Walmart Inc. — Q3 FY2020 Form 10-Q
Reporting period: Quarter and nine months ended October 31, 2019; fiscal year ends January 31. Unaudited results are compared with the corresponding 2018 periods. Amounts are U.S. dollars; financial statement amounts are in millions unless noted.
Key financial results
| Metric | Three months ended Oct. 31, 2019 | Change vs. 2018 | Nine months ended Oct. 31, 2019 | Change vs. 2018 |
|---|---|---|---|---|
| Total revenue | $127,991 | +2.5% | $382,293 | +1.8% |
| Net sales | $126,981 | +2.5% | $379,318 | +1.8% |
| Operating income | $4,718 | −5.4% | $15,246 | −4.1% |
| Operating margin | 3.7% | Down from 4.0% | 4.0% | Down from 4.3% |
| Gross profit rate | 24.5% | Down 36 bps | 24.4% | Down 36 bps |
| Net income attributable to Walmart | $3,288 | Up from $1,710 | $10,740 | Up from $2,983 |
| Diluted EPS attributable to Walmart | $1.15 | Up from $0.58 | $3.74 | Up from $1.01 |
Net income and EPS rose sharply despite lower operating income. The comparison reflects changes in “other gains and losses,” including investment fair-value movements and the prior-year Walmart Brazil disposal loss; reported profit growth should not be read as equivalent to improvement in underlying operations.
Cash flow, balance sheet and capital
- Cash from operations: $14.5 billion for the nine months, down from $17.3 billion. Management attributed the decline mainly to timing of vendor payments and U.S. associate payroll, and the inclusion of Flipkart operations.
- Free cash flow: $6.8 billion, down from $10.3 billion. The company defines this as operating cash flow less property and equipment payments; it does not deduct debt service, acquisitions, or other contractual payments.
- Capital spending: $7.8 billion, versus $7.0 billion. Spending prioritized eCommerce, technology, supply chain and remodels; U.S. spending on new stores and clubs was $67 million, versus $230 million.
- Cash and cash equivalents: $8.6 billion at October 31, 2019. Working capital deficit was $15.9 billion, which Walmart said was consistent with its customary operating model.
- Debt: $49.0 billion of long-term debt, including amounts due within one year, plus $4.9 billion of short-term borrowings. The company issued $5.5 billion of long-term debt and repaid $1.9 billion during the nine months. It also had $15 billion of undrawn committed U.S. credit lines.
- Leases: Adoption of the new lease standard added $14.8 billion to assets and $15.1 billion to liabilities at adoption. At October 31, net operating lease obligations were $17.5 billion and net finance lease obligations were $4.5 billion.
- Shareholder returns: Dividends paid were $4.5 billion and share repurchases were $4.8 billion during the nine months. The fiscal 2020 annual dividend was set at $2.12 per share; $6.6 billion remained under the repurchase authorization.
Material changes and segment performance
- Walmart U.S.: Net sales increased 3.2% for the quarter and 3.1% for the nine months. Comparable sales grew 3.3% and 3.1%, respectively; eCommerce contributed about 1.7 and 1.5 percentage points. Operating income rose to $4.2 billion for the quarter and $13.0 billion for the nine months.
- Walmart International: Quarterly net sales rose 1.3%, but nine-month sales fell 1.6%, with currency headwinds and the Brazil divestiture offsetting Flipkart and comparable sales growth. Operating income declined 46% for the quarter and 39% for the nine months. Results included a $0.3 billion non-cash impairment of Flipkart’s Jabong.com fashion trade name.
- Sam’s Club: Net sales rose 0.7% for the quarter and 1.3% for the nine months; comparable sales increased 0.6% and 1.3%. Quarterly operating income fell to $327 million from $379 million; nine-month operating income increased to $1.3 billion from $1.1 billion. Lower ticket associated with removing tobacco from some clubs affected comparable sales.
- Consolidated sales growth reflected positive U.S. and Sam’s Club comparable sales and Flipkart, partly offset by the Brazil divestiture and unfavorable currency effects. Currency reduced sales by about $1.0 billion in the quarter and $4.2 billion over nine months.
- Gross profit rate contracted, reflecting Flipkart’s mix and U.S. price investment, partly offset by merchandise mix and lower transportation-cost pressure. Expense leverage and productivity gains helped offset margin pressure.
Outlook, risks and unusual items
- No specific consolidated revenue, earnings or margin guidance is provided in the supplied filing text. Management said liquidity should be adequate for operations, investment, dividends and repurchases, and expects operating cash, cash on hand and capital-market access to meet anticipated needs.
- Management’s strategy emphasizes productive comparable-sales and eCommerce growth, technology and supply-chain investment, remodels, expense discipline and slower growth in new stores and clubs. It said it expects returns on capital to improve over time.
- Walmart Brazil’s 2018 majority-stake sale generated a $4.8 billion pretax loss in the prior-year nine-month comparison. Current-period other gains and losses were affected in part by fair-value changes in Walmart’s JD.com investment, valued at $4.5 billion at October 31, 2019.
- Walmart paid $283 million in June 2019 to resolve U.S. FCPA investigations. The settlement includes compliance reporting and monitorships; the company said it does not currently expect a material adverse effect from these matters.
- ASDA faces more than 30,000 equal-value employment claims; Walmart said it cannot reasonably estimate a potential loss. Opioid litigation and related investigations also remain unresolved, with no reasonably estimable loss or range disclosed. The filing warns that adverse outcomes in these matters could be material.
- As a subsequent event, Asda contributed $1.1 billion to its pension plan in the fourth quarter. Walmart expects a pretax pension-settlement charge of approximately $2.2 billion when individual annuity contracts are issued, expected in late fiscal 2021 or early fiscal 2022.
- Key stated risks include competition, currency fluctuations, consumer and economic conditions, labor and product costs, tariffs, fuel prices, supply-chain disruption, cybersecurity, legal and regulatory matters, and credit-rating changes. Walmart reported no material change to its previously disclosed risk factors.
Investor verification priorities
- Separate recurring operating performance from gains and losses, especially JD.com fair-value changes and the prior-year Brazil disposal loss.
- Assess whether U.S. sales and productivity gains can offset gross-margin pressure and weaker International operating results.
- Track operating cash flow and free cash flow, including the timing effects management cited and ongoing capital spending.
- Review debt and lease obligations alongside dividends and repurchases; confirm liquidity and refinancing assumptions as maturities approach.
- Monitor the outcome and potential financial exposure of the ASDA equal-value claims and opioid litigation, for which the filing provides no clear loss estimate.
- Confirm the timing and final expense impact of the expected ASDA pension settlement charge.