Walmart (then Wal-Mart Stores, Inc.) — Form 10-Q Summary
Business context and reporting period. The filing covers the quarter and nine months ended October 31, 2011, the third quarter of fiscal 2012. Walmart operates through Walmart U.S., Walmart International and Sam’s Club. Financial statements are unaudited.
Financial performance
| Metric | Three months ended Oct. 31, 2011 | Nine months ended Oct. 31, 2011 |
|---|---|---|
| Net sales | $109.5 billion; up 8.2% year over year | $321.6 billion; up 6.0% |
| Operating income | $5.9 billion; up 4.8% | $18.2 billion; up 3.5% |
| Income from continuing operations | $3.5 billion vs. $3.6 billion | $11.0 billion vs. $10.8 billion |
| Net income attributable to Walmart | $3.34 billion vs. $3.44 billion | $10.54 billion vs. $10.33 billion |
| Diluted EPS attributable to Walmart | $0.96 vs. $0.95 | $3.02 vs. $2.79 |
| Operating cash flow | Not presented for the quarter | $12.9 billion vs. $12.3 billion |
| Free cash flow | Not presented for the quarter | $3.37 billion vs. $2.95 billion |
Quarterly gross margin was 24.6%, down from 25.1%; operating margin was 5.4%, down from 5.5%. For the nine months, gross margin was 24.6% versus 24.9%, and operating margin was 5.6% versus 5.8%. Management attributed gross-margin pressure primarily to price investments and cost inflation. Operating expenses grew more slowly than sales, but operating income growth lagged sales growth.
At October 31, cash and equivalents were $7.1 billion, inventories $44.1 billion and total assets $195.0 billion. Short-term borrowings were $9.6 billion; long-term debt was $44.9 billion, plus $1.5 billion due within one year. Debt-to-total capitalization was 46.9%, versus 46.4% a year earlier. The company reported an $8.1 billion working-capital deficit, which it described as typical of its operating model.
Changes versus the prior comparable periods
- International sales rose 20.3% for the quarter and 16.1% year to date; acquisitions and currency translation were substantial contributors. The filing attributes $1.3 billion and $5.0 billion of sales growth, respectively, to currency translation, and $2.1 billion and $2.3 billion to international acquisitions.
- Walmart U.S. sales increased 2.7% for the quarter, with comparable sales up 1.2%; year-to-date comparable sales were down 0.3%. Sam’s Club comparable sales rose 9.2% in the quarter, including a 3.3% fuel contribution.
- The company completed its acquisition of approximately 51% of South Africa-based Massmart for about $2.5 billion and acquired 147 U.K. Netto stores for approximately £750 million ($1.2 billion). Purchase-price allocations were preliminary.
- Quarterly net income attributable to Walmart declined despite higher operating income, reflecting higher income-tax expense and an $8 million after-tax discontinued-operations loss. Year-to-date attributable net income increased.
- Nine-month share repurchases were $5.0 billion, down from $11.0 billion in the prior year; dividends paid were $3.8 billion. The fiscal 2012 annual dividend was set at $1.46 per share, a 21% increase.
Outlook, commentary and risks
- Management expected the fiscal 2012 effective tax rate to be at the lower end of its previously disclosed 33.5%–34.5% range. The nine-month rate was 33.3%.
- Fiscal 2012 capital expenditures were forecast at $13–14 billion. Management expected operating cash flows and short-term borrowing capacity to fund seasonal inventory needs and other cash requirements, with debt markets available for potential funding shortfalls.
- Management cited continued potential effects from foreign-exchange volatility, fuel prices, inflation and competitive pricing. Sam’s Club sales and margins are exposed to fuel prices; gross margins across segments faced price investments and cost inflation.
- The company issued $5.0 billion of senior unsecured notes in April 2011, with maturities from 2014 to 2041. It had undrawn revolving credit facilities of $10.0 billion and $6.3 billion, and reported strong commercial-paper and debt ratings; management noted that lower ratings could impair market access or raise borrowing costs.
- Legal and regulatory matters include a Pennsylvania wage-and-hour class action with a prior judgment of approximately $188 million, subject to further appeal and a downward adjustment of attorneys’ fees; new proposed California and Texas gender-discrimination classes following U.S. Supreme Court decertification of the broader Dukes class; and hazardous-materials investigations. Management said it could not reasonably estimate potential liability from its internal anti-corruption review, which was disclosed to the DOJ and SEC, but did not believe known facts indicated a material adverse effect.
- Disclosure controls were judged effective. The company continued staged implementation of a new financial system, which management identified as a significant component of internal control over financial reporting.
Important facts for investors to verify
- How much of reported sales growth reflects underlying comparable sales versus acquisitions, currency translation, square-footage growth and fuel prices.
- Whether gross-margin pressure persists and whether operating income can grow faster than sales.
- Integration results and final purchase-price allocations for Massmart and Netto, as well as progress converting Netto stores to the ASDA brand.
- Cash generation, inventory levels, borrowing needs and capital spending relative to the stated $13–14 billion fiscal-year plan.
- Developments and potential exposure in the anti-corruption investigation and the disclosed litigation and environmental matters.