RETAIL Department Stores/ Broadlines

GLOBAL EQUITY RESEARCH

UNITED STATES

Company Update

Wal-Mart Stores
Its All About the Lil Smokies!
On October 12, 2002, we attended Wal-Marts 9th Annual Analyst Meetings in Springdale, Arkansas. Enclosed is a detailed review of the meetings.
n During the meetings we heard from several top executives, including Lee Scott, president and CEO; Tom Coughlin, EVP and president of Domestic Operations; John Menzer, EVP and president and CEO of International Operations; Kevin Turner, president of SAMs Club; and Jay Fitzsimmons, SVP and treasurer. n The breakout sessions discussed a variety of topics, including Wal-Mart Store merchandising, real estate, Canada, Brazil, marketing and communication, logistics, the Information Systems division, Neighborhood Market, Walmart.com, Samsclub.com, SAMs Club merchandising and global procurement.

Stock Rating: Sector View:

1-OVERWEIGHT 2-NEUTRAL
WMT $51.75 $67 NYSE 818.95 Robert S. Drbul
1.212.526.4714 rdrbul@lehman.com

Ticker: Price (10/4/02): Price Target: Exchange: S&P 500:

John ODonnell
1.212.526.9281 ojohn@lehman.com

Helise Owens
1.212.526.5257 howen@lehman.com

n Despite the challenging retail environment, Wal-Mart remains well-positioned to expand its retailing dominance as it continues expanding into new retail categories and markets. In our opinion, Wal-Marts business remains on track as it continues to pursue growth in the food category. We would note an acceleration in the number of Supercenter openings in 2003 to 200210 from this years 180185, coupled with 2025 new Neighborhood Market stores. Separately, we note that, of the nine distribution centers slated to open next year, six will be food distribution centers.

Market Data

EPS (FY JAN)

2002

2003

2004

52-Week Range

644 230.60 Bil. 4456 2,700.0 0.6 Yes

1Q 2Q 3Q 4Q Year P/E

0.31 0.37 0.33 0.49 1.49

0.37 A 0.46 A 0.41 E 0.56 E 1.79 E 28.9

2.07 E 25.0

Company Description
As of 8/31/02, Wal-Mart had 1,603 discount stores, 1,179 Supercenters, 517 SAMs Clubs, and 36 Neighborhood Markets in the United States. The company operates over 1,200 international units.

Market Cap. Shares Outstanding (Mil.) Float Dividend Yield Convertible

Financial

Revenue FY02 5-Year EPS CAGR (%) ROE (%) Current BVPS Debt-to-Capital (%) EV/Revenue FY02 EV/EBITDA FY02

248.4 Bil. 15.0 21.5 8.29 39.0 1.0 17.1

Source: BigCharts.com

October 9, 2002
http://www.lehman.com

PLEASE REFER TO THE END OF THIS DOCUMENT FOR IMPORTANT DISCLOSURES.

Wal-Mart Stores

Summary and Investment Opinion

Wal-Mart is a truly global retailer and, in our opinion, one of the best-managed companies in the world. In 2002, Wal-Mart stood atop the Fortune 500 for the first time. Wal-Marts top ranking reflects the rise of retailing as one of the most important global industries, as well as the companys individual excellence and consistent performance. Considering the retail industry alone, Wal-Marts dominance is even more impressive: in 2001, the company had higher sales than the next four largest global retailers combined. The sales differential against U.S.-based retailers is even more pronounced, as Wal-Marts top line in 2001 was more than four times that of the second-largest retailer, Home Depot. Within retail, one notable subcategory in which Wal-Mart also leads is food/grocery retailing. We believe this success will continue for the company. The following points support our 1-Overweight rating. WalWe believe that Wal-Mart has the highest sales and earnings visibility in retailing, due to its continued aggressive rollout of the Supercenter format. In 2002, the company will be adding approximately 46 million square feet, for 9% growth over 2001. This square footage growth, combined with an estimated 4%6% comparable-store sales gains for 2002, we think provides an attractive top-line growth story. We expect this square footage growth to consist of approximately 50 new discount stores, 180185 Supercenters, 5055 SAMs Clubs, and 1520 Neighborhood Markets. Relocations or expansions of existing discount stores will account for about 110115 of the Supercenters, while the remainder will be new stores. Approximately half of the SAMs Club openings will be relocations and expansions. In 2003, we expect Wal-Mart to grow square footage by 8%, or 48 million square feet.
The company plans to open approximately 4555 new discount stores, 200210 Supercenters, 2025 Neighborhood Markets, 4045 domestic SAMs Clubs, and 120130 international units.

WalWal-Mart Stores continues to generate impressive square footage productivity. Our analysis of the sales productivity over the past four years of Wal-Marts square footage brings us to some valuable conclusions: 1. Rolling-four-quarter sales per square foot across all domestic stores increased to $408.4 from $354.7, a 4.4% CAGR. 2. For stores open longer than one year, sales per square foot increased to $413.3 from $361.2, a 4.2% CAGR. 3. For stores open less than one year, sales per square foot increased to $355.1 from $251.8, an 11.2% CAGR. Walcomparablegrowth. Wal-Mart consistently delivers solid comparable -store sales growth. Year to date, Wal-Marts comparable-store sales have increased 7.3%, with a 7.8% increase for the Wal-Mart Stores segment and 4.7% for SAMs Club. We believe the company is very well-positioned to meet its 3Q02 targeted 4% comp-store sales increase due to its improved merchandising, ability to execute in a changed competitive environment in the discount store channel, and continued share gains in the food/grocery retailing segment.

October 9, 2002

Wal-Mart Stores

While the SAMs Club division, which was just 13% of 2001 total company sales and just 9% of 2001 total company operating income, enjoyed better sales in the second quarter than the first, management is intensely focused on improving its performance.

Figure 1: Store and Square Footage Growth Plan

Units 1/31/02 Discount Stores Supercenters Sam's Clubs Neighborhood Markets U.S. Total International Global Total Global Square Footage
Source: Wal-Mart

Expansion 2002 50 180-185 50-55 15-20 295-310 120-130 415-440 46 mm 2003 45-55 200-210 40-45 20-25 300-335 120-130 420-465 48 mm

1,647 1,066 500 31 3,244 1,170 4,414 516 mm

WalwellWal-Mart is well-positioned to effectively compete in a challenging consumer spending environment. Wal-Mart has three keys to managing through the slowdown in the economy:
n maintain a high level of in-stock merchandise; n maintain a high level of customer service; and n maintain top-quality merchandise and services at everyday low prices.

During the first half of 2002, the company had price rollback sales of $4.3 billion and is well positioned to accomplish its goal of $10 billion in rollbacks for the full year. These initiatives have positioned the company well, as the environment has been more challenging over the past few months, and will also keep pressure on Kmart (which generated $36 billion in sales in 2001) as it continues to work through its bankruptcy.

Figure 2: Total U.S. Retail Sales 19962001, Ex-Auto ($ in millions)

Total Retail Sales Year 2001 2000 1999 1998 1997 1996 Ex-Auto, Parts 2,313,353 2,250,426 2,099,411 1,944,359 1,855,689 1,771,610 Sales 167,796 148,013 132,896 117,735 104,008 94,182 Wal-Mart % of Total 7.25% 6.58% 6.33% 6.06% 5.60% 5.32% Sales 39,455 36,441 33,253 30,228 27,487 25,135 Target % of Total Sales 1.71% 1.62% 1.58% 1.55% 1.48% 1.42% 36,151 37,028 35,925 33,674 31,884 30,378 Kmart "Big Three" % of Total 10.52% 9.84% 9.63% 9.34% 8.80% 8.45%

% of Total Sales 1.56% 1.65% 1.71% 1.73% 1.72% 1.71% 243,402 221,482 202,074 181,637 163,379 149,695

Source: Company reports and U.S. Bureau of the Census

October 9, 2002

Wal-Mart Stores

WalU.S. Wal-Mart holds 7% market share of the U.S. retail industry and continues to gain share in both the discount and food/grocery channels. competitors. Wal-Marts domestic operations continue to grow faster than the overall retail market and faster than its major Since 1996, the company has increased its percentage of the retail industry by more than 200 basis points. In 2001, Wal-Mart had its biggest gain in market share in the past five years, and we expect this momentum to continue. We expect the company to continue leading the way in the consolidation of the consolidation U.S. grocery store industry via its fast-growing Supercenter concept and fastNeighborhood Market stores. According to Progressive Grocer, in 1980, the top five grocery retailers accounted for only 26.5% of the grocery market. However, that figure rose to 40.3% at the end of 2001, driven in part by the rapid ascent of Wal-Mart in the food business. According to Supermarket News, in 2001 Wal-Mart became the largest retailer in the U.S. grocery store industry.
n According to Supermarket News, the U.S. grocery store industry totals $682 billion.

