Walmart Inc. (then Wal-Mart Stores, Inc.) — Form 10-Q
Reporting period: Quarter and six months ended July 31, 2017 (fiscal 2018 second quarter). Unless stated otherwise, financial amounts are in U.S. dollars.
Business context and reporting period
Walmart operates Walmart U.S., Walmart International and Sam’s Club, across physical retail and e-commerce. Management’s strategy emphasizes price leadership, integrating digital and physical shopping, disciplined expense management and directing more investment to remodels, e-commerce, technology and supply chain rather than new stores.
Key financial metrics
| Metric | Three months ended July 31, 2017 | Prior-year quarter | Six months ended July 31, 2017 | Prior-year six months |
|---|---|---|---|---|
| Total revenues | $123.4 billion | $120.9 billion | $240.9 billion | $236.8 billion |
| Net sales | $121.9 billion | $119.4 billion | $238.5 billion | $234.4 billion |
| Operating income | $6.0 billion | $6.2 billion | $11.2 billion | $11.4 billion |
| Operating margin | 4.9% | 5.2% | 4.7% | 4.9% |
| Consolidated net income | $3.1 billion | $3.9 billion | $6.3 billion | $7.1 billion |
| Net income attributable to Walmart | $2.9 billion | $3.8 billion | $5.9 billion | $6.9 billion |
| Diluted EPS attributable to Walmart | $0.96 | $1.21 | $1.96 | $2.18 |
| Gross profit margin | 25.0% | 25.1% | 24.9% | 24.9% |
Quarterly and six-month revenue rose 2.1% and 1.7%, respectively. Net sales benefited from comparable sales and retail square-foot growth, but were reduced by foreign-exchange impacts of $1.0 billion for the quarter and $2.2 billion for the six months. Operating expenses as a percentage of sales increased, primarily due to e-commerce and technology investment. The effective tax rate was 32.6% in both 2017 periods, versus 30.5% for the prior-year quarter and 31.1% for the prior-year six months.
Cash flow and liquidity: For the six months, operating cash flow was $11.4 billion, down from $14.9 billion; capital expenditures were $4.4 billion, compared with $4.6 billion. Management-defined free cash flow was $6.9 billion, versus $10.3 billion. Management attributed the operating cash-flow decline chiefly to higher incentive payments, payment timing and a greater prior-year working-capital benefit. Investing cash outflow was $3.6 billion and financing cash outflow was $8.6 billion.
At July 31, cash and cash equivalents were $6.5 billion. Current assets were $56.8 billion and current liabilities $72.8 billion; the company reported a $16.0 billion working-capital deficit, which it said was typical of its operating model. Short-term borrowings were $3.3 billion; long-term debt, including amounts due within one year, was $37.0 billion. Total equity was $79.0 billion. The filing states that liquidity sources are expected to be adequate for operations, investment, dividends and repurchases.
Capital returns: Walmart declared a fiscal 2018 annual dividend of $2.04 per share, up from $2.00, payable in quarterly installments of $0.51. It repurchased 60.6 million shares for $4.4 billion in the six months; $4.8 billion remained under the authorized program at period-end.
Material changes versus the prior comparable period
- Quarterly operating income fell 3.2% and diluted EPS fell $0.25; six-month operating income declined about 2.0% and diluted EPS fell $0.22.
- Reported earnings included a $788 million loss on extinguishment of debt, including premiums paid to retire higher-rate debt. The loss contributed materially to lower pretax income.
- Walmart U.S. net sales grew 3.3% for the quarter and 3.1% for the six months; comparable sales increased 1.7% and 1.4%. Segment operating income rose modestly.
- Walmart International net sales declined 1.0% for the quarter and 2.3% for the six months, affected by currency translation and the Yihaodian and Suburbia divestitures. Segment operating income fell $135 million and $136 million, respectively.
- Sam’s Club sales increased, helped by fuel prices and comparable sales, but segment operating income declined $68 million for the quarter and $67 million for the six months. A roughly $50 million charge related to asset impairment and the planned closure of four underperforming clubs affected quarterly expenses.
- The Suburbia sale generated a $0.7 billion pretax gain, with $387 million recognized in the quarter and the remainder deferred over the related lease terms. This partly offset comparison with the prior-year $535 million gain on the Yihaodian asset sale.
- Six-month capital spending shifted away from new stores and clubs ($520 million versus $1.17 billion) toward remodels, e-commerce, technology and supply chain.
Outlook, commentary, risks and contingencies
No specific earnings or sales guidance is provided in the supplied filing text. Management expects returns on capital to improve over time as it executes its strategy, and expects operating cash flows, cash balances and capital-market access to support anticipated needs. It intends, with limited exceptions, to reinvest foreign earnings outside the U.S.
Key disclosed risks include intense retail and e-commerce competition, currency and fuel-price volatility, execution and integration of e-commerce investments, and cybersecurity or information-system disruption. The filing updated risk disclosures concerning system availability, online-platform performance and protection of customer, associate and vendor information.
Walmart is under DOJ and SEC investigation concerning potential FCPA violations and related matters, with additional investigations and shareholder litigation. The company said it believes a loss is probable but cannot reasonably estimate a loss or range; it reported $28 million of related third-party expenses for the six months. More than 10,000 ASDA equal-value employment claims are also pending; the company cannot reasonably estimate potential losses. The filing also describes environmental matters in Brazil and elsewhere; management did not believe potential losses from the listed environmental matters would be material. These assessments involve uncertainty.
Other notable accounting developments: adoption of the stock-compensation standard in February 2017 had an immaterial impact. Walmart expected the new lease standard to materially affect the balance sheet; adoption was planned for February 2019. It also expected the new financial-instruments standard to primarily affect accounting for its JD.com investment.
Important facts for investors to verify
- How much of earnings pressure reflects the debt-extinguishment charge and divestiture comparisons versus ongoing operating performance.
- Whether e-commerce and technology investment can support comparable-sales growth while improving expense leverage and margins.
- The continuing effects of foreign exchange and the performance trend in Walmart International.
- Cash conversion, working-capital movements, debt maturities and the funding of dividends and share repurchases.
- Developments and potential financial consequences of the FCPA investigations, ASDA claims and environmental proceedings, for which loss estimates are not clear or available.
- Progress on cybersecurity and system resilience, given the expanded risk disclosures and increasing digital-retail dependence.