16 November 2010

WMT: Income Statement Analysis for the October 2010 Quarter

Wal-Mart Stores (NYSE: WMT) earned $0.95 per diluted share on a GAAP basis in the October-ending third quarter of fiscal 2011, up 16 percent from $0.81 in the same three months of last year. 

A special tax benefit of $0.05 per share lifted reported earnings.  With this benefit excluded, earnings were close to $0.90 per share and were consistent with Walmart's guidance, issued last August, to expect diluted EPS from continuing operations between $0.87 to $0.91.

This post examines Walmart's Income Statement for the quarter and compares the entries on each line to our "look-ahead" estimates.  Adjusted earnings nearly matched the $0.90 per share we had forecast. 

The principal sources for this income statement analysis were the earnings announcement and the transcript [pdf] of management's pre-recorded 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.

Before getting into the details, we will take a step back to introduce the subject of today's analysis.

Retailing behemoth Wal-Mart Stores, Inc., earned over $14 billion on net sales of $405 billion in fiscal 2010, which concluded last January.  The Revenue figure, along with a drop in energy prices, enabled Walmart to regain from Exxon Mobil (NYSE: XOM) the top position on the Fortune 500 list of America's largest corporations. 

Economies of scale and ruthless efficiencies enable Walmart to sell many products for prices lower than competitors, which include Target (NYSE: TGT), Kohl's (NYSE: KSS), and Sears Holdings (NASDAQ: SHLD).  Walmart is now purchasing more goods directly from manufacturers to reduces its costs.

Although the discounter's net sales rose only 1.0 percent in fiscal 2010, income continuing operations increased a healthy 8.8 percent.

Walmart's market value is nearly $200 billion, which makes it one of the five most valuable companies in the U.S.  The market value has been relatively steady for a number of years.

Critics of Wal-Mart abound.

Walmart's board of directors in 2010 approved a new plan to repurchase $15 billion of the company's common shares.  Walmart repurchased $11 billion of its shares in the first nine months of the current fiscal year.

For financial data reporting, Walmart has three business segments: Walmart U.S., International and Sam’s Club.  Walmart U.S. had net sales of $258 billion in fiscal 2010, or nearly 64 percent of the overall amount.  The International segment had sales of $100 billion (24.7 percent of the total), and sales at Sam's Club amounted to nearly $47 billion.  At last count, Walmart operated 4400 stores in the U.S. (including Sam's Club) and 4292 in other countries.

Net sales by Walmart U.S. grew 1.1 percent last year, but comparable store sales declined 0.7 percent.  Concerned about slow sales at home, Walmart in 2010 replaced the leader of Walmart U.S.

Walmart International has various subsidiaries or joint ventures in Brazil, Canada, China, India, Japan, Mexico, the United Kingdom, and several other countries.   Changes in currency exchange rates had a $9.8 billion unfavorable impact (almost 10 percent) on the International unit's net sales in fiscal 2010.

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 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.

Walmart restated [pdf] certain items of the prior-year results, and we have used the latest figures.  The adjustments were related to changes in inventory valuation methods and some other changes.

Revenue (Net sales and some other income) in the October quarter increased 2.6 percent, from $99.4 billion to $102 billion.  Fluctuations in currency conversion rates added about $300 million to Net Sales, or 0.3 percent to the Revenue growth rate.

Reported revenue was 1.0 percent less than our $103 billion estimate for the quarter.  Our projection was derived from government reports on retail sales, competitor news, and seasonal patterns.

Sales at Walmart U.S., which is the company's largest business, were essentially unchanged at $62.2 billion.  Comparable-store sales fell 1.3 percent. 

The International business did well again: sales increased a robust 9.3 percent from last year's third quarter to $26.9 billion. On a constant-currency basis, sales rose 8 percent.

With overseas sales growing at a faster pace than domestic, Walmart U.S.'s contribution to Walmart's total Net Sales declined from 63.1 percent in the October 2009 quarter to 61.4 percent in the latest quarter.

Sam's Club sales were up 2.7 percent, from $11.8 billion to $12.1 billion.

The composite Cost of Goods Sold (i.e., Cost of Sales) increased to $75.9 billion (74.5 percent of Revenue) from $73.9 billion in the year-earlier quarter.  The latest amount translates into a Gross Margin of 25.5 percent, about 10 basis points less profitable than the 25.6-percent margin in last year's third quarter.

Walmart beat our 25.4-percent estimate for the Gross Margin by 10 basis points.

Sales, General, and Administrative expenses increased a mere 2.1 percent, from $20.0 billion to $20.4 billion. Since these expenses rose at a slower pace than sales, SG&A decreased from 20.1 percent of Revenue to 20.0 percent.

SG&A expenses nearly matched our estimate.

Subtracting the various operating expenses discussed above from Revenue yields Operating Income of $5.6 billion, up 3.1 percent from $5.4 billion in the year-earlier quarter.  The increase is due to greater Revenue and good control of SG&A expenses.

Operating Income fell short of our $5.77 billion estimate by 2.7 percent.

Segment Operating Income, which excludes unallocated corporate overhead expenses, totaled $6.0 billion. Walmart U.S. was responsible for 73.5 percent of Segment Operating Income. However, Operating Income at Walmart International grew at 13.5 percent, dwarfing Walmart U.S.'s tepid 1.9 percent.

After raising $5 billion in a recent debt offering, the Net Interest expense of $516 million was 8.6 percent more than last year.  We had expected the net interest expense to equal $475 million.

The effective Income Tax Rate in the quarter was a relatively low 29.5 percent because the company recorded an $191 million tax benefit "due to favorable adjustments to current transfer pricing policies after negotiations with a foreign tax jurisdiction... ."   Excluding the benefit, the tax rate appears to have been 33.3 percent.  Our estimate was 34.5 percent estimate.
Excluding income attributable to noncontrolling interests trimmed the bottom-line Net Income attributable to Walmart shareholders to $3.44 billion ($0.95 per share).  Compared to last year's $3.14 billion ($0.81 per share), the latest quarter was 9.3 percent more profitable on a Net Income basis and 16 percent richer on an EPS basis.

Reported Net Income exceeded our estimate by 3.6 percent.  If we subtract the $191 million tax benefit from reported Net Income of $3.44 billion, the result is $3.25 billion ($0.89 per share).  Our estimate was $3.32 billion ($0.90 per share).

In summary, Revenue increased 2.6 percent in the October quarter, with International operations providing most of the gain.  The Gross Margin and the amount of SG&A expenses were consistent with expectations.  Interest expenses were a little higher than they had been because Walmart increased its debt.  A one-time tax benefit boosted the bottom line by $191 million, or almost $0.05 per share.  In other respects, the quarter's numbers were close to our targets.

Walmart U.S. continues to face significant profitability challenges.  This unit's comparable store sales were down 1.3 percent.  With economic weakness still weighing on its core customers, Walmart U.S has chosen to be a "price leader" to maintain customer traffic.

Full disclosure: Long WMT at time of writing.

No comments:

Post a Comment