Walmart Inc. Form 10-Q Summary
Business context and reporting period. Walmart operates Walmart U.S., Walmart International and Sam’s Club, across stores and eCommerce. This filing covers the fiscal third quarter and first nine months ended October 31, 2018; amounts are in U.S. dollars. The fiscal year ends January 31.
Key financial results
| Metric | Quarter ended Oct. 31, 2018 | Nine months ended Oct. 31, 2018 | Prior-year comparison |
|---|---|---|---|
| Total revenue | $124.9 billion | $375.6 billion | Up 1.4% and 3.2%, respectively |
| Net sales | $123.9 billion | $372.6 billion | Up 1.4% and 3.3% |
| Operating income | $5.0 billion | $15.9 billion | Up 4.7%; down 0.5% |
| Operating margin | 4.0% | 4.3% | Prior year: 3.9% and 4.4% |
| Gross profit margin | 24.8% | 24.7% | Down 21 and 18 basis points |
| Net income attributable to Walmart | $1.7 billion; diluted EPS $0.58 | $3.0 billion; diluted EPS $1.01 | Prior-year diluted EPS: $0.58 and $2.54 |
| Net cash from operating activities | Not separately reported here | $17.3 billion | Prior year: $17.1 billion |
| Free cash flow | Not separately reported here | $10.3 billion | Prior year: $10.2 billion |
Liquidity, debt and capital allocation
- At October 31, cash and cash equivalents were $9.2 billion; current assets were $69.4 billion and current liabilities $85.8 billion. Management reported a $16.3 billion working-capital deficit, which it describes as typical of its operating model.
- Long-term debt, including amounts due within one year, was $45.9 billion, versus $33.8 billion at January 31. Short-term borrowings were $7.8 billion. The company issued $15.9 billion of long-term debt during the nine-month period, partly to fund Flipkart.
- Walmart had $15.0 billion of committed U.S. credit lines, all undrawn. Management said operating cash, cash on hand and capital-market access should be sufficient for anticipated needs.
- Nine-month capital expenditures were $7.0 billion. Dividends paid were $4.6 billion; share repurchases were $4.2 billion, down from $6.7 billion in the prior-year period. The fiscal 2019 annual dividend was set at $2.08 per share.
Material changes and business performance
- Walmart U.S. net sales rose 3.7% for the quarter; comparable sales increased 3.4%, supported by traffic and ticket growth. eCommerce contributed about 1.3 percentage points to comparable sales.
- Walmart International quarterly net sales fell 2.6%, reflecting the Brazil divestiture and unfavorable currency effects; nine-month sales rose 4.2%. International operating income declined in both reported periods.
- Sam’s Club comparable sales increased 5.4% for the quarter, but reported net sales fell 2.3%, primarily because 63 net club closures and lower tobacco sales offset growth. Operating income declined 12%.
- Gross margin pressure reflected price investments, higher transportation costs and eCommerce mix. Expense leverage and productivity improvements partly offset these pressures; the company also cited eCommerce and technology investment and higher wage and benefit costs.
Outlook, unusual items and risks
- Brazil: The August 2018 sale of an 80% stake generated a pre-tax loss of approximately $4.8 billion, largely recognized in the second quarter. The loss included a $2.0 billion cumulative currency translation loss reclassified upon closing. Walmart retained 20% and agreed to specified indemnities; contingent consideration of up to $250 million may be received.
- JD.com investment: A $1.8 billion pre-tax fair-value loss was recorded in the quarter and $3.7 billion for the nine months. The nine-month result also includes the Brazil loss, contributing to $8.6 billion of total other losses. These items materially reduced year-to-date income; the prior-year period instead included debt-extinguishment losses.
- Flipkart: Walmart acquired approximately 77% in August for about $16 billion in cash, or $13.1 billion net of acquired cash. Management expects Flipkart to negatively affect net income for the remainder of fiscal 2019 and fiscal 2020; its results since acquisition were described as immaterial to this filing’s reported results.
- Other portfolio changes: The proposed Sainsbury’s/Asda combination remained subject to uncertain regulatory review and had not qualified for held-for-sale accounting. Walmart expects a loss when the criteria are met, with the amount subject to valuation and currency movements. Proposed sales of banking operations in Canada and Chile were also disclosed.
- Taxes: The effective tax rate was 29.5% for the quarter and 41.9% year to date, versus 33.9% and 32.9%. The Brazil loss, which provided minimal realizable tax benefit, increased the year-to-date rate. Walmart planned to repatriate about $5 billion of cash at an estimated tax cost of $80 million; tax accounting under the Tax Act remained under review.
- Contingencies: Walmart disclosed more than 26,000 UK Asda equal-pay claims and opioid-related litigation and investigations; it could not reasonably estimate potential losses. DOJ and SEC FCPA discussions continued; Walmart had recorded a $283 million accrual in fiscal 2018 and said the final resolution remained uncertain. A proposed $160 million securities-class-action settlement awaited court review.
- Other risks include currency, interest and fuel-price volatility, competitive and consumer pressures, acquisitions and integration, cybersecurity, labor costs, tax and regulatory changes, and litigation. Management reported no material change to the risk factors in its fiscal 2018 Form 10-K.
Important facts for investors to verify
- Whether underlying earnings and margins strengthen after excluding the Brazil disposal loss and JD fair-value losses, and how the JD investment performs.
- Flipkart’s post-acquisition contribution, integration progress and expected effects on fiscal 2019 and 2020 earnings and cash needs.
- Progress and potential financial effects of the Asda transaction and proposed Canada and Chile banking divestitures.
- Developments in the FCPA, opioid and Asda equal-pay matters, including whether disclosed accruals or loss estimates change.
- Debt growth, working-capital needs, cash availability across countries, and the sustainability of dividends and repurchases alongside investment spending.