22 February 2011

WMT: Income Statement Analysis for the January 2011 Quarter

Wal-Mart Stores (NYSE: WMT) earned $1.70 per diluted share on a GAAP basis in the January-ending fourth quarter of fiscal 2011, up 36 percent from $1.25 in the same three months of the previous year.

It might be more meaningful to consider "underlying" earnings from continuing operations, which is a non-GAAP measure that excludes restructuring charges, certain tax benefits, and the results of non-continuing operations.  Walmart's underlying earnings from continuing operations rose 11 percent in the January 2011 quarter, from $1.21 in the previous year to $1.34 per share. 

This post examines Walmart's Income Statement for the quarter and compares the entries on each line to our "look-ahead" estimates.  Underlying earnings were $0.03 better than the $1.31 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., operates 4434 stores in the U.S. (including Sam's Club) and 8838 worldwide, at last count.

In fiscal 2011, which concluded in January 2011, Walmart earned $16.4 billion on revenue of $421 billion.  Revenue rose 3.4 percent from the previous year, and income from continuing operations increased 6.3 percent.

In 2010, Walmart regained the top position from Exxon Mobil (NYSE: XOM) on the Fortune 500 list of America's largest corporations. 

Economies of scale and ruthless efficiencies allow 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 also purchases goods directly from manufacturers to reduce its costs.

Critics of Wal-Mart abound.

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

Walmart's annual dividend in fiscal 2011, $1.21 per share, was 11 percent greater than in the previous year.  The company has also spent $14.8 billion to repurchase its shares in fiscal 2011.

For financial data reporting, Walmart has three business segments: Walmart U.S., International and Sam’s Club.  Walmart U.S. had net sales of $260 billion in fiscal 2011, or 62 percent of the overall amount.  The International segment had sales of $109 billion (26 percent of the total), and sales at Sam's Club amounted to nearly $50 billion. 

Net sales by Walmart U.S. grew a tiny 0.1 percent last year, and comparable store sales declined a worrisome 1.6 percent.  Walmart, concerned about slow sales at home,  replaced the leader of Walmart U.S. in mid-2010.

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 $4.5 billion favorable impact (roughly 4 percent) on the International unit's net sales in fiscal 2011.

In November 2010, Walmart offered to acquire a controlling interest in South African retailer Massmart (JNB: MSM).  An entry into the Russian market now appears less likely, at least in the short term.

Retail sales have been rising in the U.S., but continue to be pressured by high unemployment and the fragility of the housing marketConsumer sentiment in the U.S. recently dipped and remains a concern for retailers.

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 January quarter increased 2.4 percent, from $113.6 billion to $116.4 billion.  It seems worth noting that 24 percent of the $2.7 billion increase in Revenue was due to a $664 million currency exchange benefit.

Reported revenue was 2.2 percent less than our $119 billion estimate for the quarter.  This was not a large difference, but it was still disappointing given recent indications of a strengthening economy.  Our Revenue 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, slipped 0.5 percent to $71.1 billion. Comparable-store sales fell 1.8 percent. 

The International business did well again: sales increased a robust 8.9 percent to $31.4 billion. On a constant-currency basis, International sales rose 6.6 percent.

With overseas sales growing at a much faster pace than domestic, Walmart U.S.'s contribution to Walmart's total Net Sales declined from 63.3 percent in the January 2010 quarter to 61.5 percent in the latest quarter.

Sam's Club sales were up 4.4 percent, from $12.6 billion to $13.1 billion.  Fuel sales boosted the growth rate.

The composite Cost of Goods Sold (i.e., Cost of Sales) increased to $87.2 billion (74.9 percent of Revenue) from $85.1 billion in the year-earlier quarter.  The latest amount translates into a Gross Margin of 25.1 percent, about the same as in the previous January quarter.
Walmart fell short of our 25.3-percent estimate for the Gross Margin by about 20 basis points.

Sales, General, and Administrative expenses increased less than 1 percent, from $21.1 billion to $21.2 billion. Since these expenses rose at a slower pace than sales, SG&A decreased from 18.6 percent of Revenue to 18.2 percent.

SG&A expenses were 3.7 percent less than our $22.0 billion estimate.

Subtracting the various operating expenses discussed above from Revenue yields Operating Income of $8.0 billion, up 7.3 percent from $7.5 billion in the year-earlier quarter.  The increase is due to greater Revenue and good control of SG&A expenses.

Operating Income fell just 1 percent short of our $8.1 billion estimate.

Segment Operating Income, which excludes unallocated corporate overhead expenses, totaled $8.5 billion.  Walmart U.S. was responsible for 70.8 percent of Segment Operating Income.  Walmart International's Operating Income grew at 7.1 percent, outpacing Walmart U.S.'s 4.8 percent.

After raising funds recently in the debt markets, Walmart's Net Interest expense of $532 million was 13 percent more than last year.  We had expected the net interest expense to equal $525 million.

The effective Income Tax Rate in the quarter was unusually low at 30.7 percent -- our estimate was 34.5 percent -- because Walmart recorded special tax benefits totaling $243 million.  The benefits were "due primarily to the repatriation of certain non-U.S. earnings."

This brought income from continuing operations down to $5.2 billion, compared to $5.0 billion one year earlier.  Surprisingly, the latest quarter included $1.0 billion in income from discontinued operations, which was actually related to a business in Germany that Walmart sold in fiscal 2007.

Counting the discontinued operations, but excluding income attributable to noncontrolling interests, raised the bottom-line Net Income attributable to Walmart shareholders to $6.06 billion ($1.70 per share).

Reported Net Income exceeded our $4.8 billion ($1.31 per share) estimate due to the special tax benefits and the gain from the discontinued German operation.

In summary, Revenue increased 2.4 percent in the January quarter, which was a less robust growth rate than we expected.  International operations provided most of the revenue gain, but Sam's Club also did reasonably well.  The Gross Margin was slightly less favorable than we expected, but this was offset by moderately better-than-expected SG&A expenses.  One-time items had a substantial effect on Walmart's bottom line in the latest quarter.  A tax benefit boosted earnings by $243 million, or about $0.07 per share.  Even more significantly, $1.0 billion in income from discontinued operations added an unanticipated $0.29 per share to earnings.  If these two special items are excluded, Net Income was $1.34 per share, $0.03 more than our target for the latest quarter.

Full disclosure: Long WMT at time of writing.

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