Stacking Up Wal-Mart’s Inventory Management vs. Costco and Best Buy

Wal-Mart (NYSE:WMT) is the world’s largest retailer, competing with companies like Target (NYSE:TGT), Costco (NASDAQ:COST), Amazon (NASDAQ:AMZN) and Best Buy (NYSE:BBY). Wal-Mart sells almost every variety of merchandise.

Our price estimate for Wal-Mart stands at $65.42, but there are risks to this implied premium to market price. We’ve previously highlighted the impact of food inflation and increasing grocery competition on Wal-Mart’s equity value (see Wal-Mart Should Keep Close Watch on Food Cost Inflation and Grocery Wars Could Pose Risk to Wal-Mart Stock Upside)

While there are a few concerns for Wal-Mart, its efficiency in managing inventory and working capital is its strength. The company has the capability to harness supply chain efficiencies in order to compensate for other adverse factors. Wal-Mart leaves Best Buy behind in this respect (although Cotsco is also strong in this regard). Below we compare these 3 retailers on certain metrics that depict their efficiency in managing inventory and working capital.

Quick Inventory Turnaround for Wal-Mart, but Costco is Even Quicker

We estimate that Wal-Mart is able to sell its whole inventory roughly 12 times a year on average. This is higher than that for Best Buy which sells roughly 9.7 times a year, but below Costco which turns around its inventory roughly 13.8 times a year. ^[1] Needless to say, Costco leaves Wal-Mart behind in this metric because of the nature of its business model. The retailer tends to sell in bulk amounts due to discounts on selected merchandise and its appeal to bulk buyers like small businesses.

See our full analysis and $65.42 price estimate for Wal-Mart

But could Best Buy do better? One could argue that the nature of merchandise that Best Buy sells is very different from what Wal-Mart and Costco traditionally carry. Best Buy is a specialty electronics retailer. Although electronics may not be a quick sell merchandise like groceries, there is probably room for Best Buy to improve demand forecasting so as to manage inventory more efficiently and increase the turnaround. One recent example of misjudged demand was Best Buy’s bet on 3D TV technology, which witnessed lackluster sales. We’ve previously examined Best Buy’s outlook in the wake of these struggles (see Can Best Buy Correct Product Missteps?)

Inventory turnaround is also indicative of how well these retailers manage their working capital, as inventory represents a significant component of working capital. While net working capital (as % of revenues) for Best Buy was around 0.75% for 2009, the same figure for Wal-Mart for this period was around -2.6%. For Costco, it was about -3.91%. The negative figures imply better management and more cash in hand. Drag the trend line in the modifiable chart above to see how a change in this figure can affect Wal-Mart’s stock value.

1. These values are calculated using average inventory levels and merchandise sales for the retailers’ respective fiscal years [↩]