We expect Wal-Mart to continue its assault on this industry primarily through its dominant Supercenter format. In aggregate, we estimate the Supercenter format accounted for $65 billion$70 billion in sales in 2001, or approximately 30% of total company sales. We estimate that 120 of its Supercenters generated in excess of $100 million in revenue in 2001, and we expect the number of stores at this level of productivity to double in 2002. 100,000 SKUs.
n While a full-scale rollout is still several years away, we believe that the newest

On average, a Supercenter carries about

Neighborhood Market prototype format, which averages 39,000 square feet and offers a combination of drug, food and general merchandise, holds tremendous potential for additional market share gains. The typical Neighborhood Market carries about 24,000 SKUs. As Neighborhood Markets target metro areas, this new format, in our opinion, will complement the larger non-metro-market-oriented Supercenter format as part of Wal-Marts overall strategy to significantly increase its share of the retail food industry. WalWal-Marts international segment, which contributed more than 16% of 2001 company revenue and 12% of 2001 company operating income, has made significant progress in improving its profitability, and we expect this division to continue increasing in importance. oneFor 2002, we expect one -third of company sales growth and operating income to come from the international segment. The operating margin for the international segment increased to 4.1% in 2001 versus 3.5% in 2000. In the key markets of Canada, Mexico, and the United Kingdom, the company continues to take market share. It is also poised to begin taking market share in important markets such as Japan and China. WalWal-Mart has become adept at leveraging the buying power behind its $218 billion in sales. Through its global sourcing initiatives, Wal-Mart has improved its quality of goods, supply logistics and retail prices. Since the company began its global

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Wal-Mart Stores

procurement program eight months ago, its general merchandise margin has risen 9% in total. Due to the global success of these programs, Wal-Mart can maximize its strong competitive position with suppliers to combine the best prices with a very high-quality product offering. WalWe believe that Wal- Mart has one of the most experienced, cohesive, and stable management teams in retailing as well as in corporate America. Led by Chairman Rob Walton, President and CEO Lee Scott, EVP Tom Coughlin (president and CEO of U.S. Operations), EVP John Menzer (president and CEO of International Operations) and CFO Tom Schoewe, Wal-Marts management team is extremely talented and continues to work very hard to develop a deep and well-managed organization. There has been significant continuity within the senior management ranks, as demonstrated by the continued advice and leadership of David Glass, Mr. Scotts predecessor for 12 years as CEO, who now serves as chairman of the executive committee of the board. WalWal-Mart has been a solid performer in many different economic environments. Over the past five years, shares in Wal-Mart have produced an annualized return of 24% versus a 1% decline for the S&P 500. Over the past 10 years, the shares have produced an annualized return of 15% versus a 10% return for the S&P 500. Wal-Mart stock fared well even during the recession of the early 1990s, on both an absolute and a relative basis. From January 1990 to December 1991, the stock delivered a 176% increase (versus a 26.7% increase for the S&P 500); from June 1990 to March 1991, the shares increased 24.2% (versus 4.8% increase for the S&P 500); and from March 1991 to December 1991, the shares increased 51.9% (versus an 11.2% increase for the S&P 500). The companys strong cash flow and balance sheet should facilitate the delivery of companys Wal-Mart continues to generate our projected 15% total shareholder return. significant cash flow and boasts a strong balance sheet that will help it aggressively pursue its long-term growth strategies. The company ended the second quarter with a debt-to-capitalization ratio of 39%. Management continues to focus on key metrics such as return on assets. On a rolling 12-month average, the company delivered a 50-basispoint improvement in return on assets to 8.9%, while also experiencing a 20-basis-point improvement in return on equity. The board of directors of Wal-Mart Stores, Inc. recently authorized a new $5 billion share repurchase program, replacing the previous $3 billion program. Under prior authorizations, the company repurchased $1.7 billion in common shares in the first six months of the current fiscal year. Valuation. The shares of Wal-Mart are currently trading at 28.9x our 2002 EPS This valuation is

estimate of $1.79 and 25.0x or 2003 EPS estimate of $2.07.

essentially in line with the average of other best-in-class retailers and, given the continued solid execution and high visibility of the sales and earnings, we believe that Wal-Mart should trade at a premium to that group. On an absolute basis, over the past five years, Wal-Mart has traded at an average of 32x forward earnings. Our 12-month price target of $67 assumes a return to that multiple.

October 9, 2002

Wal-Mart Stores

Company Overview Lee Scott, President and CEO

Report Card Mr. Lee Scott, president and CEO of Wal-Mart, kicked off the two-day conference with a company overview. He began by laying out the four areas the company said it wanted to focus on at last years meeting (sales, profitability, asset utilization and people development) and how it performed against those goals.

Figure 3: Trailing-12-Mo. Comp-Store Sales vs. Retail Composite (excl. Wal-Mart)

Wal-Mart Retail Composite

10%

5%

0% Sep -5%
Source: Wal-Mart

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Wal-Mart has performed well against the retail composite in terms of same-store sales, maintaining an excellent gap that peaked in December 2001/Januarty 2002. Mr. Scott noted that Wal-Mart performed well after September 11, as consumers were drawn to Wal-Marts strong price/value proposition. Going forward, Wal-Mart believes it is important to monitor fuel prices, as it believes its customer base is very sensitive to price increases in this area. Last year at this time, fuel prices were falling, which contributed to strong fourth quarter results. However, fuel prices are currently on the rise. From the perspective of store growth driving sales, Wal-Mart has met its year-ago plan. The company planned 300310 new stores in the United States and has opened 309 in the past 12 months. The company plans to open about 60 stores in October 2002 alone (including relocated supercenters). Overall, the company has been very aggressive in opening new stores over the past 12 months. Profitability in 1H02 picked up steam versus 1H01. In 1H02, earnings have grown faster than sales. Wal-Mart believes it is critical that earnings growth exceeds revenue growth. Mr. Scott stated that while it is never satisfied, it is taking the right steps toward improving profitability. Asset utilization is a big focus for the company, particularly as the economy enters into a more difficult sales period. Wal-Mart reasons that, if its inventory is well controlled, its

October 9, 2002

Wal-Mart Stores

markdown exposure is well managedwhich in turn makes a big difference in its ability to provide the consistency of earnings that people have come to expect. The company continues to emphasize the importance of minimizing costs to its employees. Wal-Mart maintains that it is performing well in the area of people development, as evidenced by the promotion of two internal employees to replace the retiring CEO of SAMs Club. Through its Business Leadership Series and computer-based learning programs, Wal-Mart is focused on developing its associate managers.

Figure 4: Store Count and Expansion

FY02 FY02 Expansion Actual Thru Plan 30-Sep 50 44 180 - 185 192 50 - 55 54 20 19 300 - 310 309 120 - 130 116 420 - 440 425

Figure 5: Wal-Marts Self Report Card Grades

Discount Stores Supercenters Sam's Clubs Neighborhood Markets U.S. Total International World Total
Source: Wal-Mart

1/31/02 1,647 1,066 500 31 3,244 1,170 4,414

Grade Sales Profitability Asset Utilization People Development

Check Check + Check Check

Source: Wal-Mart

Current Environment Mr. Scott commented that he sees mixed signals coming from the economy, and that because the recession was rather shallow, it will take longer to come out of it. Wal-Mart noted that the recent recession was the most shallow since WWII. However, he did say that, when Wal-Mart gets the right merchandise, it resonates with the consumer, and the goods turn very quicklyindicating that the consumer is ready to spend on the right products. Wal-Mart has been focused on improving its product assortment and believes that
it has a merchandise mix that can entice customers to buy.

Strategic Direction Mr. Scott discussed Wal-Marts strategic direction, highlighting that its strategy is to be in businesses it can grow, improve productivity and reinvest the gains. strategies are centered on this philosophy. Business unit

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Wal-Mart Stores

Figure 6: Who Is Wal-Mart?

Improving the Standard of Living Global Growth company Trust

We are a global retailer committed to growing our company by improving the standard of living for our customers and serving communities around the world. We earn the trust of our customers every day by providing a broad assortment of quality merchandise and services at every day low prices while fostering a culture that rewards and embraces mutual respect, integrity, and diversity. Community Broad focused assortment Mutual Every Day Low Prices Respect, Integrity, and Diversity
Source: Wal-Mart

Financial Update Jay Fitzsimmons, SVP Finance and Treasurer

Financial Results

Figure 7: 2001 Financial Results

2000 Revenues Net Income EPS
Source: Wal-Mart

Figure 8: 2H02 Financial Results

2001 217.8 6.7 1.49 % Change 13.9% 6.3% 6.4%

2000 Revenues Net Income EPS

Source: Wal-Mart

2001 114.7 3.7 0.83

% Change 13.8% 23.3% 23.9%

191.3 6.3 1.40

100.8 3.0 0.67

Figure 9: 2Q01 Financial Results

2Q01 Revenues Net Income EPS 52.8 1.6 0.36 2Q02 59.7 2.0 0.46 % Change 13.1% 25.0% 27.8%

Source: Wal-Mart

October 9, 2002

Wal-Mart Stores

Growth

Figure 10: Store and Square Footage Growth Plan

Units 1/31/02 Discount Stores Supercenters Sam's Clubs Neighborhood Markets U.S. Total International Global Total Global Square Footage
Source: Wal-Mart

Expansion 2002 50 180-185 50-55 15-20 295-310 120-130 415-440 46 mm 2003 45-55 200-210 40-45 20-25 300-335 120-130 420-465 48 mm

1,647 1,066 500 31 3,244 1,170 4,414 516 mm

Return on Assets Mr. Fitzsimmons spoke about the importance of return on assets as a key driver of WalMarts share price returns, outlining the critical factors Wal-Mart is focusing on to drive a higher ROA. These factors include inventory management, improved asset utilization, reduced financial leverage, an improved operating margin, and a lower tax rate. Since 1Q01, year-over-year sales have been growing somewhere between 12% and 16% while inventories have been at about an average of 5%6%, an indicator of WalMarts strong inventory controls. For every quarter since 1Q01, sales have grown faster than net property, translating into solid asset utilization. Wal-Marts debt capitalization ratio has been falling steadily from about 50% in 2Q00 to under 40% in 2Q02. In terms of the operating margin, Wal-Marts has grown from about 4.3% in 1Q01 to about 4.9% in 2Q02. And lastly, Wal-Mart has lowered its effective tax rate from about 37.4% in 1998 to an estimated 35.8% in 2002.

