Walmart Inc. 10-Q Summary: Quarter Ended October 31, 2007
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended October 31, 2007 (Fiscal Q3 2008) and the nine-month period ended on the same date. Walmart operates retail stores in the U.S. (Wal-Mart Stores and Sam's Club segments) and internationally. The company is a large accelerated filer. As of November 23, 2007, there were approximately 4.0 billion shares of common stock outstanding.
Key Financial Metrics
| Metric | Q3 2007 (3 Months) | Q3 2006 (3 Months) | YTD 2007 (9 Months) | YTD 2006 (9 Months) |
|---|---|---|---|---|
| Net Sales | $90,880 million | $83,543 million | $268,257 million | $246,902 million |
| Operating Income | $4,972 million | $4,465 million | $15,115 million | $14,065 million |
| Net Income | $2,857 million | $2,647 million | $8,635 million | $7,345 million |
| Diluted EPS | $0.70 | $0.63 | $2.11 | $1.76 |
| Operating Cash Flow (YTD) | $9,420 million (2007) vs $10,065 million (2006) | |||
| Total Assets | $165,064 million (Oct 31, 2007) | |||
| Total Debt (Long-term + Current) | $34,482 million (Oct 31, 2007) | |||
| Commercial Paper | $9,126 million (Oct 31, 2007) |
Note: Gross margin for Q3 2007 was 23.8% of net sales, up from 23.7% in the prior year quarter.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 8.8% in Q3 and 8.6% YTD, driven by U.S. and global expansion and a 1.5% increase in U.S. comparable store sales. Foreign currency exchange rates favorably impacted sales by $1.1 billion in Q3 and $2.7 billion YTD.
- Profitability: Net income rose 10.1% in Q3 and 17.6% YTD. Operating income increased 11.4% in Q3 and 7.5% YTD.
- Segment Performance:
- Wal-Mart Stores: Sales up 6.4% (Q3); Operating income up 11.1%.
- Sam's Club: Sales up 6.1% (Q3); Operating income up 6.2%.
- International: Sales up 16.9% (Q3); Operating income up 8.6%. Growth driven by the UK, Brazil, Canada, and China (including the acquisition of Bounteous Company Ltd.).
- Discontinued Operations: The company disposed of operations in South Korea and Germany. Q3 2006 included a $53 million gain from discontinued operations, while Q3 2007 had none. YTD 2007 included a $153 million loss related to post-closing adjustments on the German disposal.
- Accounting Changes: A favorable change in estimate for general liability and workers' compensation claims reduced accrued liabilities by $196 million (after-tax), boosting net income by $0.05 per share in Q2 and YTD 2007.
Guidance, Outlook, and Risks
- Capital Expenditures: Management announced a moderation in U.S. supercenter expansion. Fiscal 2008 capital expenditures are now expected to be approximately $15 billion, down from $15.7 billion in the prior fiscal year. The plan includes 195 new U.S. supercenters for the fiscal year.
- Dividends and Buybacks: The annual dividend was increased to $0.88 per share. The company repurchased $5.3 billion of common stock YTD under a new $15 billion authorization program (approx. $10.8 billion remaining).
- Debt Activity: The company issued $8.0 billion in long-term debt and repaid $6.7 billion in principal YTD. Commercial paper increased by $6.5 billion net.
- Tax Outlook: The effective tax rate for Q3 was 34.5%. Management expects the full-year fiscal 2008 effective tax rate to be between 34% and 35%.
- Legal and Contingencies:
- Gender Discrimination: The Dukes v. Wal-Mart class action (approx. 1.6 million women) remains pending; the 9th Circuit affirmed class certification, and the company is seeking review by a larger panel. Potential liability is material but cannot be estimated.
- Wage and Hour: Numerous "off the clock" class actions are pending. Significant judgments include a $188 million final judgment in Braun/Hummel (appealed) and a $57 million verdict in Savaglio (appealed).
- Environmental: The company is a target of a criminal investigation regarding hazardous waste transportation (RCRA) and faces various state and local investigations. Management does not believe these will have a material effect on financial condition.
Investor Verification Checklist
- Verify the impact of the moderated U.S. supercenter expansion on future revenue growth rates.
- Monitor the status of the Dukes v. Wal-Mart gender discrimination appeal and potential settlement liabilities.
- Review the working capital deficit (current liabilities exceeded current assets by $9.4 billion) and its sustainability given the company's efficient cash cycle.
- Assess the foreign currency exposure, as favorable exchange rates contributed significantly to YTD sales growth ($2.7 billion).
- Confirm the tax rate outlook (34-35%) given the mix of domestic and international income and potential changes in unrecognized tax benefits.
- Track the share repurchase program execution against the remaining $10.8 billion authorization.