Following The New York Times report that it had bribed Mexican officials to speed up store openings, Walmart could face substantial fines from the Department of Justice and Securities and Exchange Commission.
The big question is: how much will that fine be?
Now remember, the company hasn’t been charged with anything yet, so this is is all just theoretical, but…
First estimates from Business Insider put the figure over $5 billion, with the possibility it could hit $13.1 billion.
How We Got There
The DOJ will weigh the actual benefit Walmart received from opening stores earlier than having to wait for a green light from the Mexican government.
That calculation will be based on the number of stores Walmart was able to accelerate and revenue generated from those stores.
Based on Walmart’s 10-K filing for the period ended January 31, 2006, the company generated $62.7 billion through its 2,285 international stores — generating an average store revenue of $27.4 million.
Over the period The Times investigates, Walmart opened a net 239 new locations in Mexico.
If each of those locations should have not opened as quickly, then multiplying each new location by that average store revenue rate means Walmart generated an extra $6.558 billion over the 2002-05 period.
Although that is a crude approach to determine Mexico’s contribution to Walmart’s international results, it represents a first shot at what the division’s units mean to the international results. Walmart’s Mexican locations accounted for a third of total international store-fronts for fiscal year ended January 31, 2006.
But under the Alternative Fines Act, a fine under the FCPA can be twice as large as the benefit seen to the guilty party. And the fine will ultimately be impacted by the size of the company, prior criminal history, voluntary disclosure, and — the kicker here — if high level executives knew or were involved.
If doubled, Walmart could be on the line for $13.1 billion, a hit to EPS of $2.24.
And the investigation will likely not end there. The DOJ will likely look at all of Walmart’s international operations and expand the period it investigates beyond the 2002-2005 period highlighted in The Times piece.
It’s also important to note that the benefit in question is not simply net income gained from the operations, but added revenue Walmart received.
UBS analyst Robert Carroll took an interesting approach when calculating the possible hit to Walmart, and also arrived at an eye-popping figure.
Carroll compiled the most recent settlements under the Foreign Corrupt Practices Act of 1977, and found recent fines averaged between one and two per cent of total revenue.
In 2011, Walmart tallied total sales of $446.9 billion.
That could mean a fine between $4.47 billion and $8.94 billion. But if Walmart were fined at the highest percentage ever levied, which occurred in 2009 against Halliburton, that fine would reach $14.30 billion.
“We believe an ongoing FCPA investigation will have no impact on Walmart’s day to day operations in either Mexico or U.S.,” Carroll says. “Given Walmex’s position as a Mexican listed company with no operations in the United States, any potential financial penalties resulting from these accusations would be applied to parent company Walmart Stores, Inc. which fall under the jurisdiction of the U.S. DOJ and SEC. Each 1% of Walmart’s total worldwide sales would equate to ~$4.5B or ~$0.77 to full year EPS.”
Below, a look at recent settlements.