Wal-Mart Stores Division Tom Coughlin, EVP and President of Domestic Operations
Business Update Wal-Marts comparative store sales have been improving over the past four months. Wal-Mart has been carefully monitoring customer count and its relationship with average ticket. With the introduction of the food component in the Supercenters, Wal-Mart is seeing an increase in the average ticket, as consumers buy more when they come in to the store. Also, Wal-Mart is emphasizing a one buck at a time mentality, meaning that even the small-ticket items can drive significant growth for the company. The best example of this was that Mr. Coughlin recently met with the president of Lil Smokies to discuss the companys efforts to maximize sales during the holiday season. We believe this example demonstrates Wal-Marts focus on driving its sales in every single product category.

October 9, 2002

Wal-Mart Stores

Figure 11: One Buck at a Time!

Mesh solange Foam sea sponge 3-Pack Kleenex SOLO neon straws Mini lint roller Press n' Light 2-Pack scour pads Chip chip
Source: Wal-Mart

Unit 2002 Sales Price Increase $ 0.97 58% $ 1.97 56% $ 0.94 17% $ 0.97 78% $ 1.34 98% $ 1.50 24% $ 0.97 30% $ 0.97 24%

Growth The company continues to generate strong growth in its food business and remains committed to increasing its share in this category. Wal-Marts commitment to growing its food business is evidenced by the fact that it plans to open 200210 Supercenters and 2025 Neighborhood Markets in fiscal 2003. The average Wal-Mart Supercenter generates $65 million in sales, approximately one-third of which comes from food. The Neighborhood Market format is the companys prototype that is most similar to traditional grocery stores and generates approximately 65% of total sales from food. Mr. Scott noted that the company is quite pleased with the returns it is generating from the Neighborhood Market format. In addition, the company announced that six of the nine new distribution centers scheduled to open in 2003 will be food distribution centers. From February 2002 to September 2002, Wal-Mart opened 27 discount stores, 133 Supercenters and five Neighborhood Markets. The company plans to open 17 more discount stores, 59 more Supercenters and 14 new Neighborhood Markets from October 2002 to January 2003. In FY03, Wal-Mart plans to open 4555 discount stores, 200210 Supercenters and 2025 Neighborhood Markets. Wal-Mart expects the number of stores with expanded food offerings to reach 346 by the end of FY02, up from 23 such stores in FY00. It expects the number of its Neighborhood Market stores to increase to 50 by the end of FY02, up from four in 1999.

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Figure 12: Store Count Growth through 2002E

3,000

Figure 13: Store Count Growth through 2008E

4,000

Discount Stores

Supercenters

Discount Stores

Supercenters

3,000

2,000

2,000

1,000
1,000

0 1994
Source: Wal-Mart

1995

1996

1997

1998

1999

2000

2001 2002E

1994

1996

1998

2000

2002E

2004E

2006E

2008E

Source: Wal-Mart

Inventory Management Total inventory turns are up 1.2 times for discount stores and Supercenters while in-stock items are also up 0.61%. At the distribution centers, general merchandise turns are up 0.5 times, food turns are up 2.6 times and imported merchandise turns are up 0.8 times. Leadership Development In the field: first in line, rising stars, leadership express. At the home office: Leadership Development Center, Business Leadership Series, and 5th Thursday. Operations/Merchandising Operations focus: stock it, price it, show the value, take their money, and teach them. Merchandise focus: everyday low prices, opening price point, rollbacks, new items, seasonal, brandsnational and private label.

SAMs Club Kevin Turner, President and CEO of SAMs Club

The SAMs Club division will continue to focus on the business customer versus the retail consumer. The company has no plans to increase its membership fees ($30 for business members, $35 for individual members, and $100 for elite/executive members), which are the lowest in the warehouse club industry. The company believes its low fee structure is a compelling value to consumers and a distinct competitive advantage. The company also noted that returns from clubs located in markets where it is not dominant continue to be high and it will continue entering new markets rather than backfilling existing markets. SAMs Club expects to reach a total of 43 new stores for the full FY02. This equates to 4% square footage growth for the division.

October 9, 2002

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Wal-Mart Stores

Figure 14: SAMs Club Management

Years with Company 24 17 13 12 5

Name Tom Coughlin Kevin Turner Celia Sawnson Doug McMillon Greg Spragg
Source: Wal-Mart

Title President/CEO, Wal-Mart Stores and Sam's Club USA President/CEO, Sam's Club EVP Membership/Marketing/Administration EVP Merchandising EVP Operations

SAMs Club focuses on small business customers through its business membership program. According to Wal-Mart, new business start-ups in 2002 have seen the biggest jump in six years. The National Association for the Self-Employed has grown 70% this year. The franchise industry grew 10% last year. One out of nine laid-off managers and executives started their own business during the first six months of unemployment in 2002. Mr. Turner outlined SAMs Clubs three business philosophies as follows: 1. In business to serve small business Business Needs. 2. In business to serve small businesses Personal Needs/Treasure Hunt. 3. Our advantage members for a membership fee benefit from No. 1 and No. 2.

Wal-Mart International John Menzer, EVP and President and CEO of International Operations
John Menzer, president and CEO of Wal-Mart International, began the presentation by reviewing the segments sales and operating history. Wal-Mart International has grown from a $3.7 billion dollar sales business in 1996 to $35.5 billion in projected 2002 sales. The segment has also grown from a $16 million operating loss in 1996 to $1.46 billion in estimated 2002 operating profit. A major focus for the international segment will be the apparel business and expanding on the success of the private label, George. The company has experienced tremendous success with this line in the United Kingdom and is looking to roll it out in other markets such as Canada, South Korea, Mexico, Germany and the United States. Wal-Mart is also focused on accelerated product development and plans to partner with apparel designers and manufacturers to reduce lead times to six to eight weeks. Wal-Mart International operates 1,212 units in 10 countries. For the six months ended July 31, 2002, its revenues increased by 16.8% from $16.0 billion in 2H01 to $18.7 billion in 2H02. Its operating profit increased by 41.0% from $632 million in 2H01 to $891 million in 2H02.

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Figure 15: Wal-Mart International Sales Growth (in $ billions)

$40 $35 $30 $25 $20 $15 $10 $5 $0 1996
Source: Wal-Mart

Figure 16: Wal-Mart International Operating Income Growth (in $ millions)

$35.5
$1,600 $1,400 $1,200 $1,112 CAGR = 112.1% $817 $551 $262 -$16 1996 $24 1997 1998 1999 2000 2001 2002E $1,458

$32.1

CAGR = 45.8%

$22.7

$1,000 $800

$12.2 $7.5 $3.7 $5.0

$600 $400 $200 $0

1997

1998

1999

2000

2001 2002E

-$200
Source: Wal-Mart

Mexico In Mexico, Wal-Mart International operates 578 units, including 72 Supercenters, 48 SAMs Clubs, 109 Bodegas, 45 Superamas, 50 Suburbias, 45 El Porton, and 209 VIPS. Mexicos population of 100 million people is very young: 78% of the population is under 40 years old, and 17% are between the age of 39 and 65. Canada Canada has 199 traditional Wal-Mart Stores. Puerto Rico Puerto Rico has nine traditional Wal-Mart discount stores, eight SAMs Clubs and one Supercenter. Europe Wal-Mart International operates seven Supercenters and 249 Superstores in the United Kingdom. Germany has 96 Supercenters. Asia In Korea, Wal-Mart operates 12 Supercenters. Wal-Mart has 16 Supercenters, three SAMs Clubs and one Neighborhood Market in China. Supermarket/Supercenters in Japan. South America Wal-Mart runs 11 Supercenters in Argentina. Wal-Mart operates 12 Supercenters, eight SAMs Clubs and two Tojo Dias in Brazil. Wal-Mart operates 409

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Day 2: Operations, Merchandising, Product Development

The next presentation was a discussion of operations, merchandising and product development for the Wal-Mart Stores division led by Don Harris, EVP General Merchandise; Dave Dible, EVP Specialty; Doug Degn, EVP Food & Consumables; Jim Haworth, EVP and COO; Celia Clancy, SVP General Merchandise; Lois Mikita, SVP General Merchandise; and Claire Watts, SVP General Merchandise Product Development. The presentation began with an explanation of the companys operations and merchandising focuses. In terms of operations, the companys priorities are to stock the goods, price them, show customers the value, take their money, and then teach them. From a merchandising perspective, the emphasis is on everyday low prices (EDLP), opening price points, rollbacks, new items, seasonal goods and brands (both national and private label). Operations Focus The first three parts of the operations focusstocking goods, pricing them correctly, and showing the valueare reflected in Wal-Marts in-store displays which contain good instock merchandise positions with large, clearly-labeled signage. By making the price the dominant feature of the label, customers are able to see for themselves the value WalMart offers. The fourth pointtaking their moneyrefers to customer service and customers interaction with Wal-Mart employees. Specifically, the presenters described Wal-Marts checkout commitment, which emphasizes fast, friendly, being customerservice-oriented, and efficient service. The fifth commitment to teach refers to Wal-Marts vision statement of being the world-class standard for attracting, teaching, developing, and retaining the best talent in every business discipline and of utilizing corporate culture to achieve goals and objectives. Wal-Mart believes that customer service and the quality of its personnel are extremely important and, to this end, management has identified several key training focus areas, including food school, food certification and an assistant manager training program. Merchandising Focus Everyday Low Prices The primary aspect of Wal-Marts merchandising strategy is its product pricing. The first strategy mentioned was everyday low prices, or EDLP. EDLP is a huge focus and differentiator for Wal-Mart, and is represented very prominently throughout all of its stores. The presentation included a number of slides of store signs that displayed WalMarts low prices in all product categories, including general merchandise, cosmetics, and apparel.

