Walmart Inc. (then Wal-Mart Stores, Inc.) — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended October 31, 2014; comparisons are with the corresponding 2013 periods unless noted. The fiscal year ends January 31. Amounts are in U.S. dollars.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Total revenue | $119.0 billion, up 2.9% | $354.1 billion, up 2.2% |
| Net sales | $118.1 billion, up 2.8% | $351.6 billion, up 2.1% |
| Operating income | $6.265 billion, down 0.7% | $19.198 billion, down 1.7% |
| Operating margin | 5.3%, versus 5.5% | 5.5%, versus 5.7% |
| Income from continuing operations | $3.826 billion, versus $3.870 billion | $11.626 billion, versus $12.007 billion |
| Diluted EPS from continuing operations attributable to Walmart | $1.15, versus $1.14 | $3.46, versus $3.51 |
| Operating cash flow | $15.470 billion for nine months, versus $13.320 billion | |
| Capital expenditures and free cash flow | $8.243 billion in capex; $7.227 billion free cash flow, versus $9.506 billion and $3.814 billion, respectively |
Quarterly gross margin was 24.4%, down 0.1 percentage point; nine-month gross margin was also 24.4%, down 0.1 point. Walmart attributed pressure principally to U.S. price investments and Sam’s Club’s Cash Rewards Program. Operating expenses rose faster than sales in both periods, reflecting higher U.S. health-care costs and e-commerce and other investments; winter storms also increased nine-month expenses.
Balance sheet, debt and liquidity
- At October 31, cash and equivalents were $6.718 billion; inventory was $51.501 billion; and total assets were $207.889 billion.
- Short-term borrowings were $6.019 billion. Long-term debt, including amounts due within one year, was $46.594 billion; capital-lease obligations totaled $3.069 billion.
- Working-capital deficit was $5.7 billion, compared with $9.9 billion at October 31, 2013. Management said a deficit is typical of its operating model and considered liquidity adequate.
- Debt-to-total-capitalization was 41.3%, versus 45.7% a year earlier. More than $15 billion of credit lines were largely unused. The company reported S&P ratings of A-1+/AA, Moody’s P-1/Aa2 and Fitch F1+/AA for commercial paper/long-term debt.
- Cash flow from operations increased, while investing outflows were $7.157 billion and financing outflows were $8.858 billion for the nine months. Free cash flow is a company-defined non-GAAP measure and does not deduct debt service or other contractual obligations.
Changes and segment results
- U.S. comparable sales, including fuel, rose 0.7% for the quarter and 0.1% for nine months. E-commerce contributed approximately 0.2 percentage point to comparable sales in both Walmart U.S. and Sam’s Club.
- Walmart U.S. sales rose 3.4% for the quarter; operating income fell 1.2%. Price investments, pharmacy reimbursement pressure and health-care costs weighed on results.
- Walmart International sales rose 1.7% for the quarter and 1.1% for nine months; currency movements reduced sales by $0.4 billion and $2.7 billion, respectively. Operating income increased 3.7% and 5.1%.
- Sam’s Club sales rose 2.3% for the quarter; operating income increased 12.0%. Membership and other income increased 9.9% for the quarter. For nine months, operating income excluding fuel declined from $1.435 billion to $1.398 billion.
- Trailing-twelve-month return on investment was 16.4%, down from 17.5%; management cited lower operating income and continued investment in stores and e-commerce.
- Share repurchases were $1.015 billion for nine months, versus $5.806 billion; $10.3 billion remained under the $15 billion authorization. The annual dividend was raised to $1.92 per share from $1.88.
Outlook, commentary and material risks
- Management expected fiscal 2015 capital expenditures to be similar to fiscal 2014, with a greater portion in the fourth quarter; priorities included Neighborhood Market expansion and e-commerce capabilities. The filing provides no broad earnings or revenue guidance.
- Walmart Japan announced plans to close approximately 30 underperforming stores. Management estimated an EPS impact of about $0.03 in fiscal fourth-quarter 2015 and another $0.01–$0.02 in later quarters.
- The company completed the sale of Mexico’s Vips restaurant business, receiving $671 million and recognizing a $262 million net gain in discontinued operations. It also acquired substantially all remaining noncontrolling interests in Walmart Chile for approximately $1.5 billion.
- The Audit Committee’s FCPA investigation and related DOJ, SEC and Mexican government investigations remained ongoing. Walmart said a loss was probable but that it could not reasonably estimate a loss or range; it warned of possible fines, penalties, litigation costs and reputational effects. Third-party FCPA-related expenses were $41 million for the quarter and $137 million for nine months.
- Other disclosed matters include wage-and-hour litigation and 1,551 ASDA equal-value claims; outcomes and potential losses were uncertain. Management reported no material change to the risk factors in its prior annual report.
- Foreign-currency translation contributed to a $1.255 billion nine-month other comprehensive loss attributable to Walmart. Management also noted possible exposure to currency and interest-rate movements, fuel-price volatility, retail competition, costs and regulatory or legal developments.
Important facts for investors to verify
- Whether comparable sales improve and international currency headwinds ease, while monitoring U.S. traffic, ticket and e-commerce performance.
- Whether price investments, pharmacy pressures, health-care costs and strategic spending continue to depress margins and operating-income growth.
- Whether inventory growth and working-capital trends remain consistent with sales and seasonal needs, and whether operating cash flow sustains free cash flow.
- Actual fourth-quarter capital spending and the timing and cost of the Japan store closures.
- Developments in the FCPA investigations and litigation, including whether a loss becomes estimable or material.
- Debt maturities, borrowing costs, foreign-cash access and the company’s capital allocation among dividends, repurchases and investment.