Walmart Inc. — Form 10-Q Summary
Business context and period: This filing covers the quarter and six months ended July 31, 2018, Walmart’s second quarter of fiscal 2019. Walmart operates Walmart U.S., Walmart International and Sam’s Club, through physical stores and eCommerce. Unless noted otherwise, amounts are in U.S. dollars.
Financial performance and position
| Metric | Three months ended July 31, 2018 | Six months ended July 31, 2018 |
|---|---|---|
| Net sales | $127.1 billion; up 4.2% year over year | $248.7 billion; up 4.3% |
| Total revenues | $128.0 billion; up 3.8% | $250.7 billion; up 4.1% |
| Operating income | $5.75 billion, versus $5.97 billion | $10.90 billion, versus $11.21 billion |
| Gross profit rate | 24.8%, versus 25.0% | 24.7%, versus 24.9% |
| Operating margin | 4.5%, versus 4.9% | 4.4%, versus 4.7% |
| Net income attributable to Walmart | Loss of $861 million, versus income of $2.90 billion | Income of $1.27 billion, versus $5.94 billion |
| Diluted earnings per share | Loss of $0.29, versus earnings of $0.96 | Earnings of $0.43, versus $1.96 |
Cash flow, liquidity and debt: For the six months, operating cash flow was $11.10 billion, compared with $11.36 billion; capital expenditures were $4.28 billion and reported free cash flow was $6.81 billion, versus $6.94 billion. At July 31, cash and cash equivalents were $15.84 billion. Current assets of $66.37 billion were below current liabilities of $71.68 billion; management reported a $5.3 billion working capital deficit, narrower than the $16.0 billion deficit a year earlier. Long-term debt, including amounts due within one year, was $46.05 billion, and short-term borrowings were $444 million. Walmart had $15.0 billion of undrawn U.S. credit lines.
Material changes and segment results
- Quarterly earnings were dominated by a $4.8 billion pretax loss on the planned sale of an 80% stake in Walmart Brazil. The disposal group’s $3.3 billion of assets was fully impaired; the sale closed in August 2018. The loss provided minimal tax benefit, contributing to a 283% quarterly effective tax rate.
- Walmart’s JD.com investment declined about $1.9 billion in fair value from February 1 through July 31; the decline was recorded in earnings under newly adopted accounting rules. The quarter’s other gains and losses included about $0.1 billion of JD-related loss, while the six-month amount was $6.69 billion, largely reflecting Brazil and JD.
- Walmart U.S. sales rose 5.2% in the quarter, with comparable sales up 4.7%; segment operating income increased $62 million to $4.48 billion. Walmart International sales rose 4.0%, but operating income fell $299 million to $1.27 billion. Sam’s Club comparable sales rose 7.6%, while total sales fell 0.6% amid club closures and reduced tobacco sales; quarterly operating income increased $11 million to $402 million.
- Overall U.S. comparable sales increased 5.1% in the quarter. Management attributed growth to traffic and ticket gains, eCommerce contributions, and, for Walmart U.S., warmer weather. Gross margin pressure reflected price investments and higher transportation costs, including fuel and third-party trucking rates.
- Operating expenses as a percentage of net sales improved 19 basis points in the quarter and 4 basis points for the six-month period, as productivity and sales growth more than offset eCommerce and technology investment.
Outlook, transactions and risks
- Flipkart: In August 2018, Walmart acquired approximately 77% of the Indian eCommerce business for about $16 billion, financed partly with $15.85 billion of long-term debt issued during the quarter and cash on hand. Walmart expected the acquisition to reduce net income in fiscal 2019 and 2020; purchase-price allocation was not yet complete.
- Other portfolio actions: The proposed Asda-Sainsbury’s combination remained subject to a complex, uncertain regulatory review; Walmart expected a possible loss when held-for-sale criteria were met. Proposed sales of banking operations in Canada and Chile were classified as held for sale.
- Tax and repatriation: Walmart planned to repatriate about $5 billion of foreign cash at an estimated tax cost of about $80 million. The company said it was still evaluating Tax Act effects, including GILTI and potential repatriation beyond fiscal 2019.
- Contingencies: The company had accrued $283 million for FCPA-related matters and said resolution timing and terms remained uncertain. Asda faced more than 26,000 equal-value pay claims, and Walmart faced opioid-related litigation and investigations; the company could not reasonably estimate losses for these matters. Management stated that adverse outcomes could be material in some cases.
- Management said liquidity sources should be adequate for operations, investment, dividends and repurchases. No specific consolidated earnings guidance was provided in the supplied filing text. The filing said there had been no material change in previously disclosed risk factors.
Important facts for investors to verify
- How the Brazil disposal loss, subsequent sale accounting and any indemnity obligations affect future reported results and cash flows.
- Flipkart’s final purchase-price allocation, financing costs, integration progress and contribution to fiscal 2019–2020 results.
- Whether JD.com’s valuation changes continue to create material earnings volatility.
- Developments in the Asda regulatory review, the Canada and Chile banking disposals, and the related potential accounting effects.
- Progress and potential financial exposure from the FCPA matters, Asda equal-value claims and opioid litigation.
- Changes in debt, working capital, cash generation and the estimated cost and timing of foreign-cash repatriation.