Walmart Inc. — Form 10-Q Summary
Business context and period: The filing covers the quarter and six months ended July 31, 2020 (Walmart fiscal 2021 Q2 and first half), compared with the corresponding 2019 periods. Walmart operates Walmart U.S., Walmart International and Sam’s Club. The company attributed significant sales and operating changes to COVID-19, related government actions and shifts in customer demand and shopping channels.
Key financial results
| Metric | Three months ended July 31 | Six months ended July 31 |
|---|---|---|
| Net sales | $136.8 billion, up 5.7% | $270.5 billion, up 7.2% |
| Total revenues | $137.7 billion, up 5.6% | $272.4 billion, up 7.1% |
| Operating income | $6.1 billion, up from $5.6 billion | $11.3 billion, up from $10.5 billion |
| Walmart-attributable net income | $6.5 billion, versus $3.6 billion | $10.5 billion, versus $7.5 billion |
| Diluted EPS | $2.27, versus $1.26 | $3.67, versus $2.59 |
| Gross profit as a percentage of net sales | 24.9%, up from 24.3% | 24.3%, unchanged |
| Operating income as a percentage of net sales | 4.4%, versus 4.3% | 4.2%, unchanged |
Cash flow and liquidity: First-half operating cash flow was $19.0 billion, versus $11.2 billion; capital expenditures were $3.6 billion, versus $4.9 billion; and management-defined free cash flow was $15.4 billion, versus $6.3 billion. The company ended July with $16.9 billion in cash and cash equivalents and a $17.0 billion working-capital deficit. It reported $46.5 billion in long-term debt, including amounts due within one year, and $15 billion in U.S. committed credit lines, all undrawn. Management said available cash, operating cash flows and capital-market access should cover anticipated needs.
Material changes and operating drivers
- U.S. comparable sales including fuel increased 9.6% in the quarter; Walmart U.S. comparable sales rose 9.7% and Sam’s Club rose 8.8%. Larger customer baskets and pandemic-related demand contributed, while transactions declined at Walmart U.S. as customers consolidated trips.
- Walmart U.S. eCommerce sales were approximately $10.5 billion for the quarter, versus $5.4 billion a year earlier. Pickup and delivery and walmart.com were key contributors. International and Sam’s Club eCommerce sales also increased year over year.
- Walmart International net sales fell 6.8% for the quarter, largely reflecting a $2.4 billion adverse currency impact; operating income also declined. Sam’s Club net sales increased 8.8% and operating income increased to $592 million.
- Quarterly operating expenses rose 7.9%, faster than net sales, and were 21.2% of sales versus 20.8%. Walmart cited $1.5 billion of incremental pandemic-related costs for the quarter, including associate bonuses, safety measures and leave pay, plus a $0.4 billion Walmart U.S. restructuring charge. First-half pandemic-related incremental costs were $2.4 billion.
- Quarterly net income benefited materially from a $3.2 billion gain in “other gains and losses,” primarily the fair-value change of Walmart’s JD.com investment. First-half other gains were $3.9 billion. This non-operating item contributed to the increase in reported earnings.
- First-half capital expenditures declined to $3.6 billion from $4.9 billion, in part because COVID-19 affected the timing of store remodels and technology projects. Share repurchases were $723 million, down from $3.7 billion in the prior-year half.
Outlook, risks and contingencies
The filing provides no quantified earnings or sales guidance. Management emphasized uncertainty regarding the pandemic’s duration and intensity, economic stimulus, government restrictions, employment trends and consumer confidence, and expected continued short-term volatility. It said cash flows, cash on hand and capital-market access were expected to be sufficient for operating needs, investment, dividends and repurchases. Walmart maintained its fiscal 2021 annual dividend of $2.16 per share.
Key risks include pandemic-related disruption to demand, operations and supply chains; foreign-exchange movements; competition; labor and operating costs; and regulatory, cybersecurity and legal matters. The company disclosed more than 40,000 ASDA equal-value employment claims and opioid-related litigation and investigations; it said it could not reasonably estimate potential losses for these matters. It also disclosed government investigations concerning money-transfer and anti-fraud controls, with outcomes uncertain. Management stated that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- How much reported earnings growth reflects the JD.com fair-value gain versus recurring operating performance.
- Whether pandemic-driven comparable-sales and eCommerce growth persist as stimulus, restrictions and consumer behavior change.
- Whether higher safety, associate and fulfillment costs, along with the restructuring, continue to pressure expenses and margins.
- How currency movements and operating conditions affect Walmart International results.
- Developments and potential financial exposure in the ASDA, opioid and money-transfer matters, for which some losses cannot be estimated.
- Whether the working-capital deficit, debt maturities, capital spending and shareholder returns remain supported by operating cash flow and available liquidity.