Business context and reporting period
Walmart Inc. (then Wal-Mart Stores, Inc.) reported its unaudited first quarter of fiscal 2016, the three months ended April 30, 2015, compared with the same period of fiscal 2015. Its three reporting segments are Walmart U.S., Walmart International and Sam’s Club.
Financial performance and liquidity
Unless otherwise indicated, amounts are in U.S. dollars; financial statement amounts are in millions.
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Total revenue | $114.826 billion | $114.960 billion |
| Operating income | $5.680 billion | $6.193 billion |
| Income from continuing operations | $3.283 billion | $3.711 billion |
| Net income attributable to Walmart | $3.341 billion | $3.593 billion |
| Diluted EPS attributable to Walmart | $1.03 | $1.11 |
| Gross profit margin | 24.1% | 24.0% |
| Operating margin | 5.0% | 5.4% |
| Operating cash flow | $4.446 billion | $5.939 billion |
| Capital expenditures | $2.203 billion | $2.157 billion |
| Free cash flow (company-defined) | $2.243 billion | $3.782 billion |
- Net sales were $114.002 billion, down 0.1%. Revenue includes $824 million of membership and other income.
- Net interest expense was $824 million, versus $568 million. The filing attributes much of the increase to a cumulative accounting correction, including $254 million of interest expense.
- At April 30, cash and cash equivalents were $7.759 billion; inventory was $46.310 billion; and current assets and current liabilities were $62.133 billion and $69.624 billion, respectively. Walmart reported a $7.5 billion working capital deficit.
- Long-term debt, including amounts due within one year, was $44.908 billion; short-term borrowings were $799 million. Capital lease and financing obligations totaled $4.524 billion, including current obligations.
- Operating cash flow less capital expenditures declined year over year, primarily due to lower continuing-operations income and the timing of inventory and income-tax payments.
- The fiscal 2016 annual dividend was set at $1.96 per share, up from $1.92. The company repurchased $280 million of shares in the quarter; $10.0 billion remained under its $15.0 billion authorization.
Changes versus the prior comparable period
- Consolidated net sales were nearly flat, as $3.3 billion of adverse currency translation and a $560 million decline in fuel sales offset U.S. growth, expanded selling space and higher e-commerce sales.
- Walmart U.S. sales grew 3.5% and comparable sales increased 0.6%; segment operating income fell to $4.639 billion from $4.975 billion. Wage costs, additional associate hours, digital investment and other expense pressures weighed on results.
- Walmart International sales fell 6.6% to $30.278 billion, primarily reflecting currency effects; operating income declined to $1.070 billion from $1.202 billion.
- Sam’s Club sales fell 3.0% and comparable club sales declined 4.3%, including lower fuel sales. Excluding fuel, sales grew 1.2%; segment operating income decreased to $427 million from $479 million.
- Lower-margin fuel sales helped lift the consolidated gross margin by 9 basis points, but operating expenses as a share of sales rose 56 basis points. Operating income declined 8.3%.
- Currency translation and other reduced other comprehensive income by $1.684 billion before related items; Walmart-attributable comprehensive income was $1.914 billion, versus $3.877 billion.
Outlook, management commentary and risks
- Management emphasized growth balanced with returns, continued investment in associates and in integrating digital and physical retail, and a focus on asset efficiency and working capital. It cautioned that operating expenses could grow at or above sales growth and operating income could grow at or below sales growth during this investment period. The filing gives no specific quarterly or annual earnings guidance.
- Management said it expected liquidity sources to remain adequate for operations, expansion, capital expenditures, dividends and repurchases. It intended generally to reinvest foreign-held cash overseas; approximately $1.7 billion was not freely transferable to the U.S. due to restrictions.
- Walmart is subject to a wage-and-hour class action in Pennsylvania. After a state supreme court ruling, it recorded $249 million of expense for the judgment and accrued post-judgment interest; it continued to contest the matter and petitioned the U.S. Supreme Court.
- The company’s FCPA-related internal and government investigations and shareholder litigation remained ongoing. Walmart said a loss was probable but could not reasonably estimate a loss or range; it warned of possible fines, penalties, other relief and continuing costs. Third-party FCPA-related costs were $33 million for the quarter, compared with $53 million.
- The accounting correction involved Canadian property sales that did not qualify for sale accounting: properties were reinstated as assets with financing obligations. The correction included $254 million of cumulative interest expense, a $53 million tax benefit and $173 million attributable to noncontrolling interest; the company said its impact on operating income and Walmart-attributable EPS was de minimis.
- Other disclosed exposures include more than 5,000 ASDA equal-value pay claims, environmental matters and foreign-exchange and fuel-price volatility. The filing states the ASDA claims’ potential loss could not be reasonably estimated. Management reported no material change to the risk factors in its latest Form 10-K.
Important facts for investors to verify
- Whether U.S. sales momentum and e-commerce growth can offset currency headwinds and continued weakness in international and Sam’s Club results.
- Whether wage, shrink, shipping and digital-investment costs continue to pressure operating margins and cash generation.
- Developments, potential costs and eventual resolution of the FCPA investigations, shareholder suits, Pennsylvania wage case and ASDA claims.
- Debt maturities, financing obligations, working-capital needs and the sustainability of dividends and share repurchases alongside planned investment.
- The effects of currency movements, fuel prices, and the timing of inventory and tax payments on reported results and cash flow.