Walmart Inc. (then Wal-Mart Stores, Inc.) — Form 10-Q Summary
Reporting period: Quarter and six months ended July 31, 2010. Unless noted otherwise, amounts are U.S. dollars; financial statement amounts are in millions. Prior-period figures were adjusted for the accounting change described below.
Business context and financial results
Walmart operates Walmart U.S., Walmart International and Sam’s Club. Quarterly net sales rose 2.8%, while U.S. comparable sales declined; international growth and store expansion contributed to consolidated sales growth.
| Metric | Three months ended July 31, 2010 | Year-over-year change | Six months ended July 31, 2010 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $103.016 billion | +2.8% | $202.113 billion | +4.4% |
| Total revenues | $103.726 billion | +2.8% | $203.537 billion | +4.3% |
| Operating income | $6.190 billion | +4.4% | $11.927 billion | +7.4% |
| Operating margin on net sales | 6.0% | Up from 5.9% | 5.9% | Up from 5.7% |
| Gross margin | 24.7% | Down from 25.1% | 24.7% | Down from 24.9% |
| Net income attributable to Walmart | $3.596 billion | +3.6% | $6.897 billion | +6.6% |
| Diluted EPS attributable to Walmart | $0.97 | Up from $0.89 | $1.84 | Up from $1.65 |
Management attributed margin pressure primarily to investments in lower price points in certain Walmart U.S. categories. Lower operating expenses relative to sales—supported by labor productivity, organizational changes and lower incentive-plan accruals—helped lift operating margin.
Segments and material changes
- Walmart U.S.: Quarterly sales were essentially flat at $64.654 billion; comparable sales fell 1.8%. Six-month sales rose 0.6%, with comparable sales down 1.3%. Management cited weaker traffic at certain stores, deflation in some categories and competition. Quarterly operating income was $4.879 billion, down 0.2%.
- Walmart International: Quarterly sales increased 11.0% to $25.901 billion and six-month sales increased 15.9% to $50.931 billion. Growth included Mexico and store openings in Brazil and China; currency added $857 million to quarterly sales and $3.4 billion to six-month sales. Operating income increased 16.8% for the quarter and 21.8% for the six months, including currency benefits of $46 million and $162 million, respectively.
- Sam’s Club: Quarterly sales increased 2.2% to $12.461 billion; comparable club sales rose 2.6%, including a 1.6 percentage-point benefit from fuel. Six-month comparable sales rose 3.7%, including a 2.4-point fuel benefit. Operating income increased 2.4% for the quarter and 5.8% for the six months.
- Accounting and reporting: A new ERP system was implemented in U.S., Canadian and Puerto Rican operations, alongside a change in inventory retail-method application from 13 divisions to 49 departments. Prior periods were retrospectively adjusted; the change affected reported segment and consolidated operating income and net income. Separately, Puerto Rico operations were reassigned between segments, and prior segment data was reclassified.
Cash flow, liquidity and debt
- Six-month operating cash flow was $10.019 billion, versus $9.895 billion. Capital expenditure was $5.554 billion, producing reported free cash flow of $4.465 billion, versus $4.151 billion. Management said cash flow benefited from payment-cycle timing that temporarily increased accounts payable, partly offset by inventory investment.
- Cash and cash equivalents were $10.195 billion at July 31, 2010. Current assets were $53.045 billion and current liabilities $65.655 billion; management reported a $12.6 billion working-capital deficit.
- At July 31, short-term borrowings were $4.639 billion; long-term debt was $41.175 billion, including $5.546 billion due within one year. Capital-lease obligations totaled $3.419 billion. Debt to total capitalization, as defined by the company, was 43.2%, versus 40.4% a year earlier.
- Walmart issued U.S. dollar and yen-denominated notes during the period. Six-month net short-term borrowings increased $4.120 billion; long-term debt issuance proceeds were $6.433 billion. The renewed 364-day revolving facility was increased to $9 billion and remained undrawn at period-end.
- Financing also included $7.112 billion of share repurchases and $2.260 billion of dividends paid during the six months. The fiscal 2011 annual dividend was raised 11% to $1.21 per share; the company expected approximately $2.3 billion of dividends for the rest of the fiscal year.
Outlook, risks and contingencies
- Management expected a fiscal 2011 effective tax rate of approximately 34%–35%; tax contingencies and the mix of U.S. and international earnings could affect the rate. The filing provides no specific sales or earnings guidance.
- Management expected operating cash flow and short-term borrowing capacity to support seasonal inventory and other cash needs, and anticipated continued access to debt markets. It warned that credit-rating reductions could impair market access and increase borrowing costs.
- Currency movements and fuel-price volatility may continue to affect sales and operating results. Management also cited competitive pressure, consumer and economic conditions, costs, regulation and other risks in its forward-looking statements.
- Material litigation includes wage-and-hour class actions and the Dukes gender-discrimination case. After a divided Ninth Circuit decision, Walmart petitioned the U.S. Supreme Court for review on August 25, 2010. The company said potential loss in these cases could be material but could not reasonably estimate a loss range. A criminal investigation into hazardous-material handling was also disclosed; management did not expect it to materially affect results or financial condition.
- Walmart announced an agreement for its U.K. subsidiary ASDA to acquire Netto Foodstores for approximately £778 million ($1.2 billion), subject to regulatory approval and expected to close in fiscal 2011.
Important facts for investors to verify
- Whether U.S. comparable-sales weakness and gross-margin pressure persisted after the quarter.
- How much reported international growth and operating-income improvement depended on currency translation.
- Whether operating cash flow remains strong when the temporary accounts-payable timing benefit reverses and inventory investment changes.
- Debt, working-capital deficit and share repurchases alongside the increased dividend; confirm subsequent borrowing and capital-return levels.
- Developments in the Dukes appeal, wage-and-hour cases and environmental investigations, including any change in estimated exposure.
- Completion and control implications of the ERP rollout, and the approval, cost and expected contribution of the Netto acquisition.