Walmart Inc. (then Wal-Mart Stores, Inc.) — Q3 FY2018 Form 10-Q
Business context and reporting period. The filing covers the three and nine months ended October 31, 2017. Walmart operates Walmart U.S., Walmart International and Sam’s Club, combining physical retail with eCommerce. Fiscal year-end is January 31; the business is seasonal, with historically higher sales and operating income in the January quarter. Unless stated otherwise, amounts below are USD.
Financial performance and liquidity
| Metric | Three months ended Oct. 31, 2017 | Three months ended Oct. 31, 2016 | Nine months ended Oct. 31, 2017 | Nine months ended Oct. 31, 2016 |
|---|---|---|---|---|
| Total revenue | $123.2 billion | $118.2 billion | $364.1 billion | $354.9 billion |
| Net sales | $122.1 billion | $117.2 billion | $360.6 billion | $351.6 billion |
| Operating income | $4.8 billion | $5.1 billion | $16.0 billion | $16.6 billion |
| Net income attributable to Walmart | $1.7 billion | $3.0 billion | $7.7 billion | $9.9 billion |
| Diluted EPS | $0.58 | $0.98 | $2.54 | $3.16 |
| Gross profit margin | 25.0% | 25.3% | 24.9% | 25.1% |
| Operating income as % of net sales | 3.9% | 4.4% | 4.4% | 4.7% |
- Sales and margins: Quarterly and year-to-date revenue increased 4.2% and 2.6%, respectively. U.S. comparable sales, including fuel, rose 3.1% for the quarter and 2.0% year to date. Gross margin declined, which management attributed mainly to price investments, eCommerce mix and hurricane impacts. Operating expense as a percentage of sales increased 17 basis points for the quarter and 16 basis points year to date.
- Cash flow: For the nine months, operating cash flow was $17.1 billion, down from $19.8 billion. Capital expenditures were $6.9 billion, producing reported free cash flow of $10.2 billion, versus $12.3 billion. Management cited payment timing, higher incentive payments and comparison with prior-year working-capital improvements.
- Balance sheet and liquidity: At October 31, cash was $7.0 billion; current assets were $65.4 billion and current liabilities $80.4 billion, a $15.1 billion working-capital deficit. Long-term debt, including amounts due within one year, was $37.5 billion; short-term borrowings were $5.1 billion. Management said the deficit is typical of its operating model and expects operating cash flow and capital-market access to meet anticipated needs.
- Capital returns: Walmart declared a fiscal 2018 annual dividend of $2.04 per share, up from $2.00. It repurchased $6.7 billion of stock during the nine months. A new $20 billion repurchase authorization took effect November 20, 2017.
Material changes and segment results
- Quarterly net sales grew 4.2%; Walmart U.S. sales rose 4.3%, International 4.1%, and Sam’s Club 4.4%. Year-to-date sales rose 3.5% in U.S. and 3.2% at Sam’s Club, while International declined 0.1%.
- Quarterly operating income rose slightly at Walmart U.S. to $4.0 billion and at Sam’s Club to $447 million, but declined at International to $1.2 billion. Year-to-date operating income fell in International and Sam’s Club, while increasing modestly in Walmart U.S.
- International sales comparisons reflected currency movements and the sale of Yihaodian and Suburbia. Suburbia’s sale generated a reported $0.7 billion pretax gain, partly recognized in the period and partly deferred over lease terms.
- Quarterly net income and diluted EPS fell substantially, in part because of a $1.3 billion loss on early debt extinguishment; the nine-month loss on extinguishment was $2.1 billion. Walmart said the transactions retired higher-rate debt to reduce interest expense in future periods. The debt premium was approximately $2.1 billion.
- Year-to-date net income also included a $283 million accrual for the FCPA investigation. Other cited operating pressures included hurricane impacts, approximately $150 million of impairment charges related to exiting certain international properties, and continued eCommerce and technology investment.
Outlook, risks and unusual items
- No specific sales, earnings or EPS forecast is provided in the filing. Management’s stated priorities are comparable-sales and eCommerce growth, operating discipline, and redirecting capital toward remodels, eCommerce, technology and supply chain rather than new-store growth. Management believes returns on capital will improve over time.
- Management expects liquidity sources to be adequate for operations, investment, dividends and repurchases. It also anticipates that most share repurchases will be funded from free cash flow. These are forward-looking expectations, not guarantees.
- The DOJ and SEC FCPA discussions had progressed to the point that Walmart recorded a probable-loss accrual of $283 million. Resolution timing and terms remain uncertain; the company cautioned that the accrual may not reflect the final outcome. More than 10,000 ASDA equal-value employment claims are pending, and Walmart said it cannot reasonably estimate a loss or range.
- Other disclosed risks include currency and fuel-price volatility, intense retail and eCommerce competition, labor and supply-chain costs, cybersecurity, tax and regulatory changes, and legal proceedings. The filing also describes environmental matters; management did not believe possible losses in the listed environmental cases would be material.
- Upcoming accounting changes include revenue recognition adoption in February 2018, expected to have an immaterial cumulative retained-earnings adjustment, and lease accounting adoption in February 2019, which management expects to materially affect the balance sheet. The effect of the new financial-instruments standard on the JD investment could be material depending on its value at adoption.
Important facts for investors to verify
- Whether sales growth can continue while price investments, eCommerce mix and other costs pressure gross and operating margins.
- The eventual FCPA resolution and whether the $283 million accrual adequately reflects total penalties, settlements and related costs.
- The outcome and potential financial exposure of the ASDA claims, for which the company could not estimate a loss range.
- Cash-flow conversion and working-capital trends, including the impact of inventory buildup and payment timing on free cash flow.
- Debt-refinancing savings compared with the substantial one-time debt-extinguishment premium, and the pace and funding of dividends and share repurchases.
- The impact of currency movements, divestitures, hurricanes and planned accounting-standard changes on future reported results.