Walmart Inc. (then Wal-Mart Stores, Inc.) — Form 10-Q summary
Business context and reporting period
Quarter ended July 31, 2013, in fiscal 2014; results are unaudited and compared with the quarter and six months ended July 31, 2012. Walmart operates Walmart U.S., Walmart International and Sam’s Club. Its fiscal year ends January 31. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and liquidity
| Metric | Three months ended July 31, 2013 | Six months ended July 31, 2013 |
|---|---|---|
| Total revenue | $116.945 billion; +2.3% year over year | $231.132 billion; +1.7% |
| Net sales | $116.216 billion; +2.4% | $229.645 billion; +1.7% |
| Operating income | $6.793 billion; +1.4%; 5.8% of net sales | $13.249 billion; +1.3%; 5.8% of net sales |
| Consolidated net income | $4.215 billion, versus $4.161 billion | $8.160 billion, versus $8.055 billion |
| Net income attributable to Walmart | $4.069 billion, versus $4.016 billion | $7.853 billion, versus $7.758 billion |
| Diluted EPS attributable to Walmart | $1.24, versus $1.18 | $2.38, versus $2.27 |
| Gross profit margin | 24.7%, up 0.1 percentage point | 24.5%, up 0.2 percentage point |
- For the six months, operating cash flow was $11.251 billion, capital expenditures were $6.066 billion and management-defined free cash flow was $5.185 billion, down from $6.073 billion a year earlier. The filing attributes the decline chiefly to timing of income tax payments and higher capital spending.
- Cash and cash equivalents were $9.016 billion at July 31, 2013. Working capital was negative $12.2 billion; management says a working capital deficit is typical of its operating model.
- At July 31, short-term borrowings were $8.639 billion and long-term debt, including amounts due within one year, totaled $45.370 billion. Capital lease obligations were additional. Debt-to-total-capitalization was 44.4%, versus 43.7% a year earlier.
- Operating cash flow funded investment and shareholder returns. Financing included $5.0 billion of long-term debt issuance, $3.092 billion of dividends paid and $4.096 billion of share repurchases during the six months.
Changes versus the prior comparable period
- Sales growth slowed: consolidated net sales rose 2.4% in the quarter and 1.7% year to date, compared with 4.5% and 6.5%, respectively, in the prior-year periods. Management cited 3.4% growth in retail square footage and acquisitions as contributors, offset by unfavorable currency translation and weaker comparable sales at Walmart U.S. and several major international operations.
- U.S. comparable store and club sales, including fuel, increased 0.1% in the quarter but declined 0.8% year to date; Walmart U.S. comps fell 0.3% and 1.1%, respectively. Sam’s Club comps rose 1.8% and 0.4%.
- Operating income growth lagged sales growth. Operating expenses rose 3.4% in the quarter and 2.3% year to date, faster than sales; management said Walmart did not meet its expense-leverage or operating-income-growth objectives.
- Segment results were mixed. Walmart U.S. operating income rose 5.2% in the quarter and 5.5% year to date; International declined 1.3% and 2.9%; Sam’s Club rose 3.0% and 5.1%.
- Gross margin improved overall, reflecting cost savings, supply-chain productivity and merchandise mix in Walmart U.S., and lower promotional activity and inventory improvements in International. Sam’s Club faced lower fuel margins.
- Currency fluctuations reduced sales by $680 million for the quarter and $1.7 billion year to date. They reduced operating income by $20 million and $27 million, respectively. Currency translation losses also contributed to a $2.6 billion year-to-date loss in Walmart’s accumulated other comprehensive income currency category.
Outlook, management commentary and risks
- Management projected a fiscal 2014 effective tax rate of 31%–33%. It expected eCommerce investment to reduce fiscal 2014 EPS by approximately $0.09 per share; the reported quarter and six-month EPS included estimated impacts of $0.03 and $0.05 per share, respectively. The filing does not provide a general full-year sales or earnings forecast.
- Management said cash from continuing operations and short-term borrowing capacity should meet seasonal inventory and other cash needs; it expected to refinance debt as it matures and anticipated continued access to debt markets, subject to credit ratings. It intended to keep most foreign cash invested abroad and said domestic liquidity needs should be met through other funding sources.
- The Audit Committee and the company were investigating potential Foreign Corrupt Practices Act and other alleged misconduct involving foreign subsidiaries. The DOJ, SEC and Mexican authorities were conducting investigations; the company was cooperating. Related shareholder litigation was also pending. Walmart said a loss was probable but could not reasonably estimate the amount or range. Related expenses were $82 million for the quarter and $155 million year to date, including investigation and compliance-program costs.
- Other disclosed contingencies include a Pennsylvania wage-and-hour class action with a prior judgment under appeal and gender-discrimination-related claims. The filing describes outcomes as uncertain; management did not believe potential losses in the gender-discrimination matters would be material. It also disclosed environmental matters in Brazil and a Costa Rican municipal penalty sought at approximately $380,000, which management considered not material.
- Other risks highlighted include consumer spending weakness, foreign-exchange and fuel-price volatility, interest-rate and credit-market conditions, legal and regulatory developments, and operational and supply-chain risks. The company reported effective disclosure controls and no material change in internal control over financial reporting, apart from ongoing systems and shared-services implementations.
Most important facts for investors to verify
- Whether weaker comparable sales, especially at Walmart U.S. and major international operations, persisted after the reporting period.
- Whether cost growth, eCommerce and compliance spending continue to outpace sales growth and constrain operating leverage.
- How currency movements affect reported International sales, earnings and equity, and how fuel margins affect Sam’s Club.
- Developments, potential costs and any loss estimate emerging from the FCPA investigations and related shareholder litigation.
- Cash generation, capital spending, debt levels, credit ratings, dividend commitments and execution of the new $15 billion share-repurchase authorization.