Walmart Inc. (filed as Wal-Mart Stores, Inc.) — Form 10-Q Summary
Business context and reporting period. The filing covers the quarter and nine months ended October 31, 2012, compared with the same periods in 2011. Walmart operates through Walmart U.S., Walmart International and Sam’s Club. Its fiscal year ends January 31; the business is seasonal, with its highest sales and operating income typically in the quarter ending January 31.
Financial performance
| Metric | Quarter ended October 31, 2012 | Nine months ended October 31, 2012 | Prior-year comparison |
|---|---|---|---|
| Net sales | $113.2 billion | $339.0 billion | Up 3.4% and 5.4%, respectively |
| Total revenues | $113.9 billion | $341.2 billion | Up from $110.2 billion and $323.8 billion |
| Operating income | $6.1 billion | $19.2 billion | Up 4.0% and 5.7% |
| Income from continuing operations | $3.8 billion | $11.9 billion | Up from $3.5 billion and $11.0 billion |
| Net income attributable to Walmart | $3.6 billion | $11.4 billion | Up from $3.3 billion and $10.5 billion |
| Diluted EPS attributable to Walmart | $1.08 | $3.35 | Prior year: $0.96 and $3.02 |
| Cash provided by operations | Not separately stated | $15.9 billion | Prior year: $12.9 billion |
| Free cash flow (company-defined) | Not separately stated | $7.0 billion | Prior year: $3.4 billion |
Margins and sales drivers. Quarterly gross profit rate was 24.5%, down 13 basis points year over year; nine-month rate was 24.4%, down 20 basis points. Operating margin was 5.4% for the quarter (flat) and 5.7% for nine months (up from 5.6%). The U.S. business’s price-leadership focus pressured gross profit rate, while expense leverage helped offset the pressure. U.S. comparable store and club sales increased 1.9% for the quarter and 2.9% for nine months.
Segments. Quarterly net sales and operating income were $66.1 billion and $4.8 billion for Walmart U.S.; $33.2 billion and $1.5 billion for Walmart International; and $13.9 billion and $435 million for Sam’s Club. Sam’s Club comparable sales rose 3.8% including fuel (2.8% excluding fuel). International nine-month sales benefited from prior-year acquisitions, including Massmart and Netto, but were reduced by currency impacts.
Cash, debt and liquidity
- Cash and cash equivalents were $8.6 billion at October 31, 2012, versus $7.1 billion a year earlier.
- Operating cash flow was $15.9 billion; capital expenditures were $8.9 billion, resulting in company-defined free cash flow of $7.0 billion. Management attributed the increase in free cash flow mainly to timing of accrued incentive payments, improved operating results and lower capital investment.
- Cash used in investing activities was $9.4 billion; cash used in financing activities was $4.7 billion. Financing included a $4.7 billion increase in short-term borrowings, $4.0 billion of dividends paid and $4.7 billion of share repurchases.
- At October 31, current liabilities exceeded current assets by $13.4 billion, compared with an $8.1 billion deficit a year earlier. Management said working capital deficits are generally part of its operating model; the increase was mainly associated with debt due within one year, accounts payable and accrued liabilities.
- Short-term borrowings were $8.7 billion; long-term debt was $38.9 billion, with another $6.6 billion due within one year. Capital-lease obligations were $3.3 billion in total. Debt-to-total-capitalization was 43.7%, down from 46.9% a year earlier.
- Management expected fiscal 2013 capital expenditures of $12.6–$13.5 billion and said operating cash flow and short-term borrowing capacity should fund seasonal inventory and other cash needs. Credit ratings were S&P AA/A-1+, Moody’s Aa2/P-1 and Fitch AA/F1+ for long-term debt/commercial paper.
Changes, outlook and notable items
- Sales growth reflected 3.6% year-over-year retail square-foot growth and positive comparable sales. Currency movements reduced sales by $1.7 billion in the quarter and $4.7 billion year to date; fiscal 2012 acquisitions contributed $3.8 billion to the nine-month increase.
- Management expected the fiscal 2013 effective tax rate to be at the lower end of its prior 32.5%–33.5% guidance. The reported rates were 31.3% for the quarter and 32.6% year to date.
- FCPA-related internal and government investigations continued, including inquiries in Brazil, China and India. The company incurred $48 million of related third-party-adviser costs in the quarter and $99 million year to date. It could not reasonably estimate any possible loss or range; potential outcomes include penalties, settlements and other relief.
- Other disclosed matters include wage-and-hour and gender-discrimination litigation and hazardous-materials investigations. Management generally said it did not expect material financial effects for several of these matters, but outcomes remain uncertain. A Pennsylvania wage-and-hour judgment was under further appeal.
- Walmart International recorded approximately $69 million of expense in the quarter from revised estimated contingent liabilities related to employment claims in Brazil. Sam’s Club operating results also benefited from a credit related to a prior-year state excise-tax overpayment.
- The company repurchased 70.9 million shares for $4.7 billion during the nine months, with $6.7 billion remaining under its authorized repurchase program at October 31. The annual fiscal 2013 dividend was raised approximately 9% to $1.59 per share.
- Management reported disclosure controls effective. It noted staged implementation of a new financial system; no other material change in internal control over financial reporting was reported.
Key facts for investors to verify
- Whether comparable-sales momentum and operating-income growth continue, particularly as Walmart U.S. price investments pressure gross margin.
- How much of international growth reflects underlying performance versus acquisitions and currency movements, and whether foreign-exchange volatility persists.
- Whether operating cash flow and free cash flow remain strong after seasonal working-capital movements and planned capital expenditures.
- The maturity profile and cost of short-term and long-term borrowings, and continued access to debt markets at favorable ratings and rates.
- Developments, costs and potential outcomes of the FCPA investigations and related shareholder litigation, for which the filing provides no clear loss estimate.
- Whether the expected fiscal 2013 tax rate and capital-expenditure range remain achievable.