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Rollbacks The second pricing initiative discussed was rollbacks, which are when the company permanently lowers the price of a product. This strategy applies to all product categories including electronics, food, sporting goods, and apparel. Wal-Mart has established a goal of $10 billion in rollbacks in 2002. Related to both the EDLP and rollback strategies is the importance of item and price features, or signage that clearly labels which prices in a display are assigned to which item. Opening Price Points The subject of the presentation then shifted from product pricing to product assortment, and the importance of providing the best value possible to its customers. One of the ways Wal-Mart ensures that it offers the best value is by providing opening price points in all product categories. Another very important feature of Wal-Marts product assortment is new items, which are clearly labeled as such in the stores. New Items New items are especially critical to categories such as apparel, which is influenced by seasonal and fashion trends, and entertainment, due to the timing of new music and movie releases, but help invigorate all product categories. Emerging Businesses Another important feature of Wal-Marts product assortment is the presence of items in emerging businesses. The company provided specific examples of emerging businesses in a number of merchandise categories. For example, one of the emerging trends in grocery is more ready-to-eat foods such as prepackaged salad greens and instant soups. In electronics, the company highlighted digital cameras, flat-screen televisions, and DVDs. And in apparel, the emerging business is establishing more of a fashion presence in the mix, as opposed to relying on basic pieces. The company also mentioned that an important consideration for its product assortment is the inclusion of seasonal items such as holiday decorations, fresh flowers, home and garden supplies, and apparel. Built for the Masses Being that Wal-Marts product assortment is designed to appeal to the masses, a strong presence of both national and private label brands is critical. Wal-Mart offers a wide array of nationally recognized brands across all product categories, such as Schwinn Bicycles, Dutchboy paint, Black & Decker tools, Keepsake jewelry, Clorox cleaning supplies, and Oreo cookies. These national brands offer top-quality, innovative items at a significant value. Wal-Mart also has an extensive private label offering under such names as Equate, Great Value, SAMs Choice, Ol Roy dog food, Kid Connection, and Parents Choice. products. Equate is Wal-Marts private label for healthy and beauty care It was established in 1987 and positioned as a lower-cost equivalent to

national brands. It is currently the top healthcare brand at Wal-Mart. The Great Value label was established in 1993 and positioned as a lower-cost equivalent to national

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brands. There are currently over 1,300 items sold under this name and it is the No. 1 brand in Wal-Mart food. The SAMs Choice label was established in 1990 as a premium label that uses only the highest-quality ingredients. There are currently more than 230 products sold under the SAMs Choice name, primarily in food. The Ol Roy pet brand was established in 1981 and positioned as a equivalent to national brands at a value price. Wal-Mart sells more than 90 different items in the United States under the Ol Roy label and it is the No. 1 brand in terms of units and tonnage in the United States. The Kid Connection brand was established in 1999 and positioned as a valuepriced, national brand-quality maker of products for children at primary price points. Parents Choice was established in 1997 as a quality, value-priced maker of infant products. The Parents Choice line currently has 13 different items including an opening price point formula. Trends for Now Claire Watts, SVP of Product Development then discussed the most up-to-date trends that are impacting Wal-Marts merchandise strategy. For example, womens apparel offerings incorporate some fashion trends such as tailored white shirts, pin stripes, cuffed pants, sheer fabrics, faux suede, and uneven hemlines. Apparel offerings have also been influenced by street trends such as athletic-inspired clothing and graphics and the popularity of vintage looks. Housewares now incorporate more high-tech and fashion elements such as stainless steel, chrome and matte finishes. Ms. Watts then described Wal-Marts seven step product development timeline. From the time of the initial big picture meeting when a product is introduced, it only takes approximately nine months to get the finished product into the store. The big picture meeting is to discuss trend and color services and the competitive shopping environment. From there, the company develops trend guides and preliminary designs and color schemes. The preselection meeting is when the final color cards are presented, revisions are made, and the complete line is reviewed. Afterwards, technical specifications for the products such as buttons, zippers, and zipper pulls must be decided and approved. The selection meeting is when the store signage and packaging are chosen and cross department coordination is finalized. The final step, product tracking, is when the quality, color, etc. of the product is approved.

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Figure 17: Seven Step Timeline

12 Months 9 Months 7 Months 5 Months PRODUCT IN STORE!

1) Big Picture Meeting

3) Pre-Selection Meeting

6) Selection Meeting

2) Color, CAD Development

4) Product Spec 5) Technical Spec

7) Product Tracking

Source: Wal-Mart

Marketing and Communication Bob Connolly, EVP Marketing and Consumer Communication; and Jay Allen, SVP Corporate Affairs
The discussion points for this section of the presentation focused on reputation study findings from marketing initiatives. The company stated that protecting its reputation has never been more important. Wal-Mart initiated reputation work in early 2001 which was the first-ever reputation study by a specific audience. The study was used to identify key reputation drivers and glean insights that will guide communications and actions and enable the company to protect its reputation as a key asset. Wal-Mart characterizes its reputation as an extremely local experience, a battleground issue and one that is good but not great. According to a company survey, Wal-Mart ranked as the No. 1 most respected and admired company ahead of Sears, Microsoft, GM, and GE.

Figure 18: Consumer Survey of Most Admired Companies

Wal-Mart Sears Microsoft General Electric General Motors IBM AT&T Ford JC Penney Target Home Depot

123 65 56 49 49 48 40 33 31 25 25
0 50 100 150

Source: Wal-Mart

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The presentation then described the initial findings of the reputation study. Wal-Marts reputation is built on a retail foundation, and it now owns the low-price marketplace position. However, Wal-Marts reputation is not driven by its retail origins, and there is a discrepancy in the way the companys retail strategy is perceived by supporters and opponents. Supporters view the combination of high quality, low prices, and good service and management as a good value while detractors perceive the companys low prices as stemming from a combination of cheap goods, poor service and heavy-handed business practices. Management believes that, in order to change this perception, it must address the reputation drivers. Wal-Mart conducted a consumer study using two focus groups each in six cities Baltimore, Orlando, St. Louis, Las Vegas, Phoenix, and Fresno. In addition, the company conducted a random national survey of 1,000 Americans in more than 40 states, in communities both with and without a Wal-Mart. The company benchmarked itself against Target and Home Depot. From these studies, the company determined two key reputation drivers: 1) good jobs and employment practices; and 2) good neighbor that respects the community. The first driver deals with the fact that consumers believe Wal-Mart provides limited career opportunities. However, there is a major change of opinion when presented with the facts; in fact, 57% of respondents said that their opinion of the company had changed. The second driver has three layers: whether Wal-Mart is perceived as a good neighbor inside the store, outside the store and within the community. To gain insights into how the company is perceived by community leaders, Wal-Mart management conducted 20 interviews in nine metropolitan areasBaltimore, Orlando, Denver, Las Vegas, Phoenix, Houston, San Diego, Sacramento and Seattle and 200 quantitative interviews nationwide. Overall, more than 50% of respondents see Wal-Mart as providing convenient products and services to community residents, contributing to community tax revenues, as ethical and trustworthy and creating entrylevel, full-time jobs for high school graduates. Compared with Target and Home Depot, Wal-Mart found that it leads in convenience, products and services, tax revenues, and full-time, entry-level jobs and trails in clean attractive stores, generating economic activity benefiting other businesses (compared with Home Depot only) and designing buildings that complement the community. In general, the survey found that perceptions of large retailers are positive and local officials with a Wal-Mart in their community tend to be more supportive. To address these reputational gaps, management has devised a sustained, cross functional effort with action teams addressing each opportunity. The company is committed to ongoing measurement so that it can take appropriate corrective action. The second discussion point dealt with Wal-Marts marketing initiatives and focused on the Good Works campaign. Through this initiative, Wal-Mart employees are involved in numerous community service activities and charities such as the Childrens Miracle Network, the United Way, and Adopt-A-Highway.

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Commitments for SAMs Club Doug McMillon, EVP SAMs Club Merchandising; Celia Swanson, EVP SAMs Club Membership and Marketing; and Greg Spragg, EVP SAMs Club Operations
Management is clearly focused on improving the operating performance of the SAMs Club division and outlined five commitments for this segment. 1. SAMs Club is in business to serve small businesses which includes both businesses, business and personal needs. Business needs relate to wholesale items while personal needs relate to the availability of department and specialty storequality goods at a 40%50% savings. fulfill both sets of needs. 2. Members come first Management believes that membership and outstanding customer service is a shared responsibility. Every employee has a stake in getting and retaining members and growing SAMs Club membership base. The company believes it can provide the best customer service by satisfying the needs of its business members. The customer service policies employed by the Wal-Mart Stores division such as thanking members by name and greeting every customer that comes within ten feet are also policies at SAMs Club. 3. Teamwork All employees are to uphold Wal-Marts three basic principles: 1) respect for the individual, 2) providing service to customers, and 3) striving for excellence. All employees are expected to work together, recognize the contributions of others, develop associates at all levels and set an example. 4. Drive Sales The company described four ways to drive sales: 1) maintaining an in-stock position on a business member list of items, 2) executing the six rights of merchandising, 3) being aggressive item merchants, and 4) being seasonally and SIC correct (complying with OSHAs standards). The six rights of merchandising are offering the right merchandise at the right price, at the right time, in the right quantity, in the right condition and in the right place. To this end, SAMs Club intends to leverage the buying, sourcing and distribution capabilities of its parent company to maintain an in-stock merchandise position. 5. Lowest Cost Operator Management identified specific ways with which SAMs Club can maintain its status as the lowest-cost operator. By obeying the law and maintaining a clean, neat, safe, and efficient environment, SAMs Club should be able to simplify its business which, in turn, drives out costs and generates consistent profit improvement. Management believes that its low membership fee is a distinct competitive advantage that enables members to

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Neighborhood Market Ed Kolodzieski, SVP

