Walmart — Form 10-Q Summary
Business context and reporting period
Walmart’s unaudited first quarter of fiscal 2018 ended April 30, 2017; comparisons are with the three months ended April 30, 2016. The company operates Walmart U.S., Walmart International and Sam’s Club, through physical stores and e-commerce. Its strategy emphasizes everyday low prices, digital and physical integration, and investment in e-commerce, technology and supply chain.
Financial results and liquidity
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Total revenue | $117.542 billion | $115.904 billion |
| Net sales | $116.526 billion | $114.986 billion |
| Operating income | $5.237 billion | $5.275 billion |
| Consolidated net income | $3.152 billion | $3.216 billion |
| Net income attributable to Walmart | $3.039 billion | $3.079 billion |
| Diluted EPS attributable to Walmart | $1.00 | $0.98 |
| Operating cash flow | $5.385 billion | $6.193 billion |
| Capital expenditures | $1.990 billion | $2.209 billion |
| Free cash flow | $3.395 billion | $3.984 billion |
Revenue rose 1.4% and net sales rose 1.3%, while operating income fell about 0.7% and Walmart-attributable net income fell about 1.3%. Gross margin was 24.8% versus 24.7%; operating margin was 4.5% versus 4.6%. EPS increased despite lower attributable net income, alongside a decline in diluted weighted-average shares to 3.047 billion from 3.154 billion.
Operating cash flow and free cash flow declined, which management attributed primarily to higher incentive payments. Cash and cash equivalents were $6.545 billion at April 30, 2017, versus $7.597 billion a year earlier. The company reported a $16.9 billion working-capital deficit, compared with $11.2 billion a year earlier, and said it generally operates with a deficit.
At April 30, short-term borrowings were $2.617 billion, long-term debt including amounts due within one year was $37.030 billion, and capital lease and financing obligations totaled $6.850 billion. Long-term debt declined $1.2 billion during the quarter, primarily due to maturities. Dividends declared were $2.04 per share annually for fiscal 2018, payable in four $0.51 installments. Walmart repurchased $2.185 billion of shares during the quarter; $7.0 billion remained under its $20.0 billion authorization.
Material changes and segment performance
- Walmart U.S.: Sales increased 2.9% to $75.436 billion; comparable sales increased 1.1%. Operating income rose to $4.269 billion from $4.232 billion, while operating margin eased to 5.7% from 5.8%. E-commerce contributed approximately 0.8 percentage points to comparable sales.
- Walmart International: Sales decreased 3.5% to $27.097 billion, primarily reflecting $1.2 billion of adverse currency effects and a $385 million reduction from the former Yihaodian business. Operating income was approximately flat at $1.163 billion. Currency reduced segment operating income by $106 million.
- Sam’s Club: Sales increased 2.8% to $13.993 billion, including $203 million of higher fuel sales. Comparable sales increased 2.1%; excluding fuel, sales rose 1.4%. Operating income was approximately flat at $414 million.
U.S. comparable sales grew 1.2%, slower than 2.4% in the prior-year quarter; the prior year benefited by approximately 100 basis points from an extra February day. Consolidated net sales also faced a $1.2 billion negative currency impact. Operating expenses grew 2.2%, faster than sales growth of 1.3%, reflecting continued e-commerce and technology investment.
Outlook, management commentary, risks and unusual items
- Management reported no specific numerical earnings or sales guidance in the filing. It said liquidity sources should be adequate to fund operations, investment, dividends and repurchases for the foreseeable future.
- Capital allocation is shifting toward remodels, e-commerce, technology and supply chain, and away from new store openings. U.S. capital spending on new stores and clubs fell $283 million year over year, while remodel spending rose $116 million and e-commerce, technology, supply chain and other spending rose $85 million.
- Management expects strategic investments may not benefit comparable sales in the near term. It identified competitive pressures, consumer and economic conditions, currency and fuel-price volatility, labor and operating costs, cybersecurity, and legal and regulatory matters among relevant risks. The filing said there had been no material change to the risk factors in the prior Form 10-K.
- The ongoing U.S. DOJ and SEC FCPA investigations, related inquiries in multiple countries and shareholder litigation remain unresolved. Walmart said it could not reasonably estimate a loss or range of loss; third-party costs for the investigations and related compliance work were $16 million in the quarter. ASDA faces more than 10,000 U.K. equal-value employment claims; loss estimates were also unavailable.
- A $47 million land-sale gain contributed to higher membership and other income. The quarter also included $1.560 billion of other comprehensive income, including a $481 million unrealized gain on available-for-sale securities and $877 million of currency translation gains before reclassifications.
- The Suburbia apparel division sale closed in fiscal Q2, after this reporting period. Walmart expected a pretax gain of approximately $650 million, subject to customary adjustments, with about $380 million to be recognized in Q2 and the remainder deferred over lease terms.
- Management expected the new lease accounting standard, to be adopted February 1, 2019, to materially affect the balance sheet; its effects on net income and cash flow were still under evaluation. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether sales growth and e-commerce investment translate into improved operating income and expense leverage.
- International results excluding currency effects, including the ongoing impact of winding down Yihaodian.
- Cash-flow trends, incentive payments, the working-capital deficit, debt maturities and the pace of repurchases and dividends.
- Developments and potential financial consequences of the FCPA matters and ASDA employment claims, for which the filing provides no clear loss estimate.
- Timing and recognition of the Suburbia sale gain, and the performance and valuation of Walmart’s JD.com investment.