Walmart Earnings 2019-04-30
WMT 10Q Quarterly Report
| Balance Sheet | Income Statement | Cash Flow |
|---|---|---|
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the quarterly period ended April 30, 2019.
or
o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the transition period from to .
Commission File Number 001-6991
WALMART INC.
(Exact name of registrant as specified in its charter)
Delaware | 71-0415188 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
702 S.W. 8th Street Bentonville, Arkansas | 72716 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant's telephone number, including area code: (479) 273-4000
Former name, former address and former fiscal year, if changed since last report: N/A
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, par value $0.10 per share 1.900% Notes Due 2022 2.550% Notes Due 2026 | WMT | New York Stock Exchange New York Stock Exchange New York Stock Exchange | ||
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer | ý | Accelerated Filer | o | |||
Non-Accelerated Filer | o | Smaller Reporting Company | o | |||
Emerging Growth Company | o | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
The registrant had 2,854,722,137 shares of common stock outstanding as of June 5, 2019.
Walmart Inc.
Form 10-Q
For the Quarterly Period Ended April 30, 2019
Table of Contents
Page | |||
2
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
Walmart Inc.
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended April 30, | ||||||||
(Amounts in millions, except per share data) | 2019 | 2018 | ||||||
Revenues: | ||||||||
Net sales | $ | 122,949 | $ | 121,630 | ||||
Membership and other income | 976 | 1,060 | ||||||
Total revenues | 123,925 | 122,690 | ||||||
Costs and expenses: | ||||||||
Cost of sales | 93,034 | 91,707 | ||||||
Operating, selling, general and administrative expenses | 25,946 | 25,829 | ||||||
Operating income | 4,945 | 5,154 | ||||||
Interest: | ||||||||
Debt | 588 | 437 | ||||||
Finance, capital lease and financing obligations | 85 | 93 | ||||||
Interest income | (48 | ) | (43 | ) | ||||
Interest, net | 625 | 487 | ||||||
Other (gains) and losses | (837 | ) | 1,845 | |||||
Income before income taxes | 5,157 | 2,822 | ||||||
Provision for income taxes | 1,251 | 546 | ||||||
Consolidated net income | 3,906 | 2,276 | ||||||
Consolidated net income attributable to noncontrolling interest | (64 | ) | (142 | ) | ||||
Consolidated net income attributable to Walmart | $ | 3,842 | $ | 2,134 | ||||
Net income per common share: | ||||||||
Basic net income per common share attributable to Walmart | $ | 1.34 | $ | 0.72 | ||||
Diluted net income per common share attributable to Walmart | 1.33 | 0.72 | ||||||
Weighted-average common shares outstanding: | ||||||||
Basic | 2,869 | 2,950 | ||||||
Diluted | 2,886 | 2,967 | ||||||
Dividends declared per common share | $ | 2.12 | $ | 2.08 | ||||
See accompanying notes.
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Walmart Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended April 30, | |||||||
(Amounts in millions) | 2019 | 2018 | |||||
Consolidated net income | $ | 3,906 | $ | 2,276 | |||
Consolidated net income attributable to noncontrolling interest | (64 | ) | (142 | ) | |||
Consolidated net income attributable to Walmart | 3,842 | 2,134 | |||||
Other comprehensive income (loss), net of income taxes | |||||||
Currency translation and other | 507 | 1,465 | |||||
Net investment hedges | 108 | 68 | |||||
Cash flow hedges | (131 | ) | (77 | ) | |||
Minimum pension liability | 1 | 43 | |||||
Other comprehensive income (loss), net of income taxes | 485 | 1,499 | |||||
Other comprehensive (income) loss attributable to noncontrolling interest | (34 | ) | (163 | ) | |||
Other comprehensive income (loss) attributable to Walmart | 451 | 1,336 | |||||
Comprehensive income, net of income taxes | 4,391 | 3,775 | |||||
Comprehensive (income) loss attributable to noncontrolling interest | (98 | ) | (305 | ) | |||
Comprehensive income attributable to Walmart | $ | 4,293 | $ | 3,470 | |||
See accompanying notes.
