Walmart Inc. (then Wal-Mart Stores, Inc.) — Q1 FY2013 Form 10-Q
Reporting period: Three months ended April 30, 2012; comparisons are with the three months ended April 30, 2011 unless noted. Amounts are U.S. dollars. The company operates Walmart U.S., Walmart International and Sam’s Club. Its fiscal year ends January 31 in the U.S. and Canada and December 31 in other markets. The quarter is typically seasonally weaker than the holiday quarter.
Financial performance
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Net sales | $112.272 billion | $103.415 billion |
| Total revenues | $113.018 billion | $104.189 billion |
| Operating income | $6.387 billion | $5.896 billion |
| Income from continuing operations | $3.894 billion | $3.578 billion |
| Net income attributable to Walmart | $3.742 billion | $3.399 billion |
| Diluted EPS attributable to Walmart | $1.09 | $0.97 |
| Gross profit rate | 24.1% | 24.4% |
| Operating income as a percentage of net sales | 5.7% | 5.7% |
| Effective income tax rate | 33.5% | 33.5% |
Sales rose 8.6%; operating income rose 8.3%, while Walmart-attributable net income rose about 10.1%. Weighted-average diluted shares declined to 3.425 billion from 3.513 billion. No discontinued-operations loss was reported in 2012, compared with $28 million in 2011.
Segments and sales drivers
- Walmart U.S.: Sales of $66.341 billion, up 5.9%; comparable sales increased 4.2%. Operating income was $5.033 billion, up 8.1%.
- Walmart International: Sales of $32.077 billion, up 15.0%; operating income was $1.319 billion, up 21.2%. Acquisitions contributed $1.9 billion to the sales increase.
- Sam’s Club: Sales of $13.854 billion, up 7.9%; comparable club sales increased 7.5%. Operating income was $490 million, up 7.7%.
Management attributed consolidated sales growth to 5.3% retail-square-foot growth, acquisitions, positive comparable sales and approximately 100 basis points of benefit from the leap-year day. Currency fluctuations reduced reported sales by $800 million and operating income by $50 million. Management reported that operating expenses grew 6.6%, slower than sales, but operating income growth did not exceed sales growth.
Cash flow, balance sheet and capital
- Operating cash flow: $5.434 billion, versus $1.974 billion. Management cited improved inventory management, timing of associate incentive payments and strong operating performance.
- Capital expenditures: $2.375 billion. Company-defined free cash flow was $3.059 billion, versus negative $415 million. This non-GAAP measure excludes debt service, acquisitions and other contractual payments.
- Cash and cash equivalents: $8.117 billion at April 30, 2012, compared with $9.400 billion a year earlier and $6.550 billion at January 31, 2012.
- Liquidity: Current assets were $57.276 billion and current liabilities $68.978 billion; the company reported an $11.7 billion working-capital deficit, versus $6.1 billion a year earlier. Management said operating cash flows and borrowing access were expected to meet liquidity needs.
- Debt: Short-term borrowings were $5.799 billion; long-term debt, including amounts due within one year, was $45.465 billion. Capital-lease obligations totaled $3.362 billion. Debt-to-total-capitalization was 44.2%, down from 46.1% a year earlier. Long-term debt fair value was $51.788 billion against a $45.465 billion carrying value.
- Shareholder returns: The company repurchased 26.3 million shares for $1.589 billion. $9.7 billion remained under its $15 billion authorization. The board raised the fiscal 2013 annual dividend to $1.59 per share, approximately 9% above fiscal 2012; quarterly installments are $0.3975.
Changes, outlook and management commentary
Gross profit rate fell 27 basis points, primarily because of price investments and cost inflation. Management said the company reinvested expense savings in lower prices rather than passing through the full effect of inflation. Operating expenses as a percentage of sales improved by 35 basis points, but the gross-margin decline kept operating-income growth below sales growth. Trailing-12-month return on investment was 18.1%, down from 18.5% a year earlier; management cited capital expenditures and acquisition-related activity as negative factors.
- Fiscal 2013 capital expenditures were expected to be $13.0–$14.0 billion.
- Management cited a previously provided full-year effective tax-rate range of 32.5%–33.5%; actual Q1 rate was 33.5%.
- The filing did not provide a clear quantified sales or earnings forecast.
- Management said future results could be affected by exchange-rate volatility, fuel prices, inflation, competition, labor and other costs, economic conditions, and legal and regulatory developments. Debt-market access and borrowing costs could be affected by credit-rating changes.
Contingencies and unusual matters
- FCPA investigations: The board audit committee was conducting an internal investigation and the company a global compliance review. The DOJ and SEC, as well as Mexican authorities, were investigating; shareholder securities and derivative lawsuits had also been filed. Walmart said outcomes, potential costs and effects were uncertain and could not be predicted, and gave no assurance the matters would not be material in the future.
- Other litigation: A Pennsylvania wage-and-hour case had an adverse judgment under appeal, with post-judgment interest accruing. The former nationwide Dukes gender-discrimination class was decertified by the U.S. Supreme Court; proposed California and Texas cases were pending. Management said it did not expect the gender cases to materially affect results or financial condition.
- Environmental/hazardous-material matters: Government investigations included alleged hazardous-waste handling and disposal violations. The company disputed the allegations and said outcomes were uncertain; it did not expect the matters to materially affect financial condition or results. Other environmental matters in Puerto Rico and Brazil were disclosed; a Riverside County investigation was closed without further action.
- Acquisitions: Walmart expected to complete its acquisition of the remaining Bounteous Company Limited (Trust-Mart) equity in Q2 FY2013. The purchase-price allocation for the 2011 Massmart acquisition remained preliminary.
Most important facts to verify
- Whether sales growth and comparable-sales momentum continued, and how much growth reflected acquisitions, leap day, currency and underlying performance.
- Whether price investment and inflation continued to pressure gross margin, and whether operating income growth subsequently outpaced sales growth.
- Whether the Q1 operating-cash-flow improvement was sustained, given management’s cited timing effects, and whether the working-capital deficit remained manageable.
- Actual fiscal 2013 capital spending versus the $13.0–$14.0 billion expectation, alongside borrowing, debt and shareholder-return levels.
- Developments, potential costs and disclosures related to the FCPA investigations and litigation, including whether outcomes or compliance remediation become material.
- Whether the stated tax-rate range and expected financing access remained valid; the filing’s forecasts and risk assessments are forward-looking and subject to change.