Walmart Inc. (then Wal-Mart Stores, Inc.) — Q1 FY2015 Form 10-Q
Reporting period: Three months ended April 30, 2014. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and results
Walmart operates Walmart U.S., Walmart International and Sam’s Club. Quarterly results reflect retail operations, membership income and e-commerce. The company notes that sales and operating income are typically highest in the fiscal quarter ending January 31.
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Total revenue | $114,960 | $114,070 |
| Net sales | $114,167 | $113,313 |
| Operating income | $6,193 | $6,438 |
| Income from continuing operations | $3,711 | $3,932 |
| Net income attributable to Walmart | $3,593 | $3,784 |
| Diluted EPS attributable to Walmart | $1.11 total; $1.10 continuing operations | $1.14 total; $1.14 continuing operations |
| Gross profit margin | 24.0% | 24.1% |
| Operating margin on net sales | 5.4% | 5.7% |
Cash flow, debt and liquidity
- Operating cash flow was $5.939 billion, versus $4.894 billion. Capital expenditures were $2.157 billion, producing reported free cash flow of $3.782 billion, versus $1.926 billion. Management attributed the improvement mainly to timing of income-tax payments and capital expenditures.
- Cash and cash equivalents were $6.012 billion at April 30, down from $8.855 billion a year earlier. Working capital deficit was $8.3 billion, compared with $13.4 billion a year earlier.
- Short-term borrowings were $3.517 billion; long-term debt was $45.699 billion, including $3.287 billion due within one year. Debt-to-total-capitalization was 43.2%, compared with 44.8% a year earlier. The company issued $4.519 billion of long-term debt and repaid $1.574 billion during the quarter.
- Net cash used in financing was $5.177 billion, including $1.626 billion to purchase noncontrolling interests and $1.547 billion of dividends paid. The quarter-end balance sheet included $4.648 billion of dividends payable.
- Management said cash flows, cash on hand and capital-market access should be adequate for operations, investment, dividends and repurchases. Available credit lines provided more than $15 billion of additional liquidity.
Material changes and segment performance
- Total revenue and net sales each rose 0.8%. Growth in retail square feet (2.9%) and e-commerce was partly offset by a $1.6 billion adverse currency impact and weaker comparable U.S. sales.
- Operating income fell 3.8%, and continuing-operations income fell $221 million. The lower gross profit rate reflected price investments, merchandise mix and commodity costs; operating expenses rose 1.9%, faster than sales, with severe winter weather and higher healthcare costs among the drivers.
- U.S. comparable store and club sales declined 0.6%, including fuel. Walmart U.S. sales rose 2.0%, but segment operating income declined 4.3% to $4.975 billion. Sam’s Club sales rose 0.1%, while operating income declined 2.2% to $479 million. Walmart International sales declined 1.4% to $32.424 billion, while operating income increased 3.4% to $1.202 billion.
- Trailing-twelve-month ROI declined to 16.7% from 17.8%; management cited lower operating income and continued investment in stores and e-commerce. The company repurchased $626 million of shares, versus $2.246 billion a year earlier, and completed the purchase of substantially all remaining Walmart Chile noncontrolling interests for approximately $1.5 billion.
Outlook, risks and unusual items
- No specific earnings or sales guidance is provided. Management expected FY2015 capital expenditures to exceed FY2014 spending, with a higher share expected in the third and fourth quarters, and planned to expand Neighborhood Markets, other small stores and e-commerce.
- Management estimated the after-tax impact of severe U.S. winter storms at approximately $90 million for the quarter. Weather, reduced government food benefits, healthcare costs, currency movements, commodity costs and fuel-price volatility were identified as factors affecting results.
- The company stated that it is probable it will incur a loss related to ongoing FCPA matters, but could not reasonably estimate a loss or range. DOJ and SEC investigations, investigations in several foreign markets, Mexican government inquiries and shareholder lawsuits remained ongoing. The company reported $53 million of third-party FCPA-related expenses for the quarter, versus $73 million a year earlier, and warned that future consequences could be material.
- The Vips restaurant sale for approximately $625 million closed in May 2014, after quarter-end; Walmart expected to record a net gain in discontinued operations in Q2 FY2015, but did not state the amount. The quarter included $15 million of income from discontinued operations.
- The annual dividend was raised to $1.92 per share from $1.88, payable in quarterly installments of $0.48. Management reported no material change in the risk factors disclosed in the prior Form 10-K.
Important facts for investors to verify
- Whether comparable-sales trends, gross margin pressure and expense growth improve in subsequent quarters, particularly in Walmart U.S. and Sam’s Club.
- How currency movements affect International sales and operating income, and whether planned capital spending delivers adequate returns.
- Progress, costs and potential financial or operational consequences of the FCPA investigations and related litigation; the filing provides no estimable loss range.
- The realized gain and cash-flow impact from the Vips sale, and the ongoing effects of the Walmart Chile buyout.
- Debt maturities, cash availability and the sustainability of dividends and share repurchases alongside planned capital expenditures.