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Walmart Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
April 30, | January 31, | April 30, | ||||||||||
(Amounts in millions) | 2019 | 2019 | 2018 | |||||||||
ASSETS | ||||||||||||
Current assets: | ||||||||||||
Cash and cash equivalents | $ | 9,255 | $ | 7,722 | $ | 7,885 | ||||||
Receivables, net | 5,342 | 6,283 | 4,568 | |||||||||
Inventories | 44,751 | 44,269 | 43,303 | |||||||||
Prepaid expenses and other | 2,391 | 3,623 | 3,486 | |||||||||
Total current assets | 61,739 | 61,897 | 59,242 | |||||||||
Property and equipment, net | 104,604 | 104,317 | 107,622 | |||||||||
Operating lease right-of-use assets, net | 16,833 | — | — | |||||||||
Finance lease right-of-use assets, net | 3,804 | — | — | |||||||||
Property under capital lease and financing obligations, net | — | 7,078 | 7,178 | |||||||||
Goodwill | 31,416 | 31,181 | 18,850 | |||||||||
Other long-term assets | 16,148 | 14,822 | 12,035 | |||||||||
Total assets | $ | 234,544 | $ | 219,295 | $ | 204,927 | ||||||
LIABILITIES AND EQUITY | ||||||||||||
Current liabilities: | ||||||||||||
Short-term borrowings | $ | 4,828 | $ | 5,225 | $ | 7,762 | ||||||
Accounts payable | 45,110 | 47,060 | 44,612 | |||||||||
Dividends payable | 4,551 | — | 4,607 | |||||||||
Accrued liabilities | 21,023 | 22,159 | 20,782 | |||||||||
Accrued income taxes | 729 | 428 | 718 | |||||||||
Long-term debt due within one year | 1,464 | 1,876 | 1,576 | |||||||||
Operating lease obligations due within one year | 1,748 | — | — | |||||||||
Finance lease obligations due within one year | 435 | — | — | |||||||||
Capital lease and financing obligations due within one year | — | 729 | 700 | |||||||||
Total current liabilities | 79,888 | 77,477 | 80,757 | |||||||||
Long-term debt | 47,425 | 43,520 | 29,477 | |||||||||
Long-term operating lease obligations | 15,719 | — | — | |||||||||
Long-term finance lease obligations | 3,810 | — | — | |||||||||
Long-term capital lease and financing obligations | — | 6,683 | 6,828 | |||||||||
Deferred income taxes and other | 12,792 | 11,981 | 9,541 | |||||||||
Commitments and contingencies | ||||||||||||
Equity: | ||||||||||||
Common stock | 286 | 288 | 294 | |||||||||
Capital in excess of par value | 2,734 | 2,965 | 2,557 | |||||||||
Retained earnings | 76,276 | 80,785 | 82,982 | |||||||||
Accumulated other comprehensive loss | (11,091 | ) | (11,542 | ) | (10,281 | ) | ||||||
Total Walmart shareholders' equity | 68,205 | 72,496 | 75,552 | |||||||||
Noncontrolling interest | 6,705 | 7,138 | 2,772 | |||||||||
Total equity | 74,910 | 79,634 | 78,324 | |||||||||
Total liabilities and equity | $ | 234,544 | $ | 219,295 | $ | 204,927 | ||||||
See accompanying notes.
5
Walmart Inc.
Condensed Consolidated Statements of Shareholders' Equity
(Unaudited)
Accumulated | Total | |||||||||||||||||||||||||||||
Capital in | Other | Walmart | ||||||||||||||||||||||||||||
(Amounts in millions) | Common Stock | Excess of | Retained | Comprehensive | Shareholders' | Noncontrolling | Total | |||||||||||||||||||||||
Shares | Amount | Par Value | Earnings | Loss | Equity | Interest | Equity | |||||||||||||||||||||||
Balances as of February 1, 2019 | 2,878 | $ | 288 | $ | 2,965 | $ | 80,785 | $ | (11,542 | ) | $ | 72,496 | $ | 7,138 | $ | 79,634 | ||||||||||||||
Adoption of new accounting standards on February 1, 2019, net of income taxes | — | — | — | (266 | ) | — | (266 | ) | (34 | ) | (300 | ) | ||||||||||||||||||
Consolidated net income | — | — | — | 3,842 | — | 3,842 | 64 | 3,906 | ||||||||||||||||||||||
Other comprehensive income (loss), net of income taxes | — | — | — | — | 451 | 451 | 34 | 485 | ||||||||||||||||||||||
Cash dividends declared ($2.12 per share) | — | — | — | (6,071 | ) | — | (6,071 | ) | — | (6,071 | ) | |||||||||||||||||||
Purchase of Company stock | (21 | ) | (2 | ) | (73 | ) | (2,012 | ) | — | (2,087 | ) | — | (2,087 | ) | ||||||||||||||||
Cash dividend declared to noncontrolling interest | — | — | — | — | — | — | (481 | ) | (481 | ) | ||||||||||||||||||||
Other | 5 | — | (158 | ) | (2 | ) | — | (160 | ) | (16 | ) | (176 | ) | |||||||||||||||||
Balances as of April 30, 2019 | 2,862 | $ | 286 | $ | 2,734 | $ | 76,276 | $ | (11,091 | ) | $ | 68,205 | $ | 6,705 | $ | 74,910 | ||||||||||||||
Accumulated | Total | |||||||||||||||||||||||||||||
Capital in | Other | Walmart | ||||||||||||||||||||||||||||
(Amounts in millions) | Common Stock | Excess of | Retained | Comprehensive | Shareholders' | Noncontrolling | Total | |||||||||||||||||||||||
Shares | Amount | Par Value | Earnings | Loss | Equity | Interest | Equity | |||||||||||||||||||||||
Balances as of February 1, 2018 | 2,952 | $ | 295 | $ | 2,648 | $ | 85,107 | $ | (10,181 | ) | $ | 77,869 | $ | 2,953 | $ | 80,822 | ||||||||||||||
Adoption of new accounting standards on February 1, 2018, net of income taxes | — | — | — | 2,361 | (1,436 | ) | 925 | (1 | ) | 924 | ||||||||||||||||||||
Consolidated net income | — | — | — | 2,134 | — | 2,134 | 142 | 2,276 | ||||||||||||||||||||||
Other comprehensive income (loss), net of income taxes | — | — | — | — | 1,336 | 1,336 | 163 | 1,499 | ||||||||||||||||||||||
Cash dividends declared ($2.08 per share) | — | — | — | (6,135 | ) | — | (6,135 | ) | — | (6,135 | ) | |||||||||||||||||||
Purchase of Company stock | (5 | ) | (1 | ) | (15 | ) | (492 | ) | — | (508 | ) | — | (508 | ) | ||||||||||||||||
Cash dividend declared to noncontrolling interest | — | — | — | — | — | — | (489 | ) | (489 | ) | ||||||||||||||||||||
Other | 4 | — | (76 | ) | 7 | — | (69 | ) | 4 | (65 | ) | |||||||||||||||||||
Balances as of April 30, 2018 | 2,951 | $ | 294 | $ | 2,557 | $ | 82,982 | $ | (10,281 | ) | $ | 75,552 | $ | 2,772 | $ | 78,324 | ||||||||||||||
See accompanying notes.