Mr. Kolodzieski began by discussing Wal-Marts strategy around the Neighborhood Market format. The Neighborhood Market format is designed to serve as a compliment to the dominant Supercenter format. The Neighborhood Market format is a combination of drug, food and general merchandise retailing. The merchandise mix is similar to a grocery store and contains significantly fewer general merchandise items than a traditional discount store. In line with Wal-Marts corporate strategy, Neighborhood Markets feature the same low prices as the companys other formats. Mr. Kolodzieski believes that the success of the Neighborhood Market format will be due to its convenient locations and not its vast assortment of products. In markets where Wal-Mart has established a loyal customer base with its Supercenters, the addition of smaller, convenience-oriented food and drug stores that deliver the same price-value equation is a powerful draw for current customers. Because Neighborhood Markets can be placed where larger Supercenters cant, they serve as a destination for frequent grocery trips by existing Wal-Mart shoppers as well as new customers. Neighborhood Markets are strategically positioned to support existing Supercenters while still offering an assortment that allows the Neighborhood Market to also be a primary store of choice. By the end of 2002, Wal-Mart expects to operate 50 Neighborhood Markets geographically distributed as follows: Texas 25, Oklahoma 12, Arkansas 6, Alabama 2, Tennessee 2, Florida 1, Mississippi 1, Utah 1. Wal-Mart operates three prototype Neighborhood Market store formats including the 39,000 square foot format, the 42,000 square foot format and the 52,000 square foot format. Of the 50 stores that Wal-Mart will operate by year-end, 20 will be 39,000 square feet, 24 will be 42,000 square feet, and six will be 52,000 square feet. Going forward, Wal-Mart is focused on rolling out the 39,000 square foot prototype. The major design objectives of the 39,000 square foot format include: 1) to lower capital costs; 2) to lower operating costs; 3) to add greater convenience; 4) to use industrial durable materials; 5) to leverage Wal-Marts infrastructure to turn inventory over 25 times; and 6) to leverage its most valuable resourceits people. While Wal-Mart is conservatively rolling out Neighborhood Markets, it has dedicated increased management resources toward this relatively new format. and one divisional manager. In FY99, the Neighborhood Market format was run by one district manager, one regional manager Today, there are 14 district managers, eight regional managers and three divisional managers. Mr. Kolodzieski then discussed the Oklahoma City market as representative of WalMarts future plans for the Neighborhood Market format. In this market, Neighborhood Markets serve to complement the strong presence of Supercenters. Oklahoma City in 2002 compared with just 13.1% in 2000. This strategy has been successful, as Wal-Mart has earned a 27.2% share of the overall grocery market in

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Figure 19: 2000 Oklahoma City Market Share

Figure 20: 2002 Oklahoma City Market Share

Retailer Wal-Mart/NM Albertson's Homeland Crest Discount
Source: The Shelby Report

Retailer Homeland Albertson's Wal-Mart/NM Crest Discount

Source: The Shelby Report

# of Stores 24 13 10 3

% of Market 17.5 14.65 13.08 9.69

2000 % of Market 13.08 14.65 17.5 9.69

2002 % of Market 27.19 12.62 11.18 10.24

Mr. Kolodzieski then compared Wal-Marts Neighborhood Market rollout over the last five years with the companys Supercenter rollout of 19881992. Many people have urged Wal-Mart to rollout the Neighborhood Market format more aggressively. However, Mr. Kolodzieski stated that Wal-Mart is already rolling out the format at a faster rate than it did with Supercenters. He also pointed out that Wal-Mart achieves the best returns on this format when it serves to complement an existing Supercenter. Therefore, in the near term we would expect continued Supercenter expansion with a full scale Neighborhood Market rollout still a few years away. In the near term, Wal-Mart will continue to fill in opportunities for Neighborhood Markets in the six states in which it currently operates with a continued eye on expanding to new markets. Wal-Mart is planning to open 20 to 25 new Neighborhood Market stores in 2003.

Walmart.com, John Fleming SVP and COO

Mr. Fleming began his presentation by stating that Wal-Mart customers are increasingly on-line, and displaying a new set of needs. Wal-Mart is responding to these needs by providing in-depth product information, broad assortments and additional, more convenient services. By meeting these needs, Walmart.com protects and enhances its relationship with the customer, increasing trust and average spend. Mr. Fleming noted that Walmart.com defends its competitive position against both traditional and on-line competitors by leveraging its brand reputation and customer traffic. Wal-Mart is focused on utilizing its customer traffic and strong brand to enhance its relationship with the on-line customer. With regards to leveraging store traffic, Wal-Mart is launching a campaign in stores to collect customer emails and is focused on clearly communicating the Walmart.com value proposition to Wal-Mart customers by integrating into store signage and advertising. Mr. Fleming stressed that Walmart.com delivers on the Wal-Mart brand promise of trust and reliability and EDLP. Walmart.com also enables Wal-Mart to develop more personal relationships with its customers, as it is able to deliver highly personalized and relevant content to customers using email marketing. Wal-Mart is also leveraging its newly implemented database analysis tools to better understand its customers.

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Global Procurement Ken Eaton, SVP and Managing Director of Global Procurement
Wal-Marts global procurement program has only been in place eight months but is already paying dividends. Wal-Marts global procurement division now has a global presence with 21 field offices and 910 field associates. The companys strategic plan for global procurement is to leverage Wal-Mart purchases and global businesses to become the worlds best global procurement organization. This strategy will be measured by: 1) reduced cost of goods in retail markets; 2) increased worldwide import volume; 3) increased visibility and control over the global supply chain; 4) product quality; and 5) improved factory compliance with Wal-Marts social and ethical standards. Currently, Wal-Mart directly sources from the majority of its markets. The top 15

countries that Wal-Mart directly sources from produce 94.7% of the direct import volume. The effect on the companys general merchandise margin has been significant. Since Wal-Mart began its global procurement program, its general merchandise margin has risen 9% in total.

Figure 21: Margin Benefit of Global Procurement

Total Wal-Mart USA Sam USA Canada ASDA Germany

Improvement 9% 8% 3% 13% 15% 15%

General Merchandise (Excludes Food)

Source: Wal-Mart

Through this new initiative, Wal-Mart has daily interaction with suppliers. This provides numerous benefits for Wal-Mart including: 1) purchase order and sample coordination; 2) buy trip coordination; 3) factory compliance and quality inspections; 4) regulatory expertise; and 5) transportation coordination to ports of entry. Wal-Mart then gave specific examples of the cost reduction benefits that it was enjoying. Due to the global procurement initiative, Wal-Mart experienced a 28% cost reduction and a 29% retail reduction of its 20 high velocity fans, a 32% cost reduction and a 35% retail reduction of a digital camera accessory kit, a 32% cost reduction and a 12.5% retail reduction of an infant stroller, and a 40% cost reduction and 40% retail reduction of a patio furniture seat cushion. In the near term, Wal-Mart is working on various initiatives to support the global procurement strategies. First, Wal-Mart is simplifying the direct importing process through the use of technology such as Retail Link and Product Specification. It is also

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empowering its associates to more effectively merchandise and coordinate, thus eliminating a layer of bureaucracy. Second, Wal-Mart is working to align and develop the best suppliers. Through its Supplier Training Institute, Wal-Mart is partnering with its suppliers by giving them access to useful information that enables them to serve Wal-Mart more efficiently. Wal-Mart wants to do business with suppliers that can distribute goods Wal-Mart on a global basis. Next, Wal-Mart is driving costs out of the supply chain by employing an EDLC strategy. This involves improving both production timing and the transportation cost from factory to store. This also relates to inventory reduction through improved lead times and replenishment expertise. Lastly, Wal-Mart believes it must improve the consistency of its compliance programs. The company is being proactive in ensuring the quality of its products through its new three-tiered audit system and independent testing. Wal-Mart is working diligently to ensure that its suppliers meet the necessary compliance standards. This includes an ethical evaluation of factory operations based on: compliance with local laws, employment standards, workplace standards, environmental standards, right of inspection and confidentiality. Looking ahead, Wal-Mart believes that its global procurement efforts will be a key driver of earnings growth. Some of its longer-term initiatives include:
n Increase in directly sourced merchandise obtaining 10%20% in additional savings n Improvements in product quality n Increase in direct food imports n Import volume via replenishment n Fully integrating supply chain from supplier to retail store

Logistics and Supply Chain Rollin Ford, SVP Logistics

With nine new distribution centers scheduled to open in 2003, Wal-Mart operates a vast network of 97 distribution centers segmented as follows: 33 regional, 20 Sams, 19 full grocery, eight fashion, six perishable, five returns, three import, two tires, and one dot.com. In terms of general merchandise, Wal-Mart operates 33 regional distribution centers and eight fashion distribution centers. The average distance from distribution center to store has been reduced to 153 miles. Through August 2002, 2.5 billion cartons have been shipped and productivity has increased 5.4%. Wal-Marts grocery distribution network has rapidly gained critical mass. distribution centers scheduled to open in 2003. Wal-Mart

continues to focus on ramping up in this area demonstrated by the six new food The average distance from a food distribution center to the store has been reduced to 178 miles. Through August 2002, 1.3 billion cartons have been shipped and productivity has increased 6.9%. Wal-Mart is working to remove labor from store receiving, stocking and order selection.

