Business context and reporting period
Wal-Mart Stores, Inc. (now Walmart Inc.) filed this unaudited Form 10-Q for the third quarter of fiscal 2010, the three months ended October 31, 2009, and the first nine months of fiscal 2010. Comparisons are with the corresponding prior-year periods. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.
Financial performance and condition
| Metric | Q3 FY2010 | Q3 FY2009 | Nine months FY2010 | Nine months FY2009 |
|---|---|---|---|---|
| Net sales | $98,667 | $97,619 | $292,220 | $293,207 |
| Total revenues | $99,411 | $98,345 | $294,563 | $295,627 |
| Operating income | $5,593 | $5,292 | $16,692 | $16,421 |
| Income from continuing operations | $3,360 | $3,146 | $10,063 | $9,827 |
| Net income attributable to Walmart | $3,239 | $3,138 | $9,703 | $9,608 |
| Diluted EPS attributable to Walmart | $0.84 | $0.80 | $2.49 | $2.43 |
| Net cash from operating activities | Not presented quarterly | Not presented quarterly | $12,440 | $10,426 |
- Margins: Gross margin was 25.2% in Q3 versus 24.6% a year earlier, and 24.9% for nine months versus 24.2%. Operating income was 5.7% higher in Q3 and 1.7% higher year to date, despite operating expenses growing 3.0% and 2.5%, respectively.
- Cash flow and investment: Nine-month free cash flow, defined by Walmart as operating cash flow less property-and-equipment payments, was $3.555 billion versus $2.252 billion. Capital expenditures were $8.885 billion. Management attributed the improvement in operating cash flow and free cash flow principally to improved inventory management; inventory was down 4.1% year over year at October 31.
- Liquidity and debt: Cash and equivalents were $6.003 billion. Current assets of $51.948 billion were below current liabilities of $59.179 billion, a $7.231 billion working-capital deficit; the current ratio was 0.9. Total debt, including capital leases, was $47.353 billion; debt to total capitalization was 41.2%, compared with 39.3% at January 31, 2009. Long-term debt had a reported cost of $38.563 billion and fair value of $40.490 billion.
- Capital returns: The company paid $3.179 billion in dividends and spent $5.105 billion on share repurchases in the first nine months. The fiscal 2010 annual dividend was set at $1.09 per share, 15% above the prior year.
Material changes versus prior year
- Q3 net sales rose 1.1%, but nine-month sales fell 0.3%. Q3 U.S. comparable sales declined 0.8%; nine-month U.S. comparable sales declined 0.5%. Lower average transaction size, merchandise deflation and lower fuel prices weighed on comparable sales.
- Currency movements reduced International net sales by $2.6 billion in Q3 and $11.7 billion year to date. International operating income fell 5.3% in Q3 and 8.9% year to date; reported currency effects reduced International operating income by $172 million and $661 million, respectively.
- Walmart U.S. operating income increased 6.9% in Q3 and 5.1% year to date. Sam’s Club operating income rose 5.6% in Q3 but was essentially flat year to date. International sales and results included D&S, acquired in January 2009.
- Net income attributable to Walmart increased 3.2% in Q3 and 1.0% year to date; continuing-operations income and EPS rose more strongly. Discontinued operations reported a $7 million loss in Q3 and $22 million loss year to date, versus income of $105 million and $146 million in the prior-year periods. The prior-year results included a $212 million after-tax gain on the sale of Gazeley and $107 million of after-tax Seiyu restructuring expense.
- Management cited improved merchandising, inventory control and supply-chain productivity as drivers of gross-margin gains. Higher health-care benefits, advertising, remodel costs and technology-system expenses pressured operating expenses.
Outlook, risks, contingencies and unusual items
- Management expected fiscal 2010 capital expenditures of approximately $13 billion and an annual effective tax rate of approximately 34%–35%. It expected about $1 billion of dividends in Q4 and said operating cash flow and short-term borrowings were expected to fund seasonal inventory needs and other cash requirements.
- Management cautioned that interim results are not necessarily indicative of full-year results. No specific earnings or sales guidance was provided in the filing text.
- Tax matters include $964 million of unrecognized tax benefits related to continuing operations, of which $558 million would affect the effective tax rate if recognized, and $306 million of accrued interest and penalties. Audit resolutions could reduce continuing-operations unrecognized tax benefits by $310–$430 million over the next 12 months, which management did not expect to significantly change the effective tax rate. A separate $1.7 billion unrecognized tax benefit relates to a German-operations deduction claimed for fiscal 2007; resolution was considered reasonably possible within 12 months.
- Legal contingencies include wage-and-hour and employment-class actions, notably the Dukes gender-discrimination case and the EEOC distribution-center case. Walmart stated that it could not reasonably estimate possible losses in key matters and that an adverse outcome in certain matters could be material. A proposed approximately $40 million Salvas settlement was subject to court approval. The company also faced hazardous-materials investigations; it settled with Nevada for a $5,000 penalty and enhanced procedures, while California matters remained unresolved.
- International segment unusual charges included $40 million at D&S, primarily additional credit-card receivable reserves, and a $46 million charge related to a prior sale-leaseback transaction. The company issued debt in pounds, dollars, yen and euros during the period; foreign-exchange and interest-rate exposures were managed in part with derivatives.
- On December 6, 2009, Walmex announced an agreement to acquire the remaining interest in Walmart’s Central American subsidiary, with closing expected in fiscal Q1 2010, subject to customary conditions. Management reported no material change in the risk factors previously disclosed in its Form 10-K.
Most important facts for investors to verify
- Whether sales and comparable-sales trends improved after Q3, particularly given deflation, fuel-price effects and currency headwinds.
- Whether margin gains can continue while health-care, advertising, remodeling and technology costs rise.
- Cash conversion and inventory performance, and whether the planned capital spending, dividends and repurchases remain supportable without further borrowing.
- Debt maturities, borrowing levels and the effect of foreign-exchange and interest-rate movements on earnings and the balance sheet.
- Developments in the major employment, wage-and-hour, hazardous-materials and tax matters, including the claimed German tax deduction and potential exposure not accrued.
- Completion and financial effects of the announced Central American subsidiary transaction, and implementation of the new financial system and related controls.