Walmart Inc. Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended July 31, 2019 (fiscal 2020 second quarter), compared with the corresponding 2018 periods. Walmart operates Walmart U.S., Walmart International and Sam’s Club. Amounts below are in U.S. dollars; financial statement figures are in billions unless otherwise noted.
Financial performance and liquidity
- Quarter revenue: $130.4 billion, up 1.8%; net sales were $129.4 billion, up 1.8%.
- Quarter profitability: Operating income was $5.6 billion, down 2.9%; operating margin was 4.3%, versus 4.5%. Gross margin was 24.3%, versus 24.8%. Walmart-attributable net income was $3.6 billion, or $1.26 diluted per share, versus a net loss of $861 million, or $0.29 per share.
- Six-month results: Revenue was $254.3 billion, up 1.4%; operating income was $10.5 billion, down 3.4%. Walmart-attributable net income was $7.5 billion, or $2.59 diluted per share, versus $1.3 billion, or $0.43 per share.
- Cash flow, six months: Operating cash flow was $11.2 billion, versus $11.1 billion. Capital expenditures were $4.9 billion, up from $4.3 billion; company-defined free cash flow was $6.3 billion, versus $6.8 billion. Investing activities used $3.8 billion; financing activities used $5.5 billion.
- Balance sheet at July 31: Cash and cash equivalents were $9.3 billion. Long-term debt, including amounts due within one year, was $48.8 billion; short-term borrowings were $3.7 billion. Operating and finance lease obligations totaled $22.2 billion. Working capital deficit was $18.9 billion, compared with $5.3 billion at July 31, 2018. Walmart had $15 billion of undrawn U.S. committed credit lines.
- Capital returns: The fiscal 2020 annual dividend was raised to $2.12 per share from $2.08. Walmart repurchased $3.7 billion of shares in the first half; $7.7 billion remained under its $20 billion authorization.
Material changes versus the prior comparable period
- Quarterly net income swung to profit largely because the prior-year quarter included a $4.8 billion pretax loss related to selling an 80% stake in Walmart Brazil. The prior-year six-month period also included a $6.7 billion net loss in other gains and losses, while the current period recorded a $752 million gain, primarily reflecting changes in the fair value of Walmart’s JD.com investment.
- U.S. sales and operating income grew, while International sales and operating income declined. International results were affected by currency headwinds, the Brazil divestiture and lower gross margin; Flipkart’s addition supported sales but also weighed on gross margin.
- U.S. comparable sales increased 2.9% in the quarter; Sam’s Club comparable sales increased 1.7%. E-commerce contributed approximately 1.4 percentage points to Walmart U.S. comparable sales and 1.6 points to Sam’s Club comparable sales.
- Operating expenses as a percentage of net sales improved, supported by sales growth and productivity. This was more than offset at the consolidated operating-income level by lower gross margin.
- Adoption of the new lease accounting standard added $14.8 billion to assets and $15.1 billion to liabilities at adoption and resulted in approximately $0.3 billion of after-tax impairment-related adjustment to retained earnings. The company said income statement and cash flow effects were immaterial.
Outlook, commentary, risks and unusual items
- No specific numerical earnings or sales guidance is provided in the supplied filing text. Management’s stated priorities are efficient growth, e-commerce and omnichannel investment, operating discipline, and strategic capital allocation, with more spending directed to technology, supply chain and remodels than new store openings.
- Management said operating cash flow, cash on hand and capital-market access should be adequate for operations, investment, dividends and repurchases. It also noted that foreign exchange movements may affect International results and that fuel-price volatility may affect Sam’s Club.
- In June 2019, Walmart paid $283 million to resolve DOJ and SEC Foreign Corrupt Practices Act investigations. The resolution includes a three-year DOJ non-prosecution agreement, compliance reporting and a limited third-party monitorship; the company said it does not presently expect a material adverse effect from these matters.
- Material contingencies include more than 30,000 UK ASDA equal-value employment claims and opioid-related litigation and investigations. Walmart said it could not reasonably estimate a loss or range for these matters. The Supreme Court granted ASDA permission to appeal on July 31, 2019.
- Updated risk disclosures highlight natural disasters, climate-related events, geopolitical events and catastrophic events, including recent active-shooter incidents, as potential disruptions to stores, supply chains, employees and financial performance. The filing also cites competition, currency, tariffs, labor costs, cybersecurity and legal and regulatory matters as risks.
- Management reported that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- How much reported earnings growth reflects the prior-year Brazil loss and current-period fair-value changes, rather than recurring operating performance.
- Whether U.S. sales momentum and expense productivity can offset gross-margin pressure from price investment and e-commerce mix.
- How currency movements, Brazil’s divestiture and Flipkart’s growth affect International sales, margins and cash needs.
- Whether the working capital deficit, debt maturities and new lease obligations remain manageable alongside dividends and share repurchases.
- Developments and potential financial exposure in the ASDA equal-value and opioid matters, for which the filing provides no clear loss estimate.
- Progress and costs of the FCPA settlement compliance requirements and monitorship.