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Wal-Mart operates 20 SAMs Club distribution centers. SAMs logistics flows 50% of the network volume through 19 cross dock centers. These centers combined handle 12 million pallets a year. Import merchandise flow is split 50/50 between the east coast and west coast ports. Wal-Marts focus for these operations is speed and flexibility including the ability to dynamically reallocate merchandise en-route. SAMs distribution of perishable products is through a shared network between Wal-Marts Supercenters and clubs. Currently, 13 perishable operations support SAMs Clubs. These centers flow 120 million cases per year to the clubs Wal-Marts focus here is to continue blending loads and order processes across the network to drive efficiency. In 2003, Wal-Mart is planning to open nine new distribution centers, six of which are dedicated to food and three are dedicated to general merchandise. This demonstrates Wal-Marts intense focus on taking market share in the food category through its Supercenter, discount store and Neighborhood Market formats.

Figure 22: 2003 Distribution Center Openings

Food

Food Food GM

GM

GM Food Food Food

Source: Wal-Mart and Lehman Brothers Estimates

One of Wal-Marts competitive advantages is its private transportation fleet. Wal-Marts Corporate Traffic department manages over $3.2 billion in inbound transportation expenses each year. Wal-Marts private fleet handles 100% of outbound general merchandise, with 84% of the miles traveled on Wal-Mart equipment. Backhaul revenue is projected at more than $800 million for 2002. Wal-Marts private transportation fleet encompasses 6,880 drivers and travels approximately 830 million miles in a single year.

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In terms of logistics, Wal-Marts main initiatives are centered around people development, maximizing asset ROI, and driving in-stock and lower costs. The company is focused on maximizing its asset utilization through the development and use of technology, mechanization, and process improvement to drive down costs and increase customer service. Key components of the strategy include increasing facility throughput, implementing new process designs, and improving future prototypes. Wal-Mart has numerous plans to maximize its ROI over the next five years. These plans include new Superbatch expansions of older batch buildings, estimated to increase throughput by 20%. They are also driven by the latest Door per Store prototype, which has increased throughput from 220,000 to 260,000. depalletization, and print-and-apply machines. Wal-Mart is also making great strides in improving its supply chain. Given the density of its network, Wal-Mart is moving from a category-based network to a velocity-based network. There are three basic underlying store/club service principles easily executed by the stores: 1) fast-moving consumable trailers, 2) prime delivery windows, and 3) quick-to-shelf. These principles are resulting in improved performances across metrics: 1) in-stock levels, 2) efficiency and 3) inventory productivity. As a result of its supply chain improvements, Wal-Mart is efficiently flowing goods in a way that will drive costs out of the supply chain, reduce overall inventory, and improve customer in-stock. Wal-Mart is developing and implementing two-tier replenishment, dynamic replenishment, global supply chain visibility, and auto identification using RFID. Other engineering projects aimed at maximizing ROI include Auto-FID, voice order filling of general merchandise, ergonomic

Figure 23: Supply Chain Applications

Supplier Efficient Production Planning Faster Demand Response "High-Resolution" Recall

Club/Store Automatic Checkout Reduced stock-out Theft Prevention Product Tracking Consumer Smart Appliances Personalized Marketing Point-of-use Ordering

Distribution Center Automated Inventory Count Faster Receiving & Shipping Better Quality Inspection Better Overall Accuracy
Source: Wal-Mart

In summary, Wal-Marts future logistics network and merchandise flow processes can be better designed to support growth while improving its cost advantage in the marketplace. The future network and processes will:

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n Maximize the assets n Support the growth of high volume Supercenters and their increasing operational

complexity
n Improve network flexibility to support divergent retail formats n Drive increased in-stock performance and lower costs to the store shelf

Wal-Mart International
Canada Mario Pilozzi, President of Wal-Mart Canada Mr. Mario Pilozzi, President of Wal-Mart Canada opened the discussion with an overview of the Canadian economy, which grew 4.3% in 2Q02. over 200,000 housing starts in July. Retail sales in Canada grew 1.8% in June, 23,000 new jobs were created in July, and there were

Figure 24: Wal-Mart Canada Store Count

250

213
200 CAGR = 7.1%

196 153 166 174

1 50

123

131

136

144

1 00

50

0 1 994
Source: Wal-Mart

1 995

1 996

1 997

1 998

1 999

2000

2001 2002E

Wal-Mart judges that there is still potential for significant growth in Canada. Mr. Pilozzi noted that there is room for Wal-Mart to add 19 stores to the greater Toronto area. Montreal, which already has 23 Wal-Mart stores can hold up to 12 more Wal-Mart stores. Wal-Mart estimates that, given its three existing distribution centers in Canada, it has the infrastructure to support a total of 348 Wal-Mart stores across the entire country. Wal-Mart currently has a total of 199 stores in Canada. Adding pantry departments to its stores represents one initiative the company is rolling out aggressively in Canada. In fact, Wal-Mart has a mandate to put a Pantry department in every Canadian store it remodels. Wal-Mart has found that stores with Pantry departments enjoy increased shopper frequency.

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The Wal-Mart brand has enjoyed significant success in Canada.

The company is

currently the No. 1 footwear retailer in the country and the No. 2 apparel retailer. Its footwear business is growing at 6x the industry rate. Wal-Mart also maintains a onethird share of the DVD/VHS movie market in Canada. Overall, Wal-Mart is gaining tremendous momentum in Canada and the company looks for this country to continue to be a growth engine with in its International segment.

Figure 25: Canadian Retail Competitive Environment

Figure 26: Canadian Economy

Company The Bay Sears Zellers Canadian Tire Loblaws Total

# Stores 100 123 289 453 1,712 2,677

- Economy grew 4.3% in 2Q. - Retail sales increased 1.8% in June 2002. - 23,000 new jobs were created in July 2002. - 200,000 housing starts in July 2002.

Source: Wal-Mart

Source: Wal-Mart

Brazil Vincent Trius, President and CEO of Wal-Mart Brazil Wal-Mart management also highlighted Brazil as a strong growth opportunity for the company. Brazil has 175 million consumers, making it the ninth-largest economy in the world. With nearly $35 billion in retail sales, it is also a top 20 retail market. With 68% of Brazils GDP distributed in the Southeast region, Wal-Mart will be focusing its efforts on this area of the country, particularly in Sao Paolo and Rio de Janeiro.

Figure 27: Wal-Mart Brazil Store Count

16

Supercenters

Sam's Clubs 12 12

Todo Dias 12

12 9 8 5 4 9 8 6 8 8

0 1998
Source: Wal-Mart

1999

2000

2001

2002

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The introduction of two Todo Dia stores has been a successful integration thus far, as Wal-Mart has seen rapid adoption of its best practices. In its Brazilian store operations, Wal-Mart is implementing store of learning and colleague circles programs to facilitate a transfer of culture and shared vision and value systems.

Real Estate Eric Zorn, SVP of Domestic Real Estate; Rob Bray, VP of the New Store Program; Wayne Cox, VP of Design and Construction; Del Sloneker, SVP of Store Planning
Mr. Eric Zorn, SVP of Domestic Real Estate, led off the presentation on Wal-Marts Realty and Store Planning strategies. As of August 31, 2002, Wal-Mart operated 1,603 discount stores, 1,179 Supercenters, 36 Neighborhood Markets, 517 SAMs Clubs and 97 distribution centers, totaling 518.4 million square feet.

Figure 28: Store Count and Square Footage (in millions of square feet)

Figure 29: Allocation of Square Footage

Discount Stores Supercenters Neighborhood Markets Sam's Clubs Distribution Centers Total

Stores 1,603 1,179 36 517 97 3,432

Square Feet 153.9 219.5 1.6 64.4 79.0 518.4

Distribution Centers 15.2%

Discount Stores 29.7%

Sam's Clubs 12.4% Neighborhood Markets 0.3%

Supercenters 42.3%

Source: Wal-Mart

Source: Wal-Mart

Mr. Zorn went on to note that the broad new store program for future years entails the following: Supercenters will be the predominant growth vehicle; Neighborhood Markets will be used as a fill-in between Supercenters and small markets will provide new opportunities for SAMs Club in addition to existing metro markets. Supercenters currently represent 42.3% of Wal-Marts total operating real estate (including distribution centers) and 50% of Wal-Marts total retail space. The company expects these ratios to continue growing as it focuses on expanding the Supercenter format to new regions of the U.S. as well as converting existing discount store formats. Then Mr. Rob Bray, VP of the New Store Program, discussed Wal-Marts current real estate program to maximize market share. This program is focused on achieving a higher store density in metro markets; testing metro markets for saturation of Supercenters and a couple of markets with Neighborhood Markets; new market development

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resources to tap markets with highest potential; and analyzing non-metro markets for maximum density. Wal-Mart plans to add between 305 and 335 new stores in 2003 (including expansions and relocations). To illustrate Wal-Marts market share expansion strategy, Mr. Bray described one particularly interesting example of a metro market in which Wal-Mart currently has 10 discount stores and nine Supercenters and six SAMs Clubs. He stated that the companys goal is to have four discount stores, 41 Supercenters, nine Neighborhood Markets and 10 SAMs Clubs in five years in this same metro market, translating into a tripling of sales and a doubling of market share over that period (see Figure ___ below).

Figure 30: Fiscal 2004 New Store Program Plan

Figure 31: Market Development Strategy Metro Market Example

Discount Stores Supercenters Neighborhood Markets Sam's Clubs Total

45 - 55 200 - 210 20 - 25 40 - 45 305 - 335

Discount stores Supercenters Neighborhood Markets Sam's Club Sales Volume Market Share

Today In 5 Years 10 4 9 41 0 9 6 10 $1,662mm $4,867mm 5.1% 10.6%

Note: Includes new stores, expansions, and relocations.

