Walmart Inc. (then Wal-Mart Stores, Inc.) — Form 10-Q Summary
Reporting period: Quarter and six months ended July 31, 2016; figures are unaudited and in U.S. dollars. Fiscal year ends January 31.
Financial performance
| Metric | Three months ended July 31, 2016 | Six months ended July 31, 2016 |
|---|---|---|
| Net sales | $119.405 billion, up 0.1% year over year | $234.391 billion, up 0.5% |
| Total revenue | $120.854 billion, up 0.5% | $236.758 billion, up 0.7% |
| Operating income | $6.165 billion, up from $6.069 billion | $11.440 billion, down from $11.749 billion |
| Operating margin on net sales | 5.2%, versus 5.1% | 4.9%, versus 5.0% |
| Gross margin on net sales | 25.1%, versus 24.5% | 24.9%, versus 24.3% |
| Net income attributable to Walmart | $3.773 billion, versus $3.475 billion | $6.852 billion, versus $6.816 billion |
| Diluted EPS attributable to Walmart | $1.21, versus $1.08 | $2.18, versus $2.11 |
Six-month operating cash flow was $14.931 billion, compared with $10.102 billion. Capital spending was $4.619 billion, resulting in reported free cash flow of $10.312 billion, versus $5.058 billion. Management attributed the cash-flow improvement primarily to working-capital management, inventory improvement and payment timing.
At July 31, cash and equivalents were $7.676 billion, compared with $8.705 billion at January 31. Long-term debt, including current maturities, was $38.938 billion, down from $40.959 billion; short-term borrowings were $1.932 billion. Current liabilities exceeded current assets by $9.890 billion, and management said the company generally operates with a working-capital deficit. Capital lease and financing obligations were reported separately.
Material changes and business drivers
- Walmart U.S. net sales rose 3.1% in the quarter and 3.7% for six months; comparable sales increased 1.4% and 2.1%, respectively. Higher wages, incentives and technology investment contributed to lower segment operating income.
- Walmart International net sales declined 6.6% in the quarter and 6.9% for six months, substantially reflecting currency impacts of $2.7 billion and $6.2 billion, respectively. Segment operating income improved, including the benefit of a $535 million noncash gain related to the Yihaodian asset sale to JD.com.
- Sam’s Club sales declined 1.3% in the quarter and 0.2% for six months, primarily due to lower fuel prices. Operating income increased in both periods; wage and benefit costs and digital investment pressured expenses.
- Consolidated operating expenses as a percentage of net sales increased 91 basis points in the quarter and 99 basis points for six months, mainly due to wage investments, incentives and digital and information-technology spending. The reported six-month increase in Walmart-attributable earnings was modest, while the quarter showed stronger growth.
- Six-month share repurchases totaled $4.852 billion, versus $1.283 billion a year earlier. The company declared $2.00 per share in fiscal 2017 annual dividends, up from $1.96; $12.7 billion remained under its $20 billion repurchase authorization at July 31.
Outlook, risks and unusual items
The filing provides no specific numerical earnings or sales guidance. Management said it was prioritizing growth while balancing long-term returns, and cautioned that operating expenses could grow at or above sales growth and operating income could grow at or below sales growth during investment in associates and digital/physical retail integration. Management stated that liquidity sources were expected to be adequate for operations, investment, dividends and repurchases.
- Strategic transactions: After quarter-end, Walmart agreed to acquire Jet.com for approximately $3.0 billion in cash plus approximately $300 million in stock, subject to regulatory approval and expected to close in fiscal 2017. A subsidiary also agreed to sell Mexico’s Suburbia apparel business for approximately $1.0 billion, subject to approval and expected to close in fiscal 2018.
- Contingencies: The company said it was probable it would incur a loss related to ongoing FCPA investigations and related litigation, but it could not reasonably estimate a loss or range. It was cooperating with U.S. authorities and described investigations in multiple markets. Costs for these matters were expensed as incurred.
- Employment claims: ASDA faced more than 7,000 U.K. equal-value pay claims; the company said it could not reasonably estimate potential losses. In a separate Pennsylvania wage-and-hour case, Walmart paid approximately $242 million in June 2016; an attorneys’ fee dispute remained, which the company did not expect to materially affect results or financial condition.
- Other risk factors: The filing cited retail competition, currency and fuel-price volatility, labor costs, consumer trends, cybersecurity and regulatory/legal risks. It noted that Brexit could affect U.K. operations through exchange rates, food costs, trade, labor, immigration or tax changes, but said the impact was too early to assess.
Most important facts for investors to verify
- How much of reported earnings and revenue growth depended on the one-time, noncash $535 million Yihaodian gain.
- Whether U.S. wage and technology investments can support growth without further pressure on operating income and margins.
- Underlying International performance excluding foreign-exchange effects, and the continuing effects of Brexit and currency movements.
- Future cash requirements and capital allocation after the Jet.com acquisition, planned Suburbia divestiture, dividends and elevated repurchases.
- Developments and potential financial exposure from FCPA matters, ASDA equal-value claims and other disclosed legal proceedings.