6
Walmart Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended April 30, | ||||||||
(Amounts in millions) | 2019 | 2018 | ||||||
Cash flows from operating activities: | ||||||||
Consolidated net income | $ | 3,906 | $ | 2,276 | ||||
Adjustments to reconcile consolidated net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 2,714 | 2,678 | ||||||
Unrealized (gains) and losses | (783 | ) | 1,845 | |||||
Deferred income taxes | 124 | (50 | ) | |||||
Other operating activities | 75 | 265 | ||||||
Changes in certain assets and liabilities, net of effects of acquisitions: | ||||||||
Receivables, net | 970 | 1,134 | ||||||
Inventories | (421 | ) | 547 | |||||
Accounts payable | (1,854 | ) | (1,770 | ) | ||||
Accrued liabilities | (1,514 | ) | (1,813 | ) | ||||
Accrued income taxes | 346 | 49 | ||||||
Net cash provided by operating activities | 3,563 | 5,161 | ||||||
Cash flows from investing activities: | ||||||||
Payments for property and equipment | (2,205 | ) | (1,818 | ) | ||||
Proceeds from the disposal of property and equipment | 42 | 198 | ||||||
Proceeds from the disposal of certain operations | 833 | — | ||||||
Payments for business acquisitions, net of cash acquired | (56 | ) | — | |||||
Other investing activities | 251 | (62 | ) | |||||
Net cash used in investing activities | (1,135 | ) | (1,682 | ) | ||||
Cash flows from financing activities: | ||||||||
Net change in short-term borrowings | (399 | ) | 2,501 | |||||
Proceeds from issuance of long-term debt | 3,978 | — | ||||||
Repayments of long-term debt | (364 | ) | (2,521 | ) | ||||
Dividends paid | (1,520 | ) | (1,533 | ) | ||||
Purchase of Company stock | (2,135 | ) | (539 | ) | ||||
Dividends paid to noncontrolling interest | (96 | ) | (66 | ) | ||||
Other financing activities | (310 | ) | (328 | ) | ||||
Net cash used in financing activities | (846 | ) | (2,486 | ) | ||||
Effect of exchange rates on cash, cash equivalents and restricted cash | (46 | ) | 143 | |||||
Net increase (decrease) in cash, cash equivalents and restricted cash | 1,536 | 1,136 | ||||||
Cash, cash equivalents and restricted cash at beginning of year | 7,756 | 7,014 | ||||||
Cash, cash equivalents and restricted cash at end of period | $ | 9,292 | $ | 8,150 | ||||
See accompanying notes.
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Walmart Inc.
Notes to Condensed Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The Condensed Consolidated Financial Statements of Walmart Inc. and its subsidiaries ("Walmart" or the "Company") and the accompanying notes included in this Quarterly Report on Form 10-Q are unaudited. In the opinion of management, all adjustments necessary for the fair presentation of the Condensed Consolidated Financial Statements have been included. Such adjustments are of a normal, recurring nature. The Condensed Consolidated Financial Statements, and the accompanying notes, are prepared in accordance with generally accepted accounting principles in the United States ("GAAP") and do not contain certain information included in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2019 ("fiscal 2019"). Therefore, the interim Condensed Consolidated Financial Statements should be read in conjunction with that Annual Report on Form 10-K.
The Company's Consolidated Financial Statements are based on a fiscal year ending January 31 for the United States ("U.S.") and Canadian operations. The Company consolidates all other operations generally using a one-month lag and based on a calendar year. There were no significant intervening events during the month of April related to the operations consolidated using a lag that materially affected the Condensed Consolidated Financial Statements.
The Company's business is seasonal to a certain extent due to calendar events and national and religious holidays, as well as weather patterns. Historically, the Company's highest sales volume and operating income have occurred in the fiscal quarter ending January 31.
Restricted Cash
Restricted cash held outside of cash and cash equivalents was $37 million and $34 million as of April 30, 2019 and January 31, 2019, respectively, and was primarily recorded in prepaid expenses and other in the Condensed Consolidated Balance Sheets. Restricted cash held outside of cash and cash equivalents was $300 million as of April 30, 2018 and January 31, 2018, respectively, and was primarily recorded in other long-term assets in the Condensed Consolidated Balance Sheets.
Inventories
At April 30, 2019 and January 31, 2019, the Company's inventories valued at LIFO approximated those inventories as if they were valued at FIFO.
Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lease assets and liabilities to be recorded on the balance sheet. The Company adopted this ASU and related amendments as of February 1, 2019 under the modified retrospective approach and elected certain practical expedients permitted under the transition guidance, including to retain the historical lease classification as well as relief from reviewing expired or existing contracts to determine if they contain leases. For leases subject to index or rate adjustments, the most current index or rate adjustments were included in the measurement of operating lease obligations at adoption.
