Walmart Inc. (then Wal-Mart Stores, Inc.) — Form 10-Q Summary
Reporting period: Third quarter and nine months ended October 31, 2010. Dollar amounts are in U.S. dollars; financial statement amounts are unaudited. Prior-year figures were adjusted for an inventory-accounting change and certain presentation reclassifications.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $101.2 billion, up 2.6% | $303.4 billion, up 3.8% |
| Total revenues, including membership and other income | $102.0 billion, versus $99.4 billion | $305.5 billion, versus $294.5 billion |
| Operating income | $5.6 billion, up 3.1% | $17.5 billion, up 6.0% |
| Income from continuing operations | $3.6 billion, versus $3.3 billion | $10.8 billion, versus $10.0 billion |
| Net income attributable to Walmart | $3.4 billion, versus $3.1 billion | $10.3 billion, versus $9.6 billion |
| Diluted earnings per share attributable to Walmart | $0.95, versus $0.81 | $2.79, versus $2.47 |
| Gross profit margin | 25.0%, versus 25.1% | 24.8%, versus 25.0% |
| Operating income as a percentage of net sales | 5.5%, unchanged | 5.8%, versus 5.7% |
| Net cash provided by operating activities | Not presented for the quarter | $12.3 billion, versus $12.4 billion |
| Capital expenditures | Not presented for the quarter | $9.3 billion, versus $8.9 billion |
| Free cash flow, as defined by the company | Not presented for the quarter | $2.9 billion, versus $3.6 billion |
Segments and sales trends
- Walmart U.S.: Third-quarter net sales were $62.2 billion, essentially flat; operating income rose 1.9% to $4.4 billion. Comparable-store sales declined 1.5%, with weaker customer traffic the primary factor; lower average ticket also contributed in the quarter.
- Walmart International: Net sales increased 9.3% to $26.9 billion and operating income rose 13.5% to $1.2 billion in the quarter. Growth reflected expansion and favorable currency effects. For the nine months, currency movements added $3.8 billion to International net sales and $176 million to segment operating income.
- Sam’s Club: Net sales increased 2.7% to $12.1 billion, while operating income fell 7.1% to $367 million in the quarter. Comparable club sales grew 3.3%, including a 1.3 percentage-point contribution from fuel; higher interchange fees, marketing and remodeling costs pressured quarterly expenses.
- Total U.S. comparable store and club sales declined 0.8% in the quarter. The company added 2.9% to retail square footage over the trailing 12 months.
Liquidity, debt and capital allocation
- At October 31, 2010, cash and cash equivalents were $10.6 billion, versus $6.0 billion a year earlier. Working capital was negative $8.8 billion, compared with negative $7.6 billion a year earlier; management said the deficit reflects its operating model and use of cash for shareholder returns.
- Short-term borrowings were $7.4 billion; long-term debt was $40.8 billion, with $5.2 billion of long-term debt due within one year. Long-term debt, including amounts due within one year, had a carrying value of $46.0 billion and fair value of $49.3 billion. The debt-to-total-capitalization ratio was 46.4%, up from 41.3% a year earlier.
- Nine-month operating cash flow was slightly lower year over year, primarily due to a $8.0 billion cash use from increased inventory, partly offset by higher accounts payable. Free cash flow fell to $2.9 billion as capital expenditures increased.
- The company issued $11.4 billion of long-term debt during the nine months, compared with $5.5 billion in the prior-year period. It also increased net short-term borrowings by $6.8 billion. Its $9.0 billion 364-day revolving facility was undrawn at period-end.
- Share repurchases were $11.0 billion for the nine months, versus $5.1 billion a year earlier; $8.5 billion remained authorized at October 31. Dividends paid were $3.4 billion. The fiscal 2011 annual dividend was increased 11% to $1.21 per share.
Changes, outlook and significant items
- Sales growth was led by International and Sam’s Club, while U.S. comparable sales remained negative. Management attributed expense leverage to improved labor productivity, organizational changes and lower estimated incentive-plan costs.
- Management forecast fiscal 2011 capital expenditures of $13 billion to $14 billion and an annual effective tax rate of approximately 33% to 34%. The quarter’s effective tax rate was 29.5%, including a $191 million benefit from changes to transfer-pricing policies in a foreign tax jurisdiction.
- Management expected operating cash flows and short-term borrowing capacity to fund seasonal inventory and other needs, and anticipated continued access to debt markets. It cautioned that weaker credit ratings could impair market access and raise borrowing costs.
- The company changed its inventory retail-accounting method in the U.S., Canada and Puerto Rico, applying it at 49 departments rather than 13 divisions. Prior periods were retrospectively adjusted; the change reduced adjusted 2009 Walmart-attributable net income by $95 million for the quarter and $91 million for the nine months.
- Material legal uncertainties include the Dukes gender-discrimination class action, for which the company sought U.S. Supreme Court review, and wage-and-hour class actions. The company said potential losses in certain cases could be material but could not reasonably estimate a loss range. It stated that it did not expect the disclosed hazardous-materials investigations to materially affect results or financial condition.
- Acquisition developments: the planned purchase of the remaining interest in China’s Bounteous Company was extended to May 2011. The proposed Netto purchase in the U.K. was subject to divestiture of 47 stores. After quarter-end, Walmart announced an offer to acquire 51% of South Africa’s Massmart for approximately $2.3 billion, subject to approvals.
- The company identified currency and fuel-price volatility, consumer and economic conditions, costs, competition, regulation, litigation, and interest rates among factors that could affect future results. It reported disclosure controls effective and noted continued phased implementation of its new financial system.
Important facts for investors to verify
- Whether U.S. comparable-sales weakness and declining customer traffic persist, and how International growth fares excluding currency effects.
- Whether inventory and working-capital investment continues to constrain operating cash flow and free cash flow.
- How debt issuance, share repurchases and dividends affect leverage; confirm the reported debt-to-capitalization measure and remaining repurchase authorization.
- Whether the $191 million tax benefit is nonrecurring and whether the fiscal 2011 effective tax rate remains within management’s 33%–34% outlook.
- Updates on the Dukes and wage-and-hour litigation, environmental matters, and the pending acquisitions and related approvals or divestitures.
- Comparability of prior periods: confirm the retrospective inventory-accounting adjustments and segment reclassifications when evaluating year-over-year results.