Walmart Inc. (then Wal-Mart Stores, Inc.) — Form 10-Q Summary
Business context and reporting period
Unaudited results for the three and nine months ended October 31, 2016, in fiscal 2017; comparisons are to the same periods in fiscal 2016. Walmart operates through Walmart U.S., Walmart International and Sam’s Club, including physical and digital retail. The business is seasonal, with historically highest sales and operating income in the quarter ending January 31. Unless noted, amounts below are U.S. dollars.
Financial performance and liquidity
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $117.2 billion; +0.5% | $351.6 billion; +0.5% |
| Total revenue | $118.2 billion; +0.7% | $354.9 billion; +0.7% |
| Operating income | $5.1 billion, down from $5.7 billion | $16.6 billion, down from $17.5 billion |
| Operating margin on net sales | 4.4%, versus 4.9% | 4.7%, versus 5.0% |
| Consolidated net income | $3.2 billion, versus $3.4 billion | $10.3 billion, versus $10.3 billion |
| Net income attributable to Walmart | $3.0 billion, versus $3.3 billion | $9.9 billion, versus $10.1 billion |
| Diluted EPS attributable to Walmart | $0.98, versus $1.03 | $3.16, versus $3.13 |
Gross profit margin improved to 25.3% from 25.0% for the quarter and 25.1% from 24.6% for the nine months. Higher wage expense and continued investment in digital retail and information technology increased operating expenses as a share of sales, more than offsetting the gross-margin improvement. The effective tax rate fell to 29.4% from 33.9% for the quarter and to 30.6% from 33.5% for the nine months.
For the nine months, operating cash flow was $19.6 billion, up from $15.0 billion; capital expenditure was $7.5 billion, down from $8.2 billion. Company-defined free cash flow was $12.2 billion versus $6.8 billion, primarily reflecting improved working-capital management and tax guidance that accelerated deductions for remodels and related costs. Investing cash outflow was $11.1 billion; financing cash outflow was $11.1 billion. Free cash flow is a non-GAAP measure and excludes debt service, acquisitions and other contractual payments.
At October 31, cash and cash equivalents were $5.9 billion, versus $7.0 billion a year earlier. Working capital deficit was $10.7 billion, versus $5.4 billion a year earlier; management said the deficit is typical of its operating model. Short-term borrowings were $5.1 billion; long-term debt, including amounts due within one year, was $38.4 billion. Long-term debt declined $2.5 billion from January 31, mainly due to maturities. Management stated liquidity and capital-market access should be sufficient for operations, investment, dividends and repurchases. The declared fiscal 2017 annual dividend was $2.00 per share, up from $1.96.
Material changes and segment results
- U.S. comparable sales increased 0.8% for the quarter and 1.4% year to date. Walmart U.S. sales rose 2.5% and 3.3%, respectively, while operating income fell 11% for the quarter and about 9% year to date, principally because of wage and technology/digital investments.
- International sales fell 4.8% for the quarter and 6.2% year to date, with currency reducing sales by $2.1 billion and $8.3 billion, respectively. International operating income increased to $1.4 billion for the quarter and $4.2 billion year to date; year-to-date results included a $535 million noncash gain on the Yihaodian asset sale.
- Sam’s Club sales increased 1.1% for the quarter and 0.2% year to date, but operating income declined 27% and 8%, respectively. Lower fuel prices reduced sales; wage, benefit, digital and advertising investment pressured expenses. Excluding fuel, sales increased 1.8% for the quarter and 1.7% year to date.
- Membership and other income rose, partly from a $535 million Yihaodian-related gain recognized after Walmart exchanged certain China e-commerce assets for JD.com shares, and an $86 million gain from Chile shopping mall sales. Walmart also bought additional JD shares for $1.9 billion during the quarter, bringing reported ownership to approximately 10%.
- Walmart completed its $2.4 billion net acquisition of Jet.com in September. Preliminary purchase-price allocation included $1.7 billion of goodwill and $0.6 billion of intangible assets; additional compensation of approximately $0.8 billion is payable over five years. A planned sale of Mexico’s Suburbia apparel division for approximately $1.0 billion remained subject to regulatory approval and was expected to close in fiscal 2018.
- Share repurchases totaled $6.3 billion for the nine months, versus $1.7 billion a year earlier. The company reported $11.3 billion remaining under its $20 billion authorization at October 31.
Outlook, risks and contingencies
No specific numerical earnings or sales guidance is provided in the filing. Management described a strategic emphasis on growth, comparable sales, e-commerce and integration of digital and physical retail, while balancing returns. It cautioned that operating expenses may grow at or above sales growth and operating income may grow at or below sales growth during investment. Management also cited currency volatility, competition, labor and technology costs, fuel prices, consumer trends, cybersecurity, supply-chain disruption and regulatory changes as risks. Brexit could affect U.K. currency, food costs, trade policy and labor or other laws; the impact was not yet reasonably assessable.
The DOJ and SEC continued investigating possible FCPA violations involving foreign subsidiaries, including Walmex; discussions with the agencies regarding possible resolution had begun, but were preliminary. The company said it believes a loss is probable but could not reasonably estimate a loss or range. It incurred $82 million in related third-party costs in the nine months. More than 8,000 ASDA equal-value employment claims were proceeding in the U.K.; the tribunal allowed comparisons between retail and warehouse/distribution roles, and ASDA appealed. The company could not estimate potential losses. Other disclosed matters include shareholder litigation and environmental proceedings; management generally did not expect the specified environmental matters to be material.
Important facts for investors to verify
- Whether ongoing wage, digital and technology investments improve sales and customer traffic enough to offset expense growth and operating-margin pressure.
- The durability of U.S. comparable-sales growth and the extent to which international results remain affected by exchange rates and U.K. trading conditions.
- Cash generation and working-capital trends, including the effect of seasonal inventory needs, acquisitions, capital spending, dividends and share repurchases.
- Jet.com integration and expected benefits, the Suburbia sale’s timing and proceeds, and the value and accounting treatment of the JD.com investment.
- Developments in the FCPA investigations and ASDA claims, including any eventual settlement, penalties or other material liabilities.
- Potential implications of new accounting standards, particularly lease accounting; the filing said management was evaluating the impact.