The adoption of this ASU and related amendments resulted in a $14.8 billion increase to total assets and a $15.1 billion increase to total liabilities as of April 30, 2019. The Company recognized $16.8 billion and $17.5 billion of operating lease right-of-use assets and operating lease obligations, respectively, and removed $2.2 billion and $1.7 billion, respectively, of assets and liabilities related to financial obligations connected with the construction of leased stores. Several other asset and liability line items in the Company's Condensed Consolidated Balance Sheet were also impacted by immaterial amounts. Additionally, the adoption resulted in a cumulative-effect adjustment to retained earnings of approximately $0.3 billion, net of tax, which primarily consisted of the recognition of impairment. The Company’s Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Cash Flows were immaterially impacted. Updated accounting policies as a result of the adoption of this ASU are described below. Note 10 provides additional lease disclosures.
For any new or modified lease, the Company, at the inception of the contract, determines whether a contract is or contains a lease. The Company records right-of-use ("ROU") assets and lease obligations for its finance and operating leases, which are initially recognized based on the discounted future minimum lease payments over the term of the lease. As the rate implicit in the Company's leases is not easily determinable, the Company’s applicable incremental borrowing rate is used in calculating the present value of the sum of the lease payments.
Lease term is defined as the non-cancelable period of the lease plus any options to extend or terminate the lease when it is reasonably certain that the Company will exercise the option. The Company has elected not to recognize ROU asset and lease obligations for its short-term leases, which are defined as leases with an initial term of 12 months or less.
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For a majority of all classes of underlying assets, the Company has elected to not separate lease from non-lease components. For leases in which the lease and non-lease components have been combined, the variable lease expense includes expenses such as common area maintenance, utilities, and repairs and maintenance.
Revenue Recognition
Contract Balances
Contract balances as a result of transactions with customers primarily consist of receivables included in receivables, net, and deferred gift card revenue included in accrued liabilities in the Company's Condensed Consolidated Balance Sheets. The following table provides the Company's receivables and deferred gift card revenue from transactions with customers:
(Amounts in millions) | April 30, 2019 | January 31, 2019 | ||||||
Assets: | ||||||||
Receivables from transactions with customers, net | $ | 2,566 | $ | 2,538 | ||||
Liabilities: | ||||||||
Deferred gift card revenue | $ | 1,899 | $ | 1,932 | ||||
Derivatives
In fiscal 2020, the Company adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The adoption of the standard had no current or historical impact on the Company's Condensed Consolidated Financial Statements. The Company continues to use qualitative methods to assess the effectiveness of its designated hedging relationships. Upon adopting ASU 2017-12, the Company modified its existing hedge documentation to use a quantitative method for assessing effectiveness when the hedge is subsequently determined to be ineffective under the qualitative method. There were no other significant changes to the Company's accounting policies for derivatives.
Recent Accounting Pronouncements
Financial Instruments
In June 2016, the FASB issued ASU 2016-13, Financial Instruments–Credit Losses (Topic 326), which modifies the measurement of expected credit losses of certain financial instruments. The Company will adopt this ASU on February 1, 2020. Management is currently evaluating this ASU to determine its impact to the Company's Consolidated Financial Statements.
Note 2. Net Income Per Common Share
Basic net income per common share attributable to Walmart is based on the weighted-average common shares outstanding during the relevant period. Diluted net income per common share attributable to Walmart is based on the weighted-average common shares outstanding during the relevant period adjusted for the dilutive effect of share-based awards. The Company did not have significant share-based awards outstanding that were anti-dilutive and not included in the calculation of diluted net income per common share attributable to Walmart for the three months ended April 30, 2019 and 2018.
The following table provides a reconciliation of the numerators and denominators used to determine basic and diluted net income per common share attributable to Walmart:
Three Months Ended April 30, | ||||||||
(Amounts in millions, except per share data) | 2019 | 2018 | ||||||
Numerator | ||||||||
Consolidated net income | $ | 3,906 | $ | 2,276 | ||||
Consolidated net income attributable to noncontrolling interest | (64 | ) | (142 | ) | ||||
Consolidated net income attributable to Walmart | $ | 3,842 | $ | 2,134 | ||||
Denominator | ||||||||
Weighted-average common shares outstanding, basic | 2,869 | 2,950 | ||||||
Dilutive impact of share-based awards | 17 | 17 | ||||||
Weighted-average common shares outstanding, diluted | 2,886 | 2,967 | ||||||
Net income per common share attributable to Walmart | ||||||||
Basic | $ | 1.34 | $ | 0.72 | ||||
Diluted | 1.33 | 0.72 | ||||||
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Note 3. Accumulated Other Comprehensive Loss
The following table provides the changes in the composition of total accumulated other comprehensive loss for the three months ended April 30, 2019:
