Walmart Inc. — Form 10-Q Summary
Reporting period: Three months ended April 30, 2019 (first quarter of fiscal 2020); comparative figures are for the three months ended April 30, 2018. Amounts are in U.S. dollars.
Business context and performance
Walmart operates Walmart U.S., Walmart International and Sam’s Club, including eCommerce and omnichannel businesses. Management’s stated priorities include comparable-sales and eCommerce growth, expense discipline, and greater capital investment in remodels, technology, eCommerce and supply chain rather than new stores.
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Total revenue | $123.9 billion | $122.7 billion |
| Net sales | $122.9 billion | $121.6 billion |
| Operating income | $4.9 billion | $5.2 billion |
| Net income attributable to Walmart | $3.8 billion | $2.1 billion |
| Diluted EPS | $1.33 | $0.72 |
| Operating cash flow | $3.6 billion | $5.2 billion |
| Capital expenditures | $2.2 billion | $1.8 billion |
| Free cash flow | $1.4 billion | $3.3 billion |
Margins, segments and material changes
- Revenue rose 1.0% and net sales rose 1.1%. U.S. comparable sales increased 3.0% overall; Walmart U.S. comparable sales grew 3.3%, with eCommerce contributing approximately 1.4 percentage points.
- Gross profit margin declined to 24.3% from 24.6%; operating margin declined to 4.0% from 4.2%. Management attributed gross-margin pressure primarily to Flipkart and U.S. price investments, partly offset by mix and lower transportation-cost pressure. Operating expenses as a share of net sales improved by 14 basis points.
- Walmart U.S. sales grew 3.3% and operating income increased to $4.1 billion from $3.9 billion. International sales fell 4.9% to $28.8 billion and operating income fell to $738 million from $1.3 billion; currency movements reduced sales by $1.8 billion, with divestitures and Flipkart also affecting comparisons. Sam’s Club sales grew 1.5% and operating income rose to $451 million from $325 million.
- Net income and EPS increased substantially, but results were materially affected by other gains and losses: the company reported a $837 million gain versus a $1.845 billion loss in the prior-year quarter, primarily reflecting fair-value changes in its JD.com investment. The effective tax rate increased to 24.3% from 19.3%; the prior-year rate benefited from a provisional tax-reform item.
- Operating cash flow declined mainly because of inventory purchases, seasonal sell-through and eCommerce fulfillment-center activity, as well as payment timing. Capital expenditures increased by $387 million.
Cash, debt and liquidity
- Cash and cash equivalents were $9.3 billion at April 30, 2019, versus $7.9 billion a year earlier. The working-capital deficit was $18.1 billion, compared with $21.5 billion a year earlier; management said the company generally operates with a deficit.
- Long-term debt, including amounts due within one year, was $48.9 billion; short-term borrowings were $4.8 billion. Long-term debt increased by $3.5 billion during the quarter, primarily following $4.0 billion of debt issuance. The new senior unsecured notes mature in 2024, 2026 and 2029, with fixed rates of 2.850% to 3.250%.
- Following adoption of the new lease accounting standard, the balance sheet included $17.5 billion of operating lease obligations and $4.2 billion of finance lease obligations. The lease standard increased reported assets and liabilities; management said income-statement and cash-flow effects were immaterial.
- The company had $15.0 billion in undrawn U.S. committed credit lines. Management said operating cash flow, cash on hand and capital-market access should be adequate to fund operations, investment, dividends and repurchases.
- Quarterly share repurchases totaled $2.1 billion; $9.2 billion remained authorized under the $20 billion program. The fiscal 2020 annual dividend was set at $2.12 per share, paid in four quarterly installments of $0.53.
Outlook, risks and unusual items
- The filing provides no specific revenue, earnings or EPS guidance. Management expects to focus on productive growth and believes returns on capital will improve over time; these are forward-looking expectations, not a quantified forecast.
- Risks highlighted include intense retail and eCommerce competition, consumer and economic conditions, currency and fuel-price volatility, labor and supply-chain costs, tariffs, cybersecurity, integration of acquisitions, and regulatory and legal matters. The company reported no material change to the risk factors in its latest Form 10-K.
- More than 30,000 U.K. Asda equal-value employment claims are pending; the company said it cannot reasonably estimate a loss or range of loss. Opioid-related litigation and government inquiries also remain, with no reasonably estimable loss range disclosed.
- The company reported a $283 million accrual for the ongoing FCPA investigation and related matters, described resolution as nearing conclusion, and cautioned that timing and terms remain uncertain. Management did not then expect a material adverse effect, but gave no assurance about future outcomes.
- Adoption of lease accounting on February 1, 2019 added substantial lease assets and liabilities and reduced retained earnings by approximately $0.3 billion, net of tax. Other notable business changes include the prior-year Flipkart acquisition and Walmart Brazil divestiture, and termination of the proposed Sainsbury/Asda combination; the termination had no financial-statement impact.
Important facts for investors to verify
- How much of the earnings increase reflects JD.com fair-value movements rather than recurring operating performance.
- Whether the decline in operating cash flow and free cash flow reverses as inventory and seasonal cash-flow timing normalize.
- International segment trends, including currency impacts, Flipkart’s margins and the effects of portfolio divestitures.
- The eventual cost and resolution of the Asda, opioid and FCPA matters, including whether existing accruals are sufficient.
- Debt, lease obligations, capital spending, dividends and buybacks relative to future cash generation.