Walmart Inc. — Q1 FY2021 Form 10-Q
Reporting period: Three months ended April 30, 2020. Comparisons are with the three months ended April 30, 2019, unless noted. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Total revenue | $134.6 billion | $123.9 billion | +8.6% |
| Net sales | $133.7 billion | $122.9 billion | +8.7% |
| Operating income | $5.2 billion | $4.9 billion | +$279 million |
| Net income attributable to Walmart | $4.0 billion | $3.8 billion | +3.9% |
| Diluted EPS | $1.40 | $1.33 | +5.3% |
| Gross profit rate | 23.7% | 24.3% | −66 bps |
| Operating income as % of net sales | 3.9% | 4.0% | −10 bps |
U.S. comparable sales rose 10.5% including fuel: Walmart U.S. increased 10.6% and Sam’s Club increased 9.6%. Walmart International net sales grew 3.4%, including a $1.3 billion adverse currency impact. U.S. eCommerce contributed approximately 4.0 percentage points to Walmart U.S. comparable sales.
Cash flow: Operating cash flow was $7.0 billion, versus $3.6 billion; capital expenditures were $1.8 billion, versus $2.2 billion. Company-defined free cash flow was $5.3 billion, versus $1.4 billion. Management attributed stronger operating cash flow principally to faster inventory sell-through and the timing of vendor and other payments.
Liquidity and debt: Cash and cash equivalents were $14.9 billion at April 30, 2020, up from $9.5 billion at January 31, 2020. The working capital deficit was $19.3 billion. Short-term borrowings were $4.0 billion; long-term debt, including amounts due within one year, was $49.0 billion. U.S. committed credit lines totaled $15.0 billion and were undrawn. Total equity was $74.1 billion.
Material changes and drivers
- COVID-19-related stock-up demand, larger average baskets and strong online grocery and eCommerce sales drove revenue growth. An extra day in February 2020 contributed approximately 1% to net sales.
- Gross margin rate declined, primarily from category and channel mix shifts and prior-year price investments. Operating expenses increased 5.5%, but grew more slowly than sales; approximately $0.9 billion of incremental pandemic-related costs included associate bonuses, safety supplies, cleaning and expanded leave.
- Operating income improved modestly despite lower gross margin. Other gains were $721 million, principally reflecting a fair-value gain on the JD.com investment; the prior-year period included $837 million of other gains.
- Net cash provided by financing activities was $565 million, compared with $846 million used in the prior-year quarter, mainly reflecting increased short-term borrowings and lower share repurchases. Repurchases were $723 million, versus $2.1 billion.
- Other comprehensive loss attributable to Walmart was $3.4 billion, largely reflecting currency translation, and reduced Walmart shareholders’ equity to $68.2 billion from $74.7 billion at January 31, 2020.
Outlook, risks and contingencies
Management gave no specific earnings or revenue guidance. It expected continued business and economic uncertainty from the pandemic, including the duration and intensity of COVID-19, restrictions, stimulus, employment trends and consumer confidence. Management said cash flows, cash on hand and capital-market access should be sufficient for anticipated operating needs, investment, dividends and repurchases, while noting it was managing repurchases prudently.
Disclosed operating risks include supply-chain strain, sales volatility and changes in channel and product mix, government restrictions, currency fluctuations, competition and pandemic-related effects on employees and customers. International results may reflect pandemic impacts more fully in the following quarter because most international markets report on a one-month lag.
Material unresolved matters include more than 35,000 UK Asda equal-value employment claims and opioid litigation and investigations. The company said it could not reasonably estimate potential losses for these matters and warned adverse outcomes could materially affect its financial condition, results or cash flows. Separate government investigations concern money-transfer and anti-fraud/anti-money-laundering practices; the company could not predict their outcomes. The filing also describes other environmental matters, including a settled California matter for a $150,000 payment.
Important facts for investors to verify
- Whether elevated pandemic-driven sales persist, and how sales mix, eCommerce fulfillment costs and gross margins develop.
- Whether pandemic-related associate, safety and operating expenses continue to rise, and their effect on operating income.
- Cash-flow sustainability: first-quarter cash generation benefited from inventory sell-through and payment timing; free cash flow is a non-GAAP measure and excludes debt service and acquisitions.
- Borrowing levels, working capital deficit, credit access and the pace of share repurchases and dividend payments.
- Developments in the Asda equal-value claims, opioid cases and government investigations, for which potential losses are not estimable in the filing.