Source: Wal-Mart Source: Wal-Mart

Mr. Bray went on to discuss the status of Wal-Marts new Neighborhood Market concept. He said that the company is continuing to test this format and is growing the test program in conjunction with metro market density penetration strategies (e.g., Salt Lake City). Wal-Mart has also made modifications to the prototype during the last eighteen months based on insights from the initial tests. Then Wayne Cox, VP of Design and Construction, discussed Wal-Marts evolving store designs. He said the key to keeping initial building and site costs under control is to use building design refinements and competitive contractor bidding. Del Sloneker, SVP of Store Planning spoke next. He stated that his groups primary goals are to: open the most competitive store, set the best store, ensure complete in-stock of merchandise, hire and train quality associates and implement all company programs. The overarching objective of his group is to keep Wal-Mart stores fresh and appealing. Wal-Mart tries to remodel/redesign each Supercenter every five to seven years and each discount store every seven to nine years.

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Figure 32: Store Remodeling History and Plan

300

Supercenters
250 200 150 100 50 0 1998
Source: Wal-Mart

Discount stores

1999

2000

2001

2002E

2003E

2004E

RFID
RFID is one of the keys to Wal-Marts technology strategy. It is a microchip technology that will eventually be integrated into every product or product package that Wal-Mart sells. Its applications are fivefold:
n Consumer RFID can be integrated into smart appliances systems (e.g., smart Consumer:

refrigerator ordering). The technology also allows Wal-Mart to perform personalized marketing for each customer, and implement point-of-use ordering (e.g., order more brand X soda from home).
n Suppliers RFID provides timely information such that suppliers can execute more Suppliers:

efficient production planning, provide faster demand responses and provide highresolution recall.
n Club/Store This technology will facilitate automatic checkout, reduced stockout, theft Club/Store tore:

prevention and product tracking.

n Distribution Center: RFID technology will allow Wal-Mart to make automated Center

inventory counts, enjoy faster shipping and receiving, and realize better over all inventory inspection and accuracy.
n Recycling RFID can be used to automate the sorting process for recycling. Recycling:

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October 9, 2002

Figure 33: Annual Income Statement, 19952003E (in millions of $)

1995 Year $66,271 14.4% 19,068 0.8% 4,576 10.1% 3,712 145.7% $93,627 13.5% 1,122 22.1% $94,749 13.6% 74,564 $19,063 20.4% 14,952 16.0% $4,111 4.4% 1.5% 887 $4,346 4.6% 1,606 37.0% $2,740 2.9% 2.2% $0.60 2.3% 4,592 1996 Year $74,840 12.9% 19,785 3.8% 5,232 14.3% 5,002 34.8% $104,859 12.0% 1,292 15.2% $106,151 12.0% 83,510 $21,349 20.4% 16,946 16.2% $4,403 4.2% 7.1% 845 $4,850 4.6% 1,794 37.0% $3,056 2.9% 11.5% $0.67 11.5% 4,592 1997 Year $83,820 12.0% 20,668 4.5% 5,953 13.8% 7,517 50.3% $117,958 12.5% 1,263 -2.2% $119,221 12.3% 93,438 $24,520 20.8% 19,358 16.4% $5,162 4.4% 17.2% 784 $5,641 4.8% 2,115 37.5% $3,526 3.0% 15.4% $0.78 16.9% 4,534 1998 Year $95,395 13.8% 22,881 10.7% 7,111 19.5% 12,247 62.9% $137,634 16.7% 1,574 24.6% $139,208 16.8% 108,725 $28,909 21.0% 22,363 16.2% $6,546 4.8% 26.8% 797 $7,323 5.3% 2,740 37.4% 153 $4,430 3.2% 25.6% $0.99 27.0% 4,484 1999 Year $108,721 14.0% 24,801 8.4% 8,763 23.2% 22,728 85.6% $165,013 19.9% 1,796 14.1% $166,809 19.8% 129,664 $35,349 21.4% 27,040 16.4% $8,309 5.0% 26.9% 1,022 $9,083 5.5% 3,338 36.7% 170 $5,575 3.4% 5.0% $1.25 26.1% 4,474 2000 Year $121,889 12.1% 26,798 8.1% 10,542 20.3% 32,100 41.2% $191,329 15.9% 1,966 9.5% $193,295 15.9% 150,255 $41,074 21.5% 31,550 16.5% $9,524 5.0% 14.6% 1,374 $10,116 5.3% 3,692 36.5% 129 $6,295 3.3% 12.9% $1.40 12.7% 4,484 2001 Year $139,131 14.1% 29,395 9.7% 13,788 30.8% 35,485 10.5% $217,799 13.8% 2,013 2.4% $219,812 13.7% 171,562 $46,237 21.2% 36,173 16.6% $10,064 4.6% 5.7% 1,326 $10,751 4.9% 3,897 36.2% 183 $6,671 3.1% 6.0% $1.49 6.0% 4,481 2002E Year $157,772 13.4% $32,489 10.5% $14,923 8.2% $40,628 14.5% $245,813 12.9% 2,180 8.3% $247,993 12.8% 192,976 $52,836 21.5% 41,150 16.7% $11,686 4.8% 2.9% 1,168 $12,698 5.2% 4,545 35.8% 206 7,947 3.2% 19.1% $1.78 19.6% 4,464 2003E Year $175,127 11.0% $35,897 10.5% $16,729 12.1% $45,097 11.0% $272,850 11.0% 2,398 10.0% $275,249 11.0% 213,833 $59,017 21.6% 45,405 16.6% $13,612 5.0% 4.9% 1,242 $14,769 5.4% 5,354 36.3% 201 9,214 3.4% 15.9% $2.06 15.8% 4,468

Wal-Mart Stores Division Growth vs. prior year Sam's Clubs Growth vs. prior year McLane Growth vs. prior year International Growth vs. prior year Sales Growth vs. prior year Other Income Growth vs. prior year Total Revenues Growth vs. prior year Cost of Goods Sold Gross Profit Gross Margin SG&A Expenses SG&A Ratio Operating Income Operating Margin Growth vs. prior year Interest Expense Pre-tax Income Pre-tax Margin Income Taxes Tax Rate Minority Interest Net Income Net Margin Growth vs. prior year Diluted EPS Growth vs. prior year Average Shares Oustanding

October 9, 2002

Source: Company reports and Lehman Brothers estimates

Wal-Mart Stores

31

Wal-Mart Stores

32
Figure 34: Quarterly Income Statement, 200102E (in millions of $)
Q1A $30,751 11.7% 6,535 7.5% 3,130 44.3% 7,636 6.1% $48,052 11.8% 513 11.0% $48,565 11.8% 37,850 $10,202 21.2% 8,143 16.9% $2,059 4.3% -8.0% 352 $2,220 4.6% 810 36.5% 30 $1,380 2.9% -10.0% $0.31 0.4% 4,487 Q2A $33,870 14.2% 7,270 9.1% 3,297 37.6% 8,362 12.9% $52,799 14.5% 470 -1.3% $53,269 14.3% 41,412 $11,387 21.6% 8,893 16.8% $2,494 4.7% -10.8% 351 $2,613 4.9% 954 36.5% 37 $1,622 3.1% -11.2% $0.36 1.2% 4,470 Q3A $33,601 15.0% 7,295 11.0% 3,164 29.7% 8,678 16.7% $52,738 15.5% 476 -5.7% $53,214 15.2% 41,388 $11,350 21.5% 9,114 17.3% $2,236 4.2% -6.2% 322 $2,390 4.5% 872 36.5% 37 $1,481 2.8% -8.7% $0.33 4.2% 4,481 Q4A $40,909 15.3% 8,296 10.9% 4,197 18.7% 10,809 7.4% $64,210 13.5% 554 5.9% $64,764 13.5% 50,912 $13,298 20.7% 10,023 15.6% $3,275 5.1% -4.3% 301 $3,528 5.5% 1,261 35.7% 79 $2,188 3.4% 0.3% $0.49 14.1% 4,473 2001 Year $139,131 14.1% 29,395 9.7% 13,788 30.8% 35,485 10.5% $217,799 13.8% 2,013 2.4% $219,812 13.7% 171,562 $46,237 21.2% 36,173 16.6% $10,064 4.6% 5.7% 1,326 $10,751 4.9% 3,897 36.2% 183 $6,671 3.1% 6.0% $1.49 6.0% 4,481 Q1A $35,417 15.2% 7,295 11.6% 3,256 4.0% 8,992 17.8% $54,960 14.4% 458 -10.7% $55,418 14.1% 43,058 $11,902 21.7% 9,454 17.2% $2,448 4.5% 3.9% 281 $2,625 4.8% 932 35.5% 41 $1,652 3.0% 4.7% $0.37 20.2% 4,468 Q2A $38,641 14.1% 7,939 9.2% 3,423 3.8% 9,691 15.9% $59,694 13.1% 561 19.4% $60,255 13.1% 46,639 $13,055 21.9% 10,147 17.0% $2,908 4.9% 3.1% 262 $3,207 5.4% 1,124 35.0% 45 $2,038 3.4% 11.1% $0.46 26.2% 4,452 Q3E $38,305 14.0% $8,097 11.0% $3,291 4.0% $9,893 14.0% $59,586 13.0% $538 13.0% $60,124 13.0% 46,596 $12,990 21.8% 10,308 17.3% $2,681 4.5% 6.1% 280 $2,939 4.9% 1,065 36.3% 50 $1,824 3.1% 9.0% $0.41 23.9% 4,452 Q4E $46,432 13.5% $9,126 10.0% $4,365 4.0% $12,052 11.5% $71,974 12.1% $623 12.5% $72,597 12.1% 57,004 $14,971 20.8% 11,300 15.7% $3,671 5.1% 0.0% 270 $4,024 5.6% 1,459 36.3% 85 $2,480 3.4% 1.1% $0.56 13.9% 4,452 2002E Year $158,795 14.1% $32,457 10.4% $14,334 4.0% $40,628 14.5% $246,214 13.0% 2,180 8.3% $248,394 13.0% 193,297 $52,917 21.5% 41,209 16.7% $11,708 4.8% 2.9% 1,093 $12,795 5.2% 4,580 35.8% 221 7,994 3.2% 19.8% $1.79 20.5% 4,456

