Walmart Inc. (then Wal-Mart Stores, Inc.) — Form 10-Q
Reporting period: Quarter and six months ended July 31, 2015 (second quarter of fiscal 2016). Unless stated otherwise, dollar amounts are in U.S. dollars.
Business context and reporting period
Walmart operates through Walmart U.S., Walmart International and Sam’s Club, combining stores and e-commerce. Management described its priorities as growth balanced with returns, with investment in associates and integration of digital and physical retail. The business is seasonal, historically generating its highest sales and operating income in the quarter ending January 31.
Financial performance
| Metric | Three months ended July 31, 2015 | Six months ended July 31, 2015 | Comparable 2014 period |
|---|---|---|---|
| Total revenue | $120.2 billion | $235.1 billion | $120.1 billion; $235.1 billion |
| Net sales | $119.3 billion | $233.3 billion | $119.3 billion; $233.5 billion |
| Operating income | $6.1 billion | $11.7 billion | $6.7 billion; $12.9 billion |
| Income from continuing operations | $3.6 billion | $6.9 billion | $4.1 billion; $7.8 billion |
| Diluted EPS from continuing operations attributable to Walmart | $1.08 | $2.11 | $1.21; $2.31 |
| Gross profit margin | 24.5% | 24.3% | 24.6%; 24.3% |
| Operating margin | 5.1% | 5.0% | 5.7%; 5.5% |
For the six months, operating cash flow was $10.1 billion, capital expenditures were $5.0 billion and free cash flow, as defined by the company, was $5.1 billion. Cash and cash equivalents were $5.8 billion at July 31. The company reported a $7.1 billion working-capital deficit.
At July 31, short-term borrowings were $1.7 billion and long-term debt, including amounts due within one year, totaled $42.6 billion. Capital lease and financing obligations totaled $4.7 billion, including current amounts. Total current liabilities were $65.3 billion, versus current assets of $58.1 billion.
Cash dividends declared were $1.96 per share for the first six months, up from $1.92 in the prior-year period. The company repurchased $1.3 billion of shares during the six months; $9.0 billion remained authorized under its $15.0 billion repurchase program.
Material changes versus the prior comparable period
- Quarterly net sales were flat and six-month net sales declined 0.1%. Currency movements reduced sales by $4.2 billion for the quarter and $7.4 billion for the six months; lower fuel prices also reduced sales by $490 million and $1.1 billion, respectively.
- Operating income fell $671 million for the quarter and $1.2 billion for the six months. The company attributed pressure primarily to higher wages and associate hours, digital and technology investment, increased employment claim contingencies, and higher utility rates in Brazil.
- Operating cash flow fell from $11.9 billion to $10.1 billion for the six months; free cash flow declined from $6.8 billion to $5.1 billion, mainly due to lower continuing-operations income and payment timing.
- Currency translation and other items contributed a $1.2 billion loss in other comprehensive income for the six months, compared with a $1.1 billion gain in the prior-year period.
Walmart U.S. sales grew 4.8% for the quarter and operating income declined to $4.8 billion from $5.3 billion. International sales fell 9.6%, largely reflecting currency, and operating income declined to $1.3 billion from $1.5 billion. Sam’s Club sales fell 0.9% and operating income declined to $428 million from $494 million; excluding fuel, quarterly sales increased 2.8%.
Outlook, risks, contingencies and unusual items
- Management outlook: Walmart expected to continue investing in stores, clubs, e-commerce, technology and associates. It cautioned that operating expenses could grow at or above sales growth and operating income could grow at or below sales growth. Management said liquidity sources should remain adequate for operations, expansion, dividends and repurchases; no specific earnings guidance was provided in the supplied filing text.
- Lease accounting review and controls: The company was reviewing its historical accounting for leases involving construction of leased assets. Management expected an immaterial cumulative adjustment in the third quarter of fiscal 2016. The review identified a material weakness in lease-accounting controls, and management concluded disclosure controls were not effective at the period end. Remediation was underway, with completion expected before fiscal year-end 2016.
- FCPA matters: Internal and government investigations and related shareholder litigation continued. The company stated a loss was probable but could not reasonably estimate a loss or range. Third-party expenses were $30 million for the quarter and $63 million for the six months. Potential consequences could include fines, penalties, injunctions or other relief.
- Other litigation: More than 6,000 ASDA equal-value employment claims were pending in the U.K.; the company could not estimate a loss. In the Pennsylvania wage-and-hour matter, Walmart had recorded $249 million for the judgment and accrued post-judgment interest, while continuing to pursue further review.
- Other sensitivities: Management identified currency movements, fuel prices, labor costs, pharmacy reimbursement pressure, competition, legal and regulatory matters, and credit-rating changes as factors that could affect results or financing costs. The company reported no material change to the risk factors in its latest Form 10-K.
Important facts for investors to verify
- Whether the lease-accounting review resulted in the expected immaterial adjustment, and whether remediation of the material weakness was completed and controls became effective.
- Developments and any estimable financial exposure from the FCPA investigations and related litigation, as well as the ASDA and wage-and-hour claims.
- Whether sales and operating results improve as currency, fuel, wage and investment effects evolve, particularly in Walmart International and Sam’s Club.
- Whether operating cash flow and free cash flow support planned capital investment, dividends, repurchases and debt obligations.
- The continuing effects of currency translation on reported results and equity, and any changes in cash availability, debt levels or credit ratings.