Walmart Inc. (then Wal-Mart Stores, Inc.) — Form 10-Q Summary
Reporting period: Quarter and nine months ended October 31, 2013; filed December 6, 2013. Figures are unaudited. Dollar amounts are in millions unless stated otherwise.
Business context and results
Walmart operates Walmart U.S., Walmart International and Sam’s Club. Fiscal 2014 ends January 31, 2014. The business is seasonal, with its historically highest sales and operating income in the quarter ending January 31.
| Metric | Three months 2013 | Three months 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenues | $115,688 | $113,800 | $346,588 | $340,875 |
| Net sales | $114,876 | $113,077 | $344,290 | $338,644 |
| Operating income | $6,310 | $6,093 | $19,525 | $19,145 |
| Income from continuing operations | $3,870 | $3,809 | $12,007 | $11,841 |
| Net income attributable to Walmart | $3,738 | $3,635 | $11,591 | $11,393 |
| Diluted continuing-operations EPS | $1.14 | $1.07 | $3.51 | $3.34 |
For the quarter, revenue increased 1.7%, operating income 3.6%, and income from continuing operations 1.6%. For the nine months, revenue increased 1.7%, operating income 2.0%, and continuing-operations income 1.4%. Gross margin was 24.5% versus 24.4% for the quarter and 24.5% versus 24.3% year to date; operating margin was 5.5% versus 5.4% and 5.7% in both nine-month periods.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $13,320, down from $15,907; capital expenditures were $9,506, up from $8,921. Company-defined free cash flow was $3,814 versus $6,986. Management attributed the decline mainly to timing of income-tax and payable payments and higher capital expenditures.
- Cash and cash equivalents were $8,736 at October 31, 2013, compared with $8,643 a year earlier. The working-capital deficit was $9.9 billion, versus $13.4 billion a year earlier; management said Walmart generally operates with a deficit as part of its cash-management approach.
- Short-term borrowings were $12,817; long-term debt was $41,702, including $4,147 due within one year. Total reported borrowings and debt were therefore about $58.7 billion, excluding capital leases, compared with about $54.2 billion a year earlier. Debt-to-total-capitalization, as defined by the company, was 45.7% versus 43.7%.
- Walmart issued $6.75 billion of long-term debt during the nine months; proceeds were used to refinance or repay debt and for general corporate purposes. It paid $4,625 in dividends and spent $5,806 on share repurchases.
Material changes and segment performance
- Net sales growth was supported by 3.3% growth in retail square footage, e-commerce, prior-year acquisitions and positive Sam’s Club comparable sales. Currency movements reduced sales by $1.6 billion for the quarter and $3.3 billion year to date. Walmart U.S. and several international operations had lower comparable sales.
- U.S. comparable store and club sales, including fuel, declined 0.2% for the quarter and 0.6% year to date. Management cited subdued consumer spending and the 2013 payroll-tax increase; e-commerce added approximately 0.2 percentage points to the comparable-sales measure.
- Walmart U.S. sales rose 2.4% for the quarter and 1.6% year to date; operating income increased 5.8% and 5.6%. Walmart International sales increased 0.2% and 2.0%, while operating income rose 1.7% for the quarter but declined 1.4% year to date. Sam’s Club sales increased 1.1% and 1.3%, and operating income increased 9.2% and 6.3%.
- Operating expenses grew faster than sales in both periods, reflecting lower-than-expected sales, investments in e-commerce and other initiatives, and higher FCPA-related costs. Gross-margin improvements and increased membership income helped operating income grow faster than sales. The trailing-twelve-month return on investment fell to 17.5% from 18.0%.
Outlook, risks and unusual items
- Management expected fiscal 2014’s effective tax rate to be 31%–33%. It estimated e-commerce investment would reduce fiscal 2014 EPS by approximately $0.10 per share. Expected fourth-quarter costs for closing about 50 underperforming stores in Brazil and China and ending the Bharti Retail relationship were estimated to reduce fiscal 2014 EPS by approximately $0.06 and $0.04 per share, respectively.
- Walmart expected the Vips restaurant-business sale in Mexico, for approximately $625 million and subject to regulatory approval, to close in the fourth quarter and produce a net gain. The company also expected India-related transactions to produce a net loss in continuing operations. These and the planned purchase of redeemable noncontrolling interests in Walmart Chile were subject to closing conditions or approvals.
- The company, the DOJ and the SEC were investigating possible FCPA violations involving foreign operations; Mexican authorities were also investigating. Walmart reported $224 million of related investigation, compliance and organizational-enhancement expenses for the nine months. It said a loss was probable but that it could not reasonably estimate a loss or range; outcomes could include material penalties or other consequences.
- Other disclosed matters included wage-and-hour and gender-discrimination litigation, shareholder suits relating to FCPA allegations, and environmental proceedings. Walmart described the wage-and-hour appeal as pending and said it could not predict the FCPA matters’ outcome or impact. It reported no material change to the risk factors in its latest annual report.
- Currency and interest-rate movements remain risks: currency translation and other reduced accumulated other comprehensive income by $2.171 billion for the nine months, while currency movements increased the fair value of derivatives by approximately $210 million since January 31.
Investor verification priorities
- Track comparable sales and consumer demand, particularly at Walmart U.S., and separate underlying performance from currency effects, acquisitions and square-footage growth.
- Monitor operating-expense growth, e-commerce investment returns, and whether margin gains continue to offset cost pressures.
- Review operating cash flow and working-capital movements, capital spending, and borrowing needs; free cash flow is a company-defined non-GAAP measure.
- Follow developments and potential costs from the FCPA investigations and related shareholder litigation, for which no loss estimate was available.
- Verify the completion, final economics and accounting effects of the Vips sale, Walmart Chile share purchases, and India transactions, along with the projected store-closure and transaction costs.