Walmart (then Wal-Mart Stores, Inc.) — Form 10-Q Summary
Business context and reporting period
The filing reports the second quarter and first six months of fiscal 2015, ended July 31, 2014, with comparisons to the corresponding 2013 periods. Walmart operates Walmart U.S., Walmart International and Sam’s Club. Amounts below are U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Key financial metrics
| Metric | Three months ended July 31, 2014 | Six months ended July 31, 2014 | Comparable 2013 result |
|---|---|---|---|
| Total revenue | $120.1 billion, up 2.8% | $235.1 billion, up 1.8% | $116.8 billion; $230.9 billion |
| Operating income | $6.74 billion, down 0.5% | $12.93 billion, down 2.1% | $6.78 billion; $13.22 billion |
| Income from continuing operations | $4.09 billion | $7.80 billion | $4.21 billion; $8.14 billion |
| Diluted continuing-operations EPS attributable to Walmart | $1.21 | $2.31 | $1.23; $2.37 |
| Operating margin | 5.7%, down from 5.8% | 5.5%, down from 5.8% | Prior-period margins shown for comparison |
Quarterly consolidated net income attributable to Walmart was $4.09 billion, including $270 million of income from discontinued operations, principally a $262 million gain on the sale of the Vips restaurant business in Mexico. For the six months, attributable net income was $7.69 billion, including $285 million from discontinued operations. Gross profit rate declined 13 basis points for the quarter and 9 basis points for the half year.
- Segment results, quarter: U.S. net sales were $70.6 billion (+2.7%) and operating income was $5.25 billion (-2.4%); International sales were $33.9 billion (+3.1%) and operating income was $1.49 billion (+8.0%); Sam’s Club sales were $14.9 billion (+2.3%) and operating income was $494 million (-4.6%).
- Cash flow, six months: Operating cash flow was $11.9 billion, capital expenditures were $5.1 billion, and management-defined free cash flow was $6.8 billion, versus $5.2 billion in 2013. The increase was primarily attributed to timing of tax payments and capital spending.
- Liquidity and debt: Cash and equivalents were $6.2 billion at July 31, versus $7.3 billion at January 31, 2014. Working capital deficit was $7.5 billion. Short-term borrowings were $3.5 billion; long-term debt including amounts due within one year was $47.7 billion. Credit lines provided more than $15 billion of additional liquidity, largely unused. Debt-to-total-capitalization was 41.1%, compared with 44.4% a year earlier.
- Capital returns: Dividends declared were $1.92 per share for the first half (fiscal-year annual rate), up from $1.88 in the prior fiscal year. Share repurchases totaled $933 million, versus $4.10 billion in the prior-year half.
Material changes versus the prior comparable period
Sales growth was partly offset by unfavorable currency translation of $0.7 billion for the quarter and $2.3 billion for the six months. U.S. comparable sales were approximately flat; U.S. traffic declined, offset by higher average ticket, including e-commerce. Retail square footage grew about 3.0% year over year. Price investment and merchandise mix reduced gross profit rates across all three segments. Higher U.S. health-care costs and, for the half year, severe winter storms contributed to expense deleverage and lower operating income. International operating income increased, while U.S. and Sam’s Club operating income declined.
Six-month operating cash flow increased from $11.3 billion to $11.9 billion, while capital expenditures fell to $5.1 billion from $6.1 billion, partly reflecting timing. Financing cash outflow increased to $8.8 billion from $3.9 billion, including reduced short-term borrowings and approximately $1.5 billion to acquire substantially all remaining noncontrolling interests in Walmart Chile. The Vips sale generated $671 million cash proceeds.
Outlook, management commentary, risks and unusual items
- Management said liquidity sources should be adequate for operations, expansion, dividends and repurchases. It planned fiscal 2015 capital expenditures to exceed fiscal 2014 spending, with a greater share expected in the third and fourth quarters, including investment in smaller U.S. formats and e-commerce. No specific earnings or sales forecast is provided in the supplied filing text.
- Management cited price investment, mix shifts, healthcare costs, currency movements, weather, fuel-price volatility and tax-rate variability as factors affecting results. U.S. government food-benefit reductions also weighed on comparable sales.
- The Audit Committee and company continued internal reviews and investigations concerning possible FCPA violations, including matters involving Walmex and other markets; DOJ, SEC and Mexican authorities were investigating, and shareholder lawsuits were pending. The company said a loss was probable but could not reasonably estimate a loss or range; it cautioned that future impact could be material despite not then expecting a material adverse effect.
- Other disclosed proceedings included a Pennsylvania wage-and-hour class action and U.K. ASDA equal-value claims. The filing states adverse outcomes in certain proceedings could be material; the ASDA loss could not be reasonably estimated. Several environmental matters were described as not expected to be material.
- Walmart completed its purchase of substantially all remaining Walmart Chile interests. The Vips disposal gain is included in discontinued operations. The company adopted the new revenue-recognition standard on February 1, 2017 and did not expect a material effect.
Important facts for investors to verify
- Whether sales and comparable-sales trends improve, particularly in U.S. stores, and how e-commerce and new square footage contribute to growth.
- Whether margins and operating income recover as price investment, healthcare costs and merchandise mix affect performance.
- How currency movements affect International results and whether the expected higher second-half capital spending is achieved.
- Developments in the FCPA investigations and litigation, including any eventual estimate or recognition of financial exposure.
- Cash generation, debt levels, planned capital returns and management’s expectation that liquidity and credit-market access remain adequate.