Walmart Inc. (then Wal-Mart Stores, Inc.) — Q1 FY2011 Form 10-Q
Reporting period: Three months ended April 30, 2010; comparisons are with the three months ended April 30, 2009 unless otherwise noted. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 FY2011 | Prior-year quarter |
|---|---|---|
| Net sales | $99.097 billion | $93.471 billion |
| Total revenue, including membership and other income | $99.848 billion | $94.242 billion |
| Operating income | $5.772 billion | $5.217 billion |
| Income from continuing operations | $3.467 billion | $3.147 billion |
| Net income attributable to Walmart | $3.324 billion | $3.022 billion |
| Diluted EPS | $0.88 | $0.77 |
| Gross margin | 24.6% | 24.7% |
| Operating expenses as a share of net sales | 19.5% | 19.9% |
Net sales rose 6.0%; management attributed growth principally to international expansion and a 3.5% increase in retail square footage. Currency movements added $2.5 billion to reported sales. Operating income grew 10.6%, faster than sales, with management citing labor productivity and organizational changes. The effective tax rate was 34.6%, versus 33.7%.
Segments and operating trends
- Walmart U.S.: Sales increased 1.1% to $62.324 billion; operating income rose 5.6% to $4.638 billion. Comparable sales declined 0.8%, with management citing weaker traffic, higher gasoline prices, deflation in some categories, unemployment in certain areas, and competition.
- Walmart International: Sales increased 21.4% to $25.030 billion and operating income rose 27.8% to $1.095 billion. Growth reflected expansion, the prior-year comparison following the D&S acquisition, and favorable currency effects.
- Sam’s Club: Sales increased 4.6% to $11.743 billion and operating income rose 9.2% to $429 million. Comparable sales increased 4.9%, including a 3.3 percentage-point benefit from fuel sales.
Cash flow, debt, and liquidity
- Operating cash flow was $973 million, down from $3.571 billion. The filing attributes the decline primarily to a $2.230 billion cash use from increased inventory.
- Capital expenditures were $2.563 billion; reported free cash flow was negative $1.590 billion, versus positive $964 million a year earlier. Free cash flow is a company-defined non-GAAP measure.
- Investing activities used $2.236 billion; financing activities provided $1.836 billion. Cash and cash equivalents ended the quarter at $8.516 billion.
- Current assets were $51.674 billion and current liabilities $64.512 billion, a $12.838 billion working-capital deficit; the current ratio was 0.8. Management said a working-capital deficit is generally part of its operating model.
- Short-term borrowings were $4.812 billion, up from $523 million at January 31, 2010. Long-term debt was $38.680 billion, excluding short-term borrowings and capital-lease obligations. Debt-to-total-capitalization was 41.4%, compared with 41.0% a year earlier.
- The company issued $2.0 billion of senior unsecured notes in April: $750 million of 2.875% notes due 2015 and $1.250 billion of 5.625% notes due 2040.
Outlook, material developments, and risks
- Management forecast fiscal 2011 capital expenditures of $13–15 billion, an annual effective tax rate of approximately 34–35%, and approximately $3.5 billion in dividends for the remainder of the fiscal year.
- The $4.3 billion increase in short-term borrowings was used to fund a one-time acceleration of accounts-payable payments associated with the U.S., Puerto Rico, and Canada financial-system implementation. The implementation began May 1, 2010; management also described a related inventory-accounting methodology change as not expected to be material.
- The annual dividend was increased 11% to $1.21 per share. The company repurchased approximately $3.0 billion of shares during the quarter. In June 2010, the board replaced the prior $15 billion repurchase authorization with a new $15 billion program.
- After quarter-end, Walmart announced that U.K. subsidiary ASDA agreed to acquire Netto Foodstores Limited for approximately £778 million, subject to regulatory approval and expected to close in fiscal 2011.
- Legal matters include the Dukes gender-discrimination class action: the Ninth Circuit issued a divided decision on April 26, 2010; Walmart said it planned to seek Supreme Court review. The company could not reasonably estimate potential loss. A California environmental settlement approved May 3 required $20 million in civil penalties, approximately $1.6 million in investigative costs, and $6 million for environmental projects and compliance measures. A separate federal hazardous-materials investigation remained pending; management did not expect it to have a material effect.
- Other disclosed exposures include wage-and-hour and exempt-status litigation, currency and interest-rate movements, economic and competitive conditions, and execution of the new financial system. Management reported no material change to the risk factors in its fiscal 2010 Form 10-K.
Investor verification priorities
- Assess whether operating cash flow and free cash flow recover as inventory investment and payment timing normalize.
- Track U.S. comparable sales and separate underlying demand from fuel-price and currency effects in reported growth.
- Monitor short-term borrowing, total debt and lease obligations, and the company’s capital spending and shareholder-return commitments.
- Review subsequent disclosures on the Dukes litigation, environmental and other legal matters, and the ASDA-Netto transaction.
- Confirm the financial-system rollout and related inventory-accounting change proceed without material control, reporting, or operating disruption.