18 May 2010

WMT: Income Statement Analysis for the April 2010 Quarter

Wal-Mart Stores (NYSE: WMT) earned $0.88 per diluted share on a GAAP basis in fiscal 2011's first quarter, which ended on 30 April 2010.  Walmart's latest EPS was 14 percent more than the $0.77 it made in the same quarter last year.

This post examines Walmart's Income Statement for the quarter and compares the entries on each line to our "look-ahead" estimates.  Reported earnings were $0.02 better than the $0.86 per share we had forecast.

The principal sources for this income statement analysis were the earnings announcement and the transcript [pdf] of management's audio review of the quarter.

In a second article, we will report Walmart's scores as measured by the GCFR financial gauges.  The follow-up post will also provide the latest figures for the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value.

A retailing behemoth, Wal-Mart Stores, Inc., earned $14 billion on net sales greater than $400 billion in the fiscal year that concluded January 2010.  Walmart regained from Exxon Mobil (NYSE: XOM) the top position on the Fortune 500 list of America's largest corporations.    Additional background information about Walmart and the business environment in which it is currently operating can be found in the look-ahead.

Please click here to see a full-sized, normalized depiction of the actual and projected results for the just-concluded quarter, as well as the quarterly Income Statements for the last couple of years.  Please note that our organization of revenues, expenses, gains, and losses, which we use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

Revenue (Net sales and some other income) of $99.8 billion was 5.9 percent more than last year's $94.2 billion.  Changes in currency conversion rates added about $2.5 billion to Net Sales.

The reported Revenue amount is 1.1 percent less than our $101.0 billion estimate.

Walmart's business is divided into three operating segments for financial data reporting:
  • Walmart U.S.,
  • International, and
  • Sam’s Club. 
Walmart U.S contributed 63 percent of total Net Sales in the latest quarter.  Walmart U.S. sales rose 1.1 percent, from $61.6 billion in April 2009 to $62.3 billion.  However, on a same-store basis, Walmart U.S. sales disappointingly fell 1.4 percent.  The company blamed the decline on "soft customer traffic," and it noted that customers "are still concerned about their personal finances and unemployment, as well as higher fuel prices."

International stores did well, increasing 21 percent to $25.0 billion.  On a constant currency basis, sales rose a robust 8.9 percent from last year's first quarter.  In recognition of the growing importance of non-U.S. operations to Walmart, the company reported that "[m]ore than 60 percent of the additional square footage of retail selling space this quarter was within Walmart International."

Sam's Club sales were up 4.6 percent, from $11.2 billion to $11.7 billion.

As an aside, Walmart this year changed the way that it allocates certain expenses to the operating segments, and it realigned its Puerto Rico businesses across the segments.  These changes do not affect the company's composite Income Statement or how we analyze it.

The Cost of Goods Sold (CGS) increased to $74.7 billion (74.8 percent of Revenue) from $70.4 billion in the year-earlier quarter.  The latest results translate into a Gross Margin of 25.2 percent, about 10 basis points less profitable than the 25.3-percent margin in last year's first quarter.

Walmart beat our 25.0-percent estimate for the Gross Margin by 20 basis points.

Sales, General, and Administrative (SG&A) expenses increased 3.9 percent, from $18.6 billion to $19.4 billion.  Since these expenses rose less than sales, SG&A decreased from 19.8 percent of Revenue to 19.4 percent.

SG&A expenses were 1 percent less than the $19.6 billion we had estimated.

Subtracting the various operating expenses from Revenue yields Operating Income of nearly $5.8 billion, up 10.6 percent from $5.2 billion in the year-earlier quarter.  The increase can be credited to rising Revenue and control of SG&A costs. 

Operating Income surpassed our $5.66 billion estimate by 2 percent.

Walmart U.S. was responsible for 75 percent of total Operating Income.

The Net Interest expense of $471 was about the same as last year.  We had expected $475 million.

The effective Income Tax Rate in the quarter was 34.6 percent, 90 basis points higher than last year's 33.7 percent.  We had expected the rate to be 34.0 percent.  Walmart now forecasts a tax rate for the fiscal year between 34 and 35 percent, with some quarterly fluctuations.

Excluding income attributable to noncontrolling interests trimmed the bottom-line Net Income attributable to Walmart shareholders to $3.324 billion ($0.88 per share).  Compared to last year's $3.0 billion ($0.77 per share), the latest quarter was 10 percent more profitable on a Net Income basis and 14 percent more profitable on an EPS basis.

Walmart's results exceeded our $3.284 billion ($0.86 per share) forecast by 1 percent on Net Income and 2 percent on EPS.  If we had better estimated the number of common shares outstanding, our EPS error would have been $0.01 instead of $0.02. C'est la vie.

P.S.  This is the 700th post to GCFR since October 2006.

Full disclosure: Long WMT at time of writing.

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