Walmart Inc. (then Wal-Mart Stores, Inc.) — Form 10-Q
Business context and reporting period. Quarterly period ended July 31, 2009, the second quarter of Walmart’s fiscal 2010; six-month figures cover the first half of fiscal 2010. The filing is unaudited. Amounts are U.S. dollars unless noted; financial statement amounts below are in billions, except per-share data.
Financial performance
| Metric | Q2 FY2010 | Q2 FY2009 | First half FY2010 | First half FY2009 |
|---|---|---|---|---|
| Net sales | $100.08 | $101.55 | $193.55 | $195.59 |
| Operating income | $5.88 | $5.81 | $11.10 | $11.13 |
| Income from continuing operations attributable to Walmart | $3.45 | $3.40 | $6.48 | $6.43 |
| Net income attributable to Walmart | $3.44 | $3.45 | $6.46 | $6.47 |
| Diluted EPS from continuing operations | $0.88 | $0.86 | $1.65 | $1.62 |
| Diluted net EPS | $0.88 | $0.87 | $1.65 | $1.63 |
| Gross margin | 24.9% | 24.1% | 24.8% | 24.1% |
- Q2 net sales fell 1.4%; operating income rose 1.2%. For the first half, sales declined 1.0% and operating income declined 0.3%. Net income attributable to Walmart was nearly flat in both comparisons.
- Management attributed lower sales mainly to unfavorable currency movements, deflation in some categories, and lower fuel prices. Currency movements reduced International segment sales by $4.2 billion in Q2 and $9.0 billion in the first half.
- Q2 U.S. comparable sales, including fuel, declined 1.5%; Walmart U.S. comparable sales fell 1.0%, while Sam’s Club comparable sales fell 4.0%. Walmart U.S. operating income increased 5.0% in Q2; International and Sam’s Club operating income declined 6.2% and 5.0%, respectively.
- Higher gross margins reflected merchandising and inventory-management improvements, especially in Walmart U.S. and Sam’s Club. Operating expenses as a share of sales rose 0.8 percentage points in Q2, with management citing lower sales, higher health-benefit costs, and technology and systems spending.
Cash flow, balance sheet and capital
- First-half operating cash flow was $9.90 billion, versus $10.16 billion a year earlier. Capital spending was $5.74 billion, up from $5.07 billion; reported free cash flow was $4.15 billion, down from $5.09 billion.
- Cash and equivalents were $8.00 billion at July 31, 2009. Current assets were $49.03 billion and current liabilities $57.20 billion, an $8.17 billion working-capital deficit; the current ratio was 0.9. Management said the deficit was generally consistent with its operating and shareholder-return model.
- Total debt, including capital-lease obligations, was $45.24 billion; debt-to-total-capitalization was 40.3%, compared with 39.3% at January 31, 2009. Long-term debt due within one year was $6.96 billion. The company issued £1.0 billion of 2034 notes, $1.0 billion of 2014 notes, and $500 million of 2038 notes during the half.
- First-half financing included $2.79 billion of share repurchases and $2.13 billion of dividends paid. The annual fiscal 2010 dividend was raised 15% to $1.09 per share. A new $15 billion share-repurchase authorization replaced the prior program.
- Management expected operating cash flows and short-term borrowing capacity to fund seasonal inventory and other cash needs, with debt financing available if needed. Free cash flow is a company-defined non-GAAP measure and excludes debt service and other contractual obligations.
Outlook, risks and unusual items
- Management expected a fiscal 2010 annual effective tax rate of approximately 34%–35%. Unrecognized tax benefits related to continuing operations were $934 million; management said audit resolutions could reduce these by $330 million–$410 million over the next 12 months, without an expected significant effect on the tax rate.
- A separate $1.7 billion unrecognized tax benefit relates to a claimed deduction from the disposition of German operations and is presented as relating to discontinued operations. Management believed the matter could be resolved within 12 months.
- Wage-and-hour litigation remained a material uncertainty. Settlements covering 63 cases could require $352 million–$640 million, subject to court approval and claims; a separate California settlement could require $77 million–$152 million. The company said it could not reasonably estimate potential losses for several other cases, including the Dukes gender-discrimination class action.
- Hazardous-materials investigations were ongoing in several jurisdictions. Management did not expect these matters to materially affect financial condition or results, but outcomes were uncertain. A Pennsylvania wastewater matter was settled for $400,000.
- Japan’s Seiyu restructuring was reported in discontinued operations; the company recorded after-tax losses of $7 million for Q2 and $15 million for the first half. No material change to the risks disclosed in the prior 10-K was reported. Currency, economic conditions, consumer spending, labor and health costs, litigation, tax matters, and interest rates were among the stated risks.
- No specific sales or earnings guidance was provided in the supplied filing text. The filing cautions that interim results are not necessarily indicative of full-year results.
Key facts investors should verify
- Whether sales trends, comparable-store performance, and currency effects improved after the quarter, particularly in International and Sam’s Club.
- Whether gross-margin gains can offset higher operating expenses, health-benefit costs, and planned technology spending.
- Cash-flow conversion and capital spending, alongside the working-capital deficit, near-term debt maturities, and shareholder returns.
- Developments and recognized liabilities in wage-and-hour litigation, the Dukes case, and the German tax matter; settlement amounts remain conditional or uncertain.
- Actual fiscal 2010 tax rate relative to management’s 34%–35% expectation and any resolution of tax audits.