Walmart Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter of 2019, the three months ended April 30, 2018. Comparisons are with the three months ended April 30, 2017, unless noted. Amounts are in U.S. dollars.
Business context and financial performance
Walmart operates Walmart U.S., Walmart International and Sam’s Club, across stores and eCommerce. Management’s strategy emphasizes everyday low prices, connecting digital and physical shopping, and shifting investment toward eCommerce, technology, supply chain and store remodels.
- Revenue: Total revenue was $122.7 billion, up 4.4%; net sales were $121.6 billion, up 4.4%. International sales benefited by $1.9 billion from currency movements.
- Profit and margins: Operating income was $5.15 billion, down 1.6%, and operating margin was 4.2%, versus 4.5%. Gross profit margin was 24.6%, down 15 basis points. Walmart-attributable net income was $2.13 billion versus $3.04 billion; diluted EPS was $0.72 versus $1.00.
- Significant earnings item: The company recorded $1.845 billion of unrealized losses, primarily from the decline in the fair value of its JD.com investment. The loss reduced reported income but was noncash for the period. The effective tax rate was 19.3%, versus 32.6%, mainly reflecting the Tax Act and related accounting changes.
- Cash flow: Operating cash flow was $5.16 billion, compared with $5.39 billion. Capital expenditures were $1.82 billion; company-defined free cash flow was $3.34 billion versus $3.40 billion. Cash, cash equivalents and restricted cash were $8.15 billion at period-end.
- Liquidity and debt: Cash and cash equivalents on the balance sheet were $7.89 billion. Working capital deficit was $21.5 billion, versus $16.9 billion a year earlier; management said a deficit is typical of its operating model and considers liquidity adequate. Short-term borrowings were $7.76 billion and long-term debt, including amounts due within one year, was $31.05 billion. Long-term debt declined $2.7 billion from fiscal year-end, while short-term borrowings rose.
- Shareholder returns: The fiscal 2019 annual dividend was raised to $2.08 per share from $2.04. Repurchases were $539 million, down from $2.19 billion, as repurchases were suspended in anticipation of the Flipkart announcement.
Material changes versus the prior period
- U.S. comparable sales increased 2.8%, versus 1.2% a year earlier. Walmart U.S. comparable sales rose 2.4%; Sam’s Club rose 5.3%, including a 1.4% contribution from fuel.
- Walmart U.S. net sales rose 3.1%, but operating income declined to $3.93 billion from $4.05 billion, reflecting price investments, higher transportation costs and eCommerce and technology spending.
- Walmart International net sales rose 11.7% to $30.26 billion, including currency benefits; operating income increased to $1.27 billion from $1.14 billion.
- Sam’s Club net sales fell 2.7%, partly due to the net closure of 63 clubs in fiscal 2018. Operating income fell to $325 million from $399 million, amid higher shrink, transportation and shipping costs, price investments and club-exit charges.
- Operating expenses rose 4.9%, faster than net sales growth of 4.4%; expenses increased to 21.2% of net sales from 21.1%. Management cited investment spending, disposal and closure costs, and an approximately $81 million charge related to the pending divestiture of Canadian banking operations.
- The company adopted new financial-instrument accounting rules, requiring changes in JD investment fair value to be recognized in earnings. Adoption also resulted in an approximately $2.6 billion after-tax increase to opening retained earnings.
Outlook, transactions, risks and contingencies
- Outlook: The filing provides no specific consolidated earnings or revenue guidance. Management plans to prioritize comparable-sales and eCommerce growth, operating discipline, and investment in digital, technology, supply chain and remodels. It expects to fund operations, investment, dividends and repurchases through operating cash flow, cash and capital-market access.
- Flipkart: In May 2018, Walmart announced an approximately $16 billion investment for about 77% of Flipkart, subject to regulatory approval and expected to close later in calendar 2018. Funding is expected from new debt and cash on hand. Walmart expects Flipkart’s ongoing operations to negatively affect fiscal 2019 net income.
- Asda: Walmart agreed to combine Asda with J Sainsbury, with Walmart to receive approximately 42% of the combined business and about £3 billion in cash, subject to adjustments and regulatory review. Walmart would retain defined-benefit pension obligations. The filing says a potential loss may be recognized when held-for-sale criteria are met; the amount could fluctuate.
- Walmart Brazil: A June 2018 agreement to sell an 80% stake to Advent was expected to close in the second half of fiscal 2019, subject to approval. Walmart expected to record an estimated $4.5 billion net loss in fiscal Q2 2019, largely from accumulated foreign-currency translation losses.
- Legal and regulatory matters: Walmart recorded a $283 million aggregate accrual for ongoing FCPA matters; discussions with U.S. authorities continued, and final timing and terms remained uncertain. The company also faces more than 10,000 Asda equal-value employment claims and opioid-related litigation and investigations; it could not reasonably estimate potential losses for these matters. Management states that adverse outcomes in disclosed matters could be material.
- Other risks: Exposure includes currency and interest-rate movements, JD share-price volatility, retail competition, fuel and transportation costs, cybersecurity, regulatory and legal proceedings, and execution and financing risks associated with acquisitions and divestitures. Management reported no material change in the risk factors in its fiscal 2018 Form 10-K.
Most important facts for investors to verify
- How much of the earnings decline reflects the noncash JD investment loss, and how results trend excluding that item.
- Whether sales growth converts into improved gross and operating margins as price and eCommerce investments continue.
- Flipkart’s regulatory approval, financing, closing, and actual effect on fiscal 2019 earnings and debt.
- The timing, proceeds, retained obligations and accounting effects of the Asda, Brazil and banking-operation transactions.
- Developments in the FCPA, Asda employment and opioid matters, including whether existing accruals remain adequate.
- Operating cash flow, working-capital deficit, short-term borrowing levels and capital allocation as transactions are funded.