(Amounts in millions and net of income taxes) | Currency Translation and Other | Unrealized Gain on Available-for-Sale Securities | Net Investment Hedges | Cash Flow Hedges | Minimum Pension Liability | Total | ||||||||||||||||||
Balances as of February 1, 2019 | $ | (12,085 | ) | $ | — | $ | 1,395 | $ | (140 | ) | $ | (712 | ) | $ | (11,542 | ) | ||||||||
Other comprehensive income (loss) before reclassifications, net(1) | 496 | — | 108 | (145 | ) | (7 | ) | 452 | ||||||||||||||||
Reclassifications to income, net(1) | (23 | ) | — | — | 14 | 8 | (1 | ) | ||||||||||||||||
Balances as of April 30, 2019 | $ | (11,612 | ) | $ | — | $ | 1,503 | $ | (271 | ) | $ | (711 | ) | $ | (11,091 | ) | ||||||||
(1) Income tax impact is immaterial
The following table provides the changes in the composition of total accumulated other comprehensive loss for the three months ended April 30, 2018:
(Amounts in millions and net of income taxes) | Currency Translation and Other | Unrealized Gain on Available-for-Sale Securities | Net Investment Hedges | Cash Flow Hedges | Minimum Pension Liability | Total | ||||||||||||||||||
Balances as of February 1, 2018 | $ | (12,136 | ) | $ | 1,646 | $ | 1,030 | $ | 122 | $ | (843 | ) | $ | (10,181 | ) | |||||||||
Adoption of new accounting standards on February 1, 2018, net(1) (2) | 89 | (1,646 | ) | 93 | 28 | — | (1,436 | ) | ||||||||||||||||
Other comprehensive income (loss) before reclassifications, net(1) | 1,302 | — | 68 | (86 | ) | 32 | 1,316 | |||||||||||||||||
Reclassifications to income, net(1) | — | — | — | 9 | 11 | 20 | ||||||||||||||||||
Balances as of April 30, 2018 | $ | (10,745 | ) | $ | — | $ | 1,191 | $ | 73 | $ | (800 | ) | $ | (10,281 | ) | |||||||||
(1) Income tax impact is immaterial
(2) Primarily relates to the adoption of ASU 2016-01, Financial Instruments–Overall and ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
Amounts reclassified from accumulated other comprehensive loss to net income for derivative instruments are recorded in interest, net, in the Company's Condensed Consolidated Statements of Income. Amounts reclassified from accumulated other comprehensive loss to net income for the minimum pension liability, as well as the cumulative translation resulting from the disposition of a business, are recorded in other gains and losses in the Company's Condensed Consolidated Statements of Income.
Note 4. Long-term Debt
The following table provides the changes in the Company's long-term debt for the three months ended April 30, 2019:
(Amounts in millions) | Long-term debt due within one year | Long-term debt | Total | |||||||||
Balances as of February 1, 2019 | $ | 1,876 | $ | 43,520 | $ | 45,396 | ||||||
Proceeds from issuance of long-term debt | — | 3,978 | 3,978 | |||||||||
Repayments of long-term debt | (364 | ) | — | (364 | ) | |||||||
Other | (48 | ) | (73 | ) | (121 | ) | ||||||
Balances as of April 30, 2019 | $ | 1,464 | $ | 47,425 | $ | 48,889 | ||||||
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Debt Issuances
Information on long-term debt issued during the three months ended April 30, 2019 for general corporate purposes is as follows:
(Amounts in millions) | ||||||||||||
Issue Date | Principal Amount | Maturity Date | Fixed vs. Floating | Interest Rate | Net Proceeds | |||||||
April 23, 2019 | 1,500 USD | July 8, 2024 | Fixed | 2.850% | $ | 1,493 | ||||||
April 23, 2019 | 1,250 USD | July 8, 2026 | Fixed | 3.050% | 1,242 | |||||||
April 23, 2019 | 1,250 USD | July 8, 2029 | Fixed | 3.250% | 1,243 | |||||||
Total | $ | 3,978 | ||||||||||
These issuances are senior, unsecured notes which rank equally with all other senior, unsecured debt obligations of the Company, and are not convertible or exchangeable. These issuances do not contain any financial covenants and do not restrict the Company's ability to pay dividends or repurchase company stock.
Maturities
The following table provides details of debt repayments during the three months ended April 30, 2019:
(Amounts in millions) | ||||||||||
Maturity Date | Original Amount | Fixed vs. Floating | Interest Rate | Repayment | ||||||
February 1, 2019 | 500 USD | Fixed | 4.125% | $ | 364 | |||||
Total repayment of matured debt | $ | 364 | ||||||||
Note 5. Fair Value Measurements
Assets and liabilities recorded at fair value are measured using the fair value hierarchy, which prioritizes the inputs used in measuring fair value. The levels of the fair value hierarchy are:
• | Level 1: observable inputs such as quoted prices in active markets; |
• | Level 2: inputs other than quoted prices in active markets that are either directly or indirectly observable; and |
• | Level 3: unobservable inputs for which little or no market data exists, therefore requiring the Company to develop its own assumptions. |
The Company has equity investments, primarily its investment in JD.com, Inc. ("JD"), measured at fair value on a recurring basis included in other long-term assets in the accompanying Condensed Consolidated Balance Sheet as follows:
• | The purchased portion of the investment in JD measured using Level 1 inputs, and |
• | The portion of the investment in JD received in exchange for selling certain assets related to Yihaodian, the Company's former eCommerce operations in China, measured using Level 2 inputs. Fair value is determined primarily using quoted prices in active markets for similar assets. |
Information for the fair value of the Company's investment in JD is as follows:
(Amounts in millions) | Fair Value as of April 30, 2019 | Fair Value as of January 31, 2019 | ||||||
Investment in JD measured using Level 1 inputs | $ | 2,181 | $ | 1,791 | ||||
Investment in JD measured using Level 2 inputs | 2,185 | 1,792 | ||||||
Total | $ | 4,366 | $ | 3,583 | ||||
The changes in fair value for the Company's investment in JD is included in other gains and losses in the Company's Condensed Consolidated Statements of Income.