October 9, 2002

Wal-Mart Stores Division Growth vs. prior year Sam's Clubs Growth vs. prior year McLane Growth vs. prior year International Growth vs. prior year Sales Growth vs. prior year Other Income Growth vs. prior year Total Revenues Growth vs. prior year Cost of Goods Sold Gross Profit Gross Margin SG&A Expenses SG&A Ratio Operating Income Operating Margin Growth vs. prior year Interest Expense Pre-tax Income Pre-tax Margin Income Taxes Tax Rate Minority Interest Net Income Net Margin Growth vs. prior year Diluted EPS Growth vs. prior year Average Shares Oustanding
Source: Company reports and Lehman Brothers estimates

Figure 35: Annual Balance Sheet 19952003E (in millions of $)

1995 Assets: Cash and Equivalents Receivables, Net Recov. Sale/Leaseback Inventories Prepaid Expenses Total Current Assets Property & Equipment, net Other Assets Total Assets Liabilities and Equity: Short-term Debt Acct Pay Accrued Liabilities Current Portion LT Debt Income Taxes and Other Current Total Current Liabilities Long-Term Debt Deferred Taxes Minority Interest Total Liabilities Shareholders' Equity Liabilities and Equity $83 853 0 15,989 406 $17,331 18,894 1,316 $37,541 1996 $883 845 0 15,897 368 $17,993 20,324 1,287 $39,604 1997 $0 976 0 16,497 432 $17,905 $23,606 2,426 $43,937 1998 $1,879 1,118 0 17,076 1,059 $21,132 $25,973 2,891 $49,996 1999 $1,856 1,341 0 19,793 1,366 $24,356 $35,969 10,024 $70,349 $3,323 13,105 6,161 2,085 1,129 $25,803 $16,674 759 1,279 $44,515 25,834 $70,349 2000 $2,054 1,768 0 21,442 1,291 $26,555 $37,617 13,958 $78,130 $2,286 15,092 6,355 4,234 982 $28,949 $15,655 1,043 1,140 $46,787 31,343 $78,130 2001 $2,161 2,000 0 22,614 1,395 $28,170 $42,556 12,649 $83,375 $743 15,617 7,174 3,639 0 $27,173 $18,732 1,161 1,207 $48,273 35,102 $83,375 2002E $2,268 2,212 0 23,736 1,475 $29,691 $49,371 12,291 $91,352 $743 17,368 7,866 3,639 0 $29,616 $19,588 1,229 1,207 $51,640 39,712 $91,352 2003E $2,661 2,456 0 24,591 1,637 $31,345 $56,111 12,824 $100,280 $743 19,245 8,731 3,639 0 $32,358 $21,054 1,364 1,207 $55,983 44,296 $100,280

$8,533 2,798 123 $11,454 10,600 731 22,785 14,756 $37,541

$10,041 618 298 $10,957 10,016 1,488 22,461 17,143 $39,604

$9,126 3,628 1,141 565 $14,460 9,674 2,747 26,881 18,503 $45,384

10,257 4,998 1,006 501 $16,762 $9,607 716 1,799 $28,884 21,112 $49,996

Source: Company reports and Lehman Brothers estimates

October 9, 2002

Wal-Mart Stores

33

Wal-Mart Stores

34
Figure 36: Annual Cash Flow Statement, 19952003E (in millions of $)
1995 Cash From Operations Net Income Depreciation & Amortization Deferred Taxes Nonrecurring Items/Other Changes in Working Capital: Receivables Inventories Payables Net Accrued Liabilities and Other Assets Total Oper. Cash Flow Cash From Investing Capital Expenditures Acquisitions Sale of Plants Other Net Cash From Investing Cash From Financing Change in ST Debt Net Proceeds from REIT Issuance of LT Debt Repayment of LT Debt Purchase of Stock/Other Dividends Net Cash From Financing Effect of Exchange Rate Changes Change In Cash Beginning Cash Ending Cash
Source: Company reports and Lehman Brothers estimates

1996 $3,056 1,463 0 (58) 99 1,208 162 5,930 (2,643) 464 111 (2,068) (2,458) 632 (615) (140) (481) (3,062) 800 83 883

1997 $3,526 1,634 0 (78) (365) 1,048 1,358 7,123 (2,636) (1,865) 80 (4,421) 547 (648) (1,426) (611) (2,138) 564 883 1,447

1998 $4,430 1,872 0 n/a (148) (379) 1,108 697 7,580 (3,734) (855) n/a 171 (4,418) 536 (1,075) (1,498) (693) (2,730) 432 1,447 1,879

1999 $5,377 2,375 0 198 (255) (2,088) 1,849 738 8,194 (6,183) (10,419) n/a (244) (16,846) 4,316 6,000 (863) 66 (890) 8,629 (23) 1,879 1,856

2000 $6,295 2,868 0 (1,795) 2,061 301 9,730 (8,042) (672) (8,714) (2,022) 3,778 (1,519) 15 (1,070) (818) 198 1,856 2,054

2001 $6,671 3,290 0 (1,235) 368 1,166 10,260 (8,383) 1,237 (7,146) (1,533) 4,591 (3,519) (1,268) (1,249) (2,978) (29) 107 2,054 2,161

2002E $7,947 3,385 68 (212) (1,122) 1,751 970 12,787 (10,200) (10,200) 856 (2,000) (1,337) (2,481) 106 2,161 2,268

2003E $9,214 3,860 135 (243) (855) 1,877 170 14,158 (10,600) (10,600) 1,466 (3,000) (1,630) (3,164) 394 2,268 2,661

October 9, 2002

$2,740 1,304 0 (61) (1,850) 448 (198 2,383 (3,566) 234 (3,332) 660 1,004 (207) (12) (458) 987 38 45 83

Wal-Mart Stores

Rating and Price Target Chart: WMT

Date
16-Sep-02 13-Sep-02 07-Feb-02 28-Sep-01 11-Sep-01

Closing Price
$54.75 $54.40 $58.39 $49.50 $46.23

Rating
1-Overwght/3-Negative

Price Target
$67.00

Date
19-Jun-00 08-Feb-00 14-Dec-99 13-Dec-99

Closing Price
$54.31 $59.50 $67.06 $68.25

Rating

Price Target
$100.00 $100.00 $80.00 $75.00

Dropped $80.00 $70.00

Disclosures: The analysts responsible for preparing this report have received compensation based upon various factors including the Firms total revenues, a portion of which is generated by investment banking activities. Lehman Brothers Inc. and/or an affiliate managed or co-managed within the past 12 months a public offering of securities for Wal-Mart Stores. Lehman Brothers Inc. and/or an affiliate has received compensation for investment banking purposes from Wal-Mart Stores within the past 12 months. Risk Disclosure(s): WMT: We believe the long-term risks for Wal-Mart are (1) the challenges associated with managing increasingly vast and complex operations, (2) the growing contribution of the lower-margin food business to the overall merchandise mix, (3) the ability to acquire and successfully integrate assets abroad, and (4) the proficiency with which the company adapts its store formats to the various economic and cultural environments in international markets. Our earnings forecast and investment thesis for Wal-Mart are subject to such factors as cost of goods, consumer spending and debt levels, currency fluctuations, interest rate fluctuations, store expansion plans, and variability in comparable-store sales.

October 9, 2002

35

GLOBAL EQUITY RESEARCH

New York 745 Seventh Avenue New York, NY 10019 USA 1.212.526.7000

Key to Investment Opinions Stock Ratings: 1-Overweight - the stock is expected to outperform the unweighted expected total return of the industry sector over a 12-month investment horizon. 2-Equal weight - the stock is expected to perform in line with the unweighted expected total return of the industry sector over a 12-month investment horizon. 3-Underweight - the stock is expected to underperform the unweighted expected total return of the industry sector over a 12-month investment horizon. RSRS -Rating Suspended - The rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Lehman Brothers is acting in an advisory capacity in a merger or strategic transaction involving the company. Sector View: 1-Positive - sector fundamentals/valuations are improving. 2-Neutral - sector fundamentals/valuations are steady, neither improving nor deteriorating. 3-Negative - sector fundamentals/valuations are deteriorating. Stock Ratings From February 2001 to August 5, 2002 (sector view did not exist): This is a guide to expected total return (price performance plus dividend) relative to the total return of the stocks local market over the next 12 months. 1-Strong Buy - expected to outperform the market by 15 or more percentage points. 2-Buy - expected to outperform the market by 5-15 percentage points. 3-Market Perform - expected to perform in line with the market, plus or minus 5 percentage points. 4-Market Underperform - expected to underperform the market by 5-15 percentage points. 5-Sell - expected to underperform the market by 15 or more percentage points. Stock Ratings Prior to February 2001 (sector view did not exist): 1-Buy - expected to outperform the market by 15 or more percentage points. 2-Outperform - expected to outperform the market by 5-15 percentage points. 3-Neutral - expected to perform in line with the market, plus or minus 5 percentage points. 4-Underperform - expected to underperform the market by 5-15 percentage points. 5-Sell - expected to underperform the market by 15 or more percentage points. V -Venture - return over multiyear timeframe consistent with venture capital; should only be held in a well diversified portfolio. Distribution of Ratings Lehman Brothers Equity Research has 1480 companies under coverage. 32% have been assigned a 1-Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating. 28% of companies with this rating are investment banking clients of the Firm. 41% have been assigned a 2-Equal weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating. 11% of companies with this rating are investment banking clients of the Firm. 27% have been assigned a 3-Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating. 39% of companies with this rating are investment banking clients of the Firm.

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