Walmart Inc. (then Wal-Mart Stores, Inc.) — Q3 FY2016 Form 10-Q
Reporting period: Three and nine months ended October 31, 2015. Amounts are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context
Walmart operates through Walmart U.S., Walmart International and Sam’s Club, with retail, wholesale and e-commerce operations. Management emphasized investing in associates and integrating digital and physical retail, while balancing growth with returns. The business is seasonal, with historically higher sales and operating income in the quarter ending January 31.
Financial performance and position
| Metric | Q3 FY2016 | Q3 FY2015 | Nine months FY2016 | Nine months FY2015 |
|---|---|---|---|---|
| Total revenue | $117.4 billion | $119.0 billion | $352.5 billion | $354.1 billion |
| Net sales | $116.6 billion | $118.1 billion | $349.9 billion | $351.6 billion |
| Operating income | $5.7 billion | $6.3 billion | $17.5 billion | $19.2 billion |
| Operating margin | 4.9% | 5.3% | 5.0% | 5.5% |
| Income from continuing operations | $3.4 billion | $3.8 billion | $10.3 billion | $11.6 billion |
| Diluted continuing-operations EPS | $1.03 | $1.15 | $3.13 | $3.46 |
| Gross profit margin | 25.0% | 24.4% | 24.6% | 24.4% |
- Cash flow: Nine-month operating cash flow was $15.0 billion, versus $15.5 billion. Capital expenditures were $8.2 billion, producing reported free cash flow of $6.8 billion versus $7.2 billion. Investing cash outflow was $7.6 billion and financing cash outflow was $9.3 billion.
- Liquidity: Cash and cash equivalents were $7.0 billion at October 31, 2015. The company reported a $5.4 billion working-capital deficit, which management described as typical of its operating model. Management believed liquidity sources were adequate for operations, investment, dividends and repurchases.
- Debt: Long-term debt, including amounts due within one year, was $41.4 billion; short-term borrowings were $5.0 billion. Long-term capital lease and financing obligations totaled $6.1 billion. Long-term debt declined $4.3 billion from January 31, 2015.
- Shareholder returns: Nine-month dividends paid were $4.7 billion and share repurchases were $1.7 billion. The fiscal 2016 annual dividend was set at $1.96 per share, up from $1.92. A new $20 billion repurchase authorization replaced the prior program in October; the full $20 billion remained available at period-end.
Material changes versus the prior comparable period
- Quarterly net sales declined 1.3%; nine-month net sales declined 0.5%. Currency movements reduced sales by $4.9 billion for the quarter and $12.3 billion year to date; lower fuel prices reduced sales by $515 million and $1.6 billion, respectively.
- Despite improved gross margin, operating income fell $551 million for the quarter and $1.7 billion year to date. Walmart cited higher wages, increased associate hours, and continued digital and technology investment as key expense pressures.
- Walmart U.S. sales grew 3.8% in the quarter and comparable sales increased 1.4%, but segment operating income fell $426 million. International sales fell 11.4%, largely reflecting currency, and operating income declined $92 million. Sam’s Club sales fell 2.2% including fuel; operating income rose $46 million in the quarter but declined $72 million year to date.
- Currency translation and other items reduced nine-month other comprehensive income attributable to Walmart by $3.6 billion, primarily reflecting currency movements in several international markets.
Outlook, risks and unusual items
- Outlook: No specific revenue or earnings guidance was provided in the supplied filing text. Management said operating expenses may grow at or above sales growth and operating income may grow at or below sales growth during increased investment. It also cautioned that strategic investments may not benefit near-term sales and comparable sales.
- Lease accounting and controls: A review identified immaterial historical lease-accounting errors. Walmart recorded a cumulative adjustment in the quarter, increasing assets by $1.7 billion, liabilities by $1.6 billion and net income attributable to Walmart by approximately $100 million, with no cash-flow impact. The review also identified a material weakness in internal controls over lease accounting; disclosure controls were deemed ineffective at the required reasonable-assurance level. Management expected remediation before fiscal year-end 2016.
- Legal and compliance contingencies: The company faces ongoing U.S. and foreign investigations into possible FCPA violations, including DOJ and SEC investigations, Mexican inquiries and related shareholder litigation. It reported $93 million of third-party FCPA-related expenses for the nine months and said a potential loss is probable but cannot be reasonably estimated. More than 6,000 ASDA equal-value employment claims also remain unresolved, with no loss range estimable. A Pennsylvania wage-and-hour judgment had a recorded accrual of $249 million, with further post-judgment interest accruing.
- Other risks: Management cited currency and fuel-price volatility, pharmacy reimbursement pressure, labor costs, legal and regulatory matters, and potential credit-rating changes. It stated that risk factors from the prior annual report had not materially changed.
- Other transaction: Walmart acquired the remaining noncontrolling interest in China e-commerce business Yihaodian for approximately $760 million in July 2015.
Most important facts for investors to verify
- Whether sales and operating trends improve, particularly in Walmart U.S. and Sam’s Club, and whether wage and digital investments translate into returns.
- The scale and duration of currency effects on International sales, earnings and accumulated other comprehensive loss.
- Progress in remediating the lease-accounting material weakness and any subsequent accounting or control disclosures.
- Developments in FCPA investigations and litigation, ASDA employment claims, and the potential financial exposure where losses remain unestimable.
- Cash generation, working-capital needs, debt maturities and the pace of dividends and share repurchases relative to investment requirements.