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The Company also holds derivative instruments. Derivative fair values are the estimated amounts the Company would receive or pay upon termination of the related derivative agreements as of the reporting dates. The fair values have been measured using the income approach and Level 2 inputs, which include the relevant interest yield and foreign currency forward curves. As of April 30, 2019 and January 31, 2019, the notional amounts and fair values of these derivatives were as follows:
April 30, 2019 | January 31, 2019 | ||||||||||||||
(Amounts in millions) | Notional Amount | Fair Value | Notional Amount | Fair Value | |||||||||||
Receive fixed-rate, pay variable-rate interest rate swaps designated as fair value hedges | $ | 4,000 | $ | (42 | ) | $ | 4,000 | $ | (78 | ) | |||||
Receive fixed-rate, pay fixed-rate cross-currency swaps designated as net investment hedges | 2,250 | 392 | 2,250 | 334 | |||||||||||
Receive fixed-rate, pay fixed-rate cross-currency swaps designated as cash flow hedges | 4,090 | (408 | ) | 4,173 | (272 | ) | |||||||||
Total | $ | 10,340 | $ | (58 | ) | $ | 10,423 | $ | (16 | ) | |||||
Nonrecurring Fair Value Measurements
In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company's assets and liabilities are also subject to nonrecurring fair value measurements. Generally, fair value measurements on a nonrecurring basis are required as a result of impairment charges or business acquisitions. The Company did not have any material assets or liabilities subject to nonrecurring fair value measurements as of April 30, 2019 or January 31, 2019, respectively.
Other Fair Value Disclosures
The Company records cash and cash equivalents, restricted cash, and short-term borrowings at cost. The carrying values of these instruments approximate their fair value due to their short-term maturities.
The Company's long-term debt is also recorded at cost. The fair value is estimated using Level 2 inputs based on the Company's current incremental borrowing rate for similar types of borrowing arrangements. The carrying value and fair value of the Company's long-term debt as of April 30, 2019 and January 31, 2019, are as follows:
April 30, 2019 | January 31, 2019 | |||||||||||||||
(Amounts in millions) | Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||
Long-term debt, including amounts due within one year | $ | 48,889 | $ | 53,707 | $ | 45,396 | $ | 49,570 | ||||||||
Note 6. Derivative Financial Instruments
In connection with various derivative agreements, including master netting arrangements, the Company held cash collateral from counterparties of $209 million and $220 million at April 30, 2019 and January 31, 2019, respectively. Furthermore, as part of the master netting arrangements with each of these counterparties, the Company is also required to post collateral with a counterparty if the Company's net derivative liability position exceeds $150 million with such counterparties. The Company did not have any cash collateral posted with counterparties at April 30, 2019 or January 31, 2019, respectively.
At April 30, 2019 and January 31, 2019, the Company had ¥180 billion of outstanding long-term debt designated as a hedge of its net investment in Japan, as well as outstanding long-term debt of £1.7 billion at April 30, 2019 and January 31, 2019, that was designated as a hedge of its net investment in the United Kingdom. These nonderivative net investment hedges will mature on dates ranging from July 2020 to January 2039.
The Company's derivative instruments, as well as its nonderivative debt instruments designated and qualifying as net investment hedges, were classified as follows in the Company's Condensed Consolidated Balance Sheets:
April 30, 2019 | January 31, 2019 | ||||||||||||||||||||||
(Amounts in millions) | Fair Value Instruments | Net Investment Instruments | Cash Flow Instruments | Fair Value Instruments | Net Investment Instruments | Cash Flow Instruments | |||||||||||||||||
Derivative instruments | |||||||||||||||||||||||
Derivative assets: | |||||||||||||||||||||||
Other long-term assets | $ | — | $ | 392 | $ | 41 | $ | — | $ | 334 | $ | 78 | |||||||||||
Derivative liabilities: | |||||||||||||||||||||||
Deferred income taxes and other | 42 | — | 449 | 78 | — | 350 | |||||||||||||||||
Nonderivative hedging instruments | |||||||||||||||||||||||
Long-term debt | — | 3,794 | — | — | 3,863 | — | |||||||||||||||||
Amounts related to the Company's derivatives expected to be reclassified from accumulated other comprehensive loss to net income during the next 12 months are not significant.
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Note 7. Contingencies
Legal Proceedings
The Company is involved in a number of legal proceedings. The Company has made accruals with respect to these matters, where appropriate, which are reflected in the Company's Condensed Consolidated Financial Statements. For some matters, a liability is not probable or the amount cannot be reasonably estimated and therefore an accrual has not been made. However, where a liability is reasonably possible and may be material, such matters have been disclosed. The Company may enter into discussions regarding settlement of these matters, and may enter into settlement agreements, if it believes settlement is in the best interest of the Company and its shareholders.
Unless stated otherwise, the matters discussed below, if decided adversely to or settled by the Company, individually or in the aggregate, may result in a liability material to the Company's financial condition or results of operations.
ASDA Equal Value Claims
ASDA Stores Ltd. ("Asda"), a wholly-owned subsidiary of the Company, is a defendant in over 30,000 equal value ("Equal Value") claims that began in 2008 and are proceeding before an Employment Tribunal in Manchester (the "Employment Tribunal") in the United Kingdom ("UK") on behalf of current and former Asda store employees, and further claims may be asserted in the future. The claimants allege that the work performed by female employees in Asda's retail stores is of equal value in terms of, among other things, the demands of their jobs compared to that of male employees working in Asda's warehouse and distribution facilities, and that the disparity in pay between these different job positions is not objectively justified. As a result, claimants are requesting differential back pay based on higher wage rates in the warehouse and distribution facilities and higher wage rates on a prospective basis.
