshare. Arvest also has branches in Oklahoma, Missouri and Kansas with combined assets in excess of $15.33 billion, according to the March 31, filings with the Federal Deposit Insurance Corp.
Walton’s youngest son Jim, is the chairman and CEO of Arvest Bank Group, a position he has held since 1990.
CORRUPTION COSTS
Alleged violations of the Foreign Corruption Practices Act by Wal-Mart has cost the retailer more than $612 million in legal fees and compliance restructuring costs over the past three years.
In fiscal 2015 which ended Jan. 31, Wal-Mart said it spent $173 million on FCPA compliance-related costs. The majority of that — $121 million — was spent on legal costs associated with the investigation and additional inquiries. The remaining $52 million was spent on Wal-Mart’s internal compliance overhaul. In the prior two years, FCPA costs total $439 million for Wal-Mart, with $282 million in 2014 and $157 million in 2013.
At $173 million in fiscal 2015, the FCPA expenses equate to roughly the loss of a nickel per share in earnings last year. In the three years since Wal-Mart begin disclosing its FCPA-related expenses the impact to earnings is nearly 19 cents a share.
When the case is finally resolved, analysts expect the fines and total costs could reach up to 9% of the company’s total gross earnings or approximately $7 billion.
LAW OF BIG NUMBERS
Wal-Mart faces an uphill challenge in the foreseeable future to overcome the law of big numbers hurdle that has stifled sales growth at 2% annually, according to several Wall Street analysts who watch the company.
In the past two years Walmart U.S. has grown its store count to 4,516 by the end of fiscal 2015 (Jan. 31). That included 316 new stores in fiscal 2015 and 198 in 2014. Sales revenue rose to $288 billion in fiscal 2015, up 3.08%
But consolidated net sales including Sam’s Club and International rose just 1.9% to $482.229 billion. While some international markets are performing well, the high dollar value relative to other global currencies continues to cost the retailer. The company took a $5.3 billion hit to fiscal 2015 sales revenue because of negative currency exchange rates.
CARBON FOOTPRINT
Wal-Mart executives say they are committed to sustainable practices that reduce the retailer’s energy consumption and becoming 100% powered by renewable energy. But no deadline has been given on such goals. To date Wal-Mart reports 26% of its electricity used is generated from renewable sources.
Critics say Wal-Mart’s sustainability efforts have been more rhetoric than substance. The Institute for Local Self Reliance said Wal-Mart is one of the nation’s largest users of coal-fired electricity, and that its heavy reliance on coal pumps nearly 8 million metric tons of carbon pollution into the air each year.
According to an ILSR 2014 report, Walmart’s U.S. operations use nearly six times the amount of electricity as the entire U.S. auto industry. The operations use more than 4.2 million tons of coal each year, accounting for nearly 75% of the company’s total emissions from U.S. electricity use.
Other retailers, including Kohl’s and Ikea, are outpacing Wal-Mart in the shift to renewable energy. Ikea has installed rooftop solar panels on 90% of its U.S. stores, including in many heavy coal-using states where Wal-Mart has no renewable energy projects, according to Stacey Mitchell, a senior researcher at ISLR.
“If you dumped coal on a football field, you’d have to pile it 35 feet high, from end-zone to end-zone just to power Wal-Mart’s U.S. stores for one week,” Mitchell noted.
But progress is being made. Wal-Mart is much closer to its goal of achieving 0% waste. Walmart U.S. operations waste diversion improved to 82.4% in 2014. Walmart International achieved an estimated 68% diversion across stores, clubs, distribution centers and other facilities.
VOLUNTEERING PAYS
Wal-Mart encourages its employees to give of their time and talents in their local communities around the world. In 2014, Wal-Mart workers volunteered more than 1.5 million hours toward causes they care about in their local communities.
For each hour volunteered, Wal-Mart will donate the worker’s hourly pay rate to the charity in cash funds. Last year Wal-Mart contributed $14 million to the causes supported through its Volunteerism Always Pays (VAP) program.
SLAVE TO THE DIVIDEND
One constant at Wal-Mart Stores is a consistent quarterly dividend paid to shareholders that has increased threefold over the past decade. The biggest benefactors of the rising dividend are the Walton family heirs who together own 51% of the outstanding shares.
The cash dividend projected for this year is $1.96 per share, an increase from $1.92 last year. For the Walton family heirs the dividend payments totaled about $3.176 billion last year. This year at the higher rate the cash dividend payout to the family is expected to total $3.242 billion.
Even amid challenging sales growth, increased foreign exchange costs and compressed margins, Wal-Mart continues to raise its cash dividend year-over-year which helps support demand for the stock and adds to the Walton Family wealth.
STOCK PERFORMANCE
Wall Street continues to be cautious with respect to Wal-Mart shares despite approving of the management changes and dramatic overhaul the retailer is making with regards to its U.S. division. Wal-Mart shares have felt the tension thus far in 2015.
Wal-Mart shares trading Tuesday (June 2) at $74.47 have tumbled more than 13% in value since January. In the two years since CEO Doug McMillon has been in charge the stock price is down 1.8%.
This comes on the heels of solid price growth between 2009 and mid 2012, when the share price began to flatten out in the mid-$70 range. Former CEO Mike Duke presided over the company at a time (2009 to 2013) when share price rose from $50 to more than $77 — a gain of 54% over the five-year period.
POLITICAL GIVINGS
As a Fortune 100 company that does business around the world, Wal-Mart Stores has ample reasons to lobby for and against laws that impacts the business. The company’s lobby funding peaked in 2011 with annual contributions totaling $7.84 million.
Since that time political contributions have ranged between $6.13 million in 2013 and $7 million in 2014. Prior to 2008, the company’s annual political contributions toward lobbying efforts topped out at $3.2 million.
The issues most often funded by Wal-Mart Stores in recent years include: taxes, trade, labor & workplace, health and consumer public safety, according to OpenSecrets.org.