Walmart Inc. (then Wal-Mart Stores, Inc.) — Form 10-Q Summary
Business context and reporting period
Reports the unaudited three months ended April 30, 2016, Walmart’s first quarter of fiscal 2017. The retailer operates through Walmart U.S., Walmart International and Sam’s Club, including digital retail. Unless noted otherwise, amounts below are in U.S. dollars.
Key financial metrics
| Metric | Quarter ended April 30, 2016 | Prior-year quarter |
|---|---|---|
| Total revenue | $115.9 billion | $114.8 billion |
| Net sales | $115.0 billion | $114.0 billion |
| Operating income | $5.275 billion | $5.680 billion |
| Consolidated net income | $3.216 billion | $3.283 billion |
| Net income attributable to Walmart | $3.079 billion | $3.341 billion |
| Diluted earnings per share | $0.98 | $1.03 |
| Gross profit margin | 24.7% | 24.1% |
| Operating income as a percentage of net sales | 4.6% | 5.0% |
| Operating cash flow | $6.193 billion | $4.446 billion |
| Capital expenditures | $2.209 billion | $2.203 billion |
| Free cash flow (company-defined) | $3.984 billion | $2.243 billion |
Cash and cash equivalents were $7.597 billion at April 30, 2016. The company reported a working-capital deficit of $11.2 billion. Long-term debt, including amounts due within one year, was $39.408 billion; short-term borrowings were $3.813 billion. Capital lease and financing obligations totaled $6.801 billion, including current amounts.
Material changes versus the prior comparable period
- Revenue and net sales rose 0.9%. Positive comparable sales and 1.1% growth in retail square feet were partly offset by a $3.5 billion adverse currency translation impact and lower Sam’s Club fuel sales.
- U.S. comparable store and club sales increased 2.4%, including fuel; the leap-year extra day contributed approximately 100 basis points. Walmart U.S. comparable sales rose 2.9%.
- Gross margin improved 60 basis points, but operating expenses as a share of sales rose 107 basis points. Management cited wage investments and continued digital and technology spending. Operating income fell $405 million.
- Operating cash flow increased by $1.747 billion, which management attributed primarily to improved working-capital management. Financing cash outflow increased to $5.432 billion, mainly reflecting higher share repurchases.
- Walmart U.S. sales rose 4.3%, while International sales fell 7.2%, largely from currency effects. International operating income increased to $1.164 billion; Walmart U.S. and Sam’s Club operating income declined.
- Net income attributable to Walmart fell more than consolidated net income; the filing attributes the change in noncontrolling-interest results primarily to the cumulative impact of an immaterial lease-accounting correction made in the prior-year quarter.
Outlook, management commentary, risks and unusual items
- No specific quarterly or full-year earnings or sales guidance is provided. Management prioritizes growth while balancing returns, investing in associates and integrating digital and physical retail. It cautions that expenses may grow at or above sales growth and operating income may grow at or below sales growth during these investments.
- Management said operating cash flow, cash on hand and capital-market access should be sufficient for operating needs, investment, dividends and repurchases. The fiscal 2017 annual dividend was raised to $2.00 per share from $1.96; quarterly installments are $0.50 per share.
- The company repurchased $2.735 billion of shares in the quarter, versus $280 million a year earlier; $14.7 billion remained authorized under its $20 billion program.
- The Audit Committee and company continue investigations and compliance work concerning possible FCPA violations; U.S. and Mexican authorities are investigating, and shareholder litigation is pending. Walmart said a loss is probable but it cannot reasonably estimate a loss or range. Third-party costs for these matters were $25 million in the quarter.
- Other disclosed contingencies include more than 7,000 ASDA equal-value pay claims, a wage-and-hour case remanded for further proceedings after the U.S. Supreme Court denied review, and environmental matters. The filing says potential losses for certain environmental proceedings are not expected to be material; outcomes remain uncertain.
- Foreign-exchange and interest-rate movements remain risks; currency effects materially reduced reported International sales. The filing also identifies competition, labor costs, consumer conditions, fuel prices, cybersecurity and regulatory or legal developments as risks.
Important facts for investors to verify
- Whether sales momentum and margin gains can offset ongoing wage, technology and digital investment costs.
- How International sales and earnings trend excluding currency effects, and the effect of exchange rates on future results.
- Whether working-capital-driven cash flow improvement is sustainable and how cash generation supports debt, dividends and repurchases.
- Developments in the FCPA investigations and litigation, ASDA pay claims and other contingencies, including any change in the company’s ability to estimate potential losses.
- The timing and returns from strategic and capital investments, and the effect of fuel-price volatility on Sam’s Club.