In March 2015, Asda asked the Employment Tribunal to stay all proceedings and to "strike out" substantially all of the claims because the claimants had not adhered to the Tribunal's procedural rule for including multiple claimants on the same claim form. In July 2015, the Employment Tribunal denied Asda's requests. Following additional proceedings, in June 2017 the Employment Appeal Tribunal ruled in favor of Asda on the "strike out" issue and remitted the matter to the Employment Tribunal to determine whether the improperly filed claims should be struck out. In October 2018, claimants appealed this ruling to the Court of Appeals and in January 2019, the Court of Appeals declined to strike out any claims relying on the Employment Tribunal’s finding that claimants had not deliberately disregarded the Tribunal’s procedural rule.
As to the initial phase of the Equal Value claims, in October 2016 following a preliminary hearing, the Employment Tribunal ruled that claimants could compare their positions in Asda's retail stores with those of employees in Asda's warehouse and distribution facilities. In August 2017, the Employment Appeal Tribunal affirmed the Employment Tribunal's ruling and also granted permission for Asda to appeal substantially all of its findings. Asda sought permission to appeal the remainder of the Employment Appeal Tribunal's findings to the Court of Appeals and a hearing before the Court of Appeals on the comparability findings was held in October 2018. The Court of Appeals upheld the Employment Tribunal’s findings. Asda sought permission to appeal the Court of Appeals decision to the Supreme Court on February 27, 2019 and is awaiting a decision on its application.
Claimants are now proceeding in the next phase of their claims. That phase will determine whether the work performed by the claimants is of equal value to the work performed by employees in Asda's warehouse and distribution facilities.
At present, the Company cannot predict the number of such claims that may be filed, and cannot reasonably estimate any loss or range of loss that may arise from these proceedings. The Company believes it has substantial factual and legal defenses to these claims, and intends to defend the claims vigorously.
National Prescription Opiate Litigation and Related Matters
In December 2017, the United States Judicial Panel on Multidistrict Litigation consolidated numerous lawsuits filed against a wide array of defendants by various plaintiffs, including counties, cities, healthcare providers, Native American tribes, individuals, and third-party payors, asserting claims generally concerning the impacts of widespread opioid abuse. The consolidated multidistrict litigation is entitled In re National Prescription Opiate Litigation (MDL No. 2804) and is pending in the U.S. District Court for the Northern District of Ohio. The Company is named as a defendant in some of the cases included in this multidistrict litigation. Similar cases that name the Company have also been filed in state courts by state, local and tribal governments, health care providers and other plaintiffs. Plaintiffs are seeking compensatory and punitive damages, as well as injunctive relief including abatement. The Company cannot predict the number of such claims that may be filed, but believes it has substantial factual and legal defenses to these claims, and intends to defend the claims vigorously. The Company has also been responding to subpoenas, information requests and investigations from governmental entities related to nationwide controlled substance dispensing and distribution practices involving opioids. The Company cannot reasonably estimate any loss or range of loss that may arise from these matters. Accordingly, the Company can provide no assurance as to the scope and outcome of these matters and no assurance as to whether its business, financial position, results of operations or cash flows will not be materially adversely affected.
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FCPA Investigation and Related Matters
The Audit Committee (the "Audit Committee") of the Board of Directors of the Company has been conducting an internal investigation into, among other things, alleged violations of the U.S. Foreign Corrupt Practices Act ("FCPA") and other alleged crimes or misconduct in connection with foreign subsidiaries, including Wal-Mart de México, S.A.B. de C.V. ("Walmex"), and whether prior allegations of such violations and/or misconduct were appropriately handled by the Company. The Audit Committee and the Company engaged outside counsel from a number of law firms and other advisors who assisted in the investigation of these matters.
The Company also conducted a voluntary global review of its policies, practices and internal controls for anti-corruption compliance and, as part of that review, strengthened and enhanced its global anti-corruption compliance program through appropriate remedial anti-corruption measures. In November 2011, the Company voluntarily disclosed that investigative activity to the U.S. Department of Justice (the "DOJ") and the Securities and Exchange Commission (the "SEC"). Since the implementation of the global review and the enhanced anti-corruption compliance program, the Audit Committee and the Company identified or were made aware of additional allegations regarding potential violations of the FCPA. When such allegations were reported or identified, the Audit Committee and the Company, together with their third-party advisors, conducted inquiries and investigations. Inquiries or investigations regarding allegations of potential FCPA violations were conducted in a number of foreign markets where the Company operates or has operated, including, but not limited to, Brazil, China and India.
As previously disclosed, the Company is under investigation by the DOJ and the SEC regarding possible violations of the FCPA. The Company has been cooperating with the agencies and discussions have been ongoing regarding the resolution of these matters. These discussions progressed to a point that, in fiscal 2018, the Company reasonably estimated a probable loss and recorded an aggregate accrual of $283 million with respect to these matters (the "Accrual"). While the Company believes the final resolution of these matters is nearing a conclusion, there can be no assurance as to the timing or the terms of the final resolution of these matters.
A number of federal and local government agencies in Mexico also investigated these matters. Walmex cooperated with the Mexican governmental agencies that conducted these investigations.
