Walmart Inc. (Wal-Mart Stores, Inc.) — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three months ended July 31, 2011 (fiscal 2012 second quarter), with year-to-date results for the six months ended that date. Walmart reports three segments: Walmart U.S., Walmart International, and Sam’s Club. Amounts below are in U.S. dollars; financial statements are unaudited.
Financial performance
| Metric | Three months ended July 31, 2011 | Prior-year quarter | Six months ended July 31, 2011 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $108.6 billion | $103.0 billion | $212.1 billion | $202.1 billion |
| Total revenues | $109.4 billion | $103.7 billion | $213.6 billion | $203.5 billion |
| Operating income | $6.4 billion | $6.2 billion | $12.3 billion | $11.9 billion |
| Net income attributable to Walmart | $3.8 billion | $3.6 billion | $7.2 billion | $6.9 billion |
| Diluted EPS attributable to Walmart | $1.09 | $0.97 | $2.06 | $1.84 |
| Operating margin as a percentage of net sales | 5.9% | 6.0% | 5.8% | 5.9% |
| Gross profit margin | 24.7% | 24.8% | 24.6% | 24.8% |
Quarterly net sales grew 5.5%, but operating income grew 3.1%; diluted EPS increased 12 cents. The effective tax rate was 32.2% for the quarter versus 34.3% a year earlier. Management attributed sales growth largely to expansion and favorable currency translation, which contributed $2.3 billion to quarterly International sales. Retail square footage increased 5.6% year over year.
Segment trends were mixed: quarterly Walmart U.S. sales rose 0.4%, while comparable-store sales declined 1.1%, attributed mainly to lower customer traffic. International sales rose 16.2%, including currency effects, and operating income rose 8.9%; its operating margin fell to 4.7% from 5.0%. Sam’s Club sales rose 9.5% and comparable club sales rose 9.0%, including a 4.5-percentage-point benefit from fuel; excluding fuel, comparable sales rose 4.5%.
Cash flow, debt, and liquidity
- Six-month cash from operations was $9.7 billion, down from $10.0 billion. Capital expenditures were $5.7 billion, producing company-defined free cash flow of $4.0 billion versus $4.5 billion.
- Investing cash outflow was $8.9 billion, including $3.3 billion related to the Netto and Massmart acquisitions. Financing cash outflow was $206 million. Cash and equivalents ended at $8.1 billion, compared with $10.2 billion a year earlier.
- At July 31, 2011, short-term borrowings were $6.4 billion, long-term debt was $45.2 billion, and long-term debt due within one year was $1.8 billion. Debt-to-total capitalization was 45.7%, up from 43.2% a year earlier. The company also reported $3.6 billion of capital-lease obligations.
- Working capital deficit was $9.2 billion. Management said cash flows from operations and short-term borrowing capacity should fund seasonal inventory needs and other requirements. The renewed revolving credit facilities were undrawn at quarter-end.
Changes, outlook, and notable items
- Walmart completed acquisitions of approximately 51% of South African retailer Massmart for about $2.5 billion and 147 U.K. Netto stores for about $1.2 billion. Purchase-price allocations were preliminary; Netto stores were expected to convert to ASDA by fiscal year-end. The company also expected to complete its remaining Bounteous/Trust-Mart transaction by the end of fiscal 2012, subject to approvals.
- Management expected fiscal 2012 capital expenditures of $12.5–$13.5 billion, excluding acquisitions, and the annual effective tax rate at the lower end of its 33.5%–34.5% range.
- Second-quarter operating expenses included approximately $49 million of foreign-currency derivative mark-to-market losses connected with the Massmart acquisition, $36 million of Netto and Massmart acquisition costs, and $30 million of U.S. storm-related costs. Management also cited currency and fuel-price volatility as factors that may affect results.
- The annual dividend was raised 21% to $1.46 per share for fiscal 2012. The company authorized a new $15 billion share-repurchase program; six-month repurchases totaled $3.5 billion for 65.4 million shares, compared with $7.1 billion for 135.6 million shares in the prior-year period.
- Legal matters include a Pennsylvania wage-and-hour class action judgment that was largely upheld on appeal, with attorneys’ fees remanded for reduction; Walmart planned further appellate review. The U.S. Supreme Court decertified the Dukes gender-discrimination class, though plaintiffs may pursue individual claims or a narrower class. The company also disclosed ongoing hazardous-materials investigations and other environmental matters; management did not expect those environmental matters to materially affect results, but outcomes remain uncertain.
Key facts for investors to verify
- Whether Walmart U.S. comparable-store sales and customer traffic improve, and whether International growth persists excluding currency effects.
- How acquired businesses contribute to sales and operating income, and whether preliminary acquisition accounting or integration costs change materially.
- Whether operating-margin pressure, acquisition spending, capital expenditures, dividends, and repurchases remain supportable by operating cash flow and the company’s debt capacity.
- Progress and potential financial exposure from the wage-and-hour, gender-discrimination, and environmental proceedings; several outcomes or loss estimates are not clear from the filing.
- Whether the stated tax-rate and capital-expenditure outlook is achieved, given the risks and uncertainties described in the filing.