Furthermore, lawsuits relating to the matters under investigation were filed by several of the Company's shareholders against Walmart, certain current and former directors and former officers and certain of Walmex's former officers. These matters have been resolved.
Existing lawsuits relating to the allegations have been resolved, but the Company could be exposed to a variety of negative consequences as a result of the matters noted above. There could be one or more enforcement actions or lawsuits in respect of the matters that are the subject of some or all of the on-going government investigations, and such actions, if brought, may result in judgments, settlements, fines, penalties, injunctions, cease and desist orders, debarment or other relief, criminal convictions and/or penalties. The Company expects that there will be on-going media and governmental interest, including additional news articles on these matters, which could impact the perception among certain audiences of the Company's role as a corporate citizen.
In addition, the Company has incurred and expects to continue to incur costs in responding to requests for information or subpoenas seeking documents, testimony and other information in connection with the government investigations and in conducting the investigations. These costs will be expensed as incurred. For the three months ended April 30, 2019 and 2018, the Company incurred the following third-party expenses in connection with the FCPA investigation and related matters:
Three Months Ended April 30, | ||||||||
(Amounts in millions) | 2019 | 2018 | ||||||
Ongoing inquiries and investigations | $ | 2 | $ | 4 | ||||
Global compliance program and organizational enhancements | 2 | 3 | ||||||
Total | $ | 4 | $ | 7 | ||||
The Company does not presently believe that these matters, including the payment of the Accrual at some point-in-time in the future, will have a material adverse effect on its business, financial position, results of operations or cash flows, although given the inherent uncertainties in such situations, the Company can provide no assurance that these matters will not be material to its business, financial position, results of operations or cash flows in the future.
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Note 8. Disposals, Acquisitions and Related Items
The following disposals, acquisitions and related items pertain to the Company's Walmart International segment. Other immaterial transactions have also occurred or have been announced.
Walmart Brazil
In August 2018, the Company sold an 80 percent stake of Walmart Brazil to Advent International ("Advent"). Under the terms, Advent agreed to contribute additional capital to the business over a three-year period and Walmart agreed to indemnify Advent for certain matters. Additionally, the Company may receive up to approximately $250 million in contingent consideration.
As a result, the Company recorded a pre-tax net loss of $4.8 billion during the second quarter of fiscal 2019 in other gains and losses in the Company's Condensed Consolidated Statement of Income. In calculating the loss, the fair value of the disposal group was reduced by $0.8 billion related to an indemnity, for which a liability was recognized upon closing and is recorded in deferred income taxes and other in the Company's Condensed Consolidated Balance Sheets. The Company indemnified Advent for certain pre-closing tax and legal contingencies and other matters for up to R$2.3 billion, adjusted for interest based on the Brazilian interbank deposit rate.
The Company deconsolidated the financial statements of Walmart Brazil during the third quarter of fiscal 2019 and began accounting for its remaining 20 percent ownership interest using the equity method of accounting. This equity method investment was determined to have no fair value and continues to have no carrying value.
Flipkart
In August 2018, the Company acquired 81 percent of the outstanding shares, or 77 percent of the diluted shares, of Flipkart, an Indian-based eCommerce marketplace, for cash consideration of approximately $16 billion. The acquisition increases the Company's investment in India, a large, growing economy. The purchase price allocation, which is still preliminary primarily due to certain tax items, is as follows:
• | Assets of $24.1 billion, which comprise primarily of $2.2 billion in cash and cash equivalents, $2.8 billion in other current assets, $5.0 billion in intangible assets and $13.5 billion in goodwill. Of the intangible assets, $4.7 billion represents the fair value of trade names, each with an indefinite life, which were estimated using the income approach based on Level 3 unobservable inputs. The remaining $0.3 billion of intangible assets primarily relate to acquired technology with a life of 3 years. The goodwill arising from the acquisition consists largely of anticipated synergies and economies of scale primarily related to procurement and logistics and is not expected to be deductible for tax purposes; |
• | Liabilities of $3.7 billion, which comprise primarily of $1.8 billion of current liabilities and $1.8 billion of deferred income taxes; and |
• | Noncontrolling interest of $4.3 billion, for which the fair value was estimated using the income approach based on Level 3 unobservable inputs. |
Asda
In April 2019, the Company announced the termination of a previously announced merger agreement that would have provided for the combination of J Sainsbury plc and Asda Group Limited, the Company's U.K. subsidiary. As the proposed transaction had not yet met the held for sale criteria, the announcement of its termination had no impact on the Company's Condensed Consolidated Financial Statements.
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Note 9. Segments and Disaggregated Revenue
Segments
The Company is engaged in the operation of retail, wholesale and other units, as well as eCommerce websites, located throughout the U.S., Africa, Argentina, Canada, Central America, Chile, China, India, Japan, Mexico, and the United Kingdom, as well as Brazil until the sale of the majority stake discussed in Note 8. The Company's operations are conducted in three reportable segments: Walmart U.S., Walmart International and Sam's Club. The Company defines its segments as those operations whose results the chief operating decision maker ("CODM") regularly reviews to analyze performance and allocate resources. The Company sells similar individual products and services in each of its segments. It is impractical to segregate and identify revenues for each of these individual products and services.
The Walmart U.S. segment includes the Company's mass merchant concept in the U.S., as well as eCommerce and omni-channel initiatives. The Walmart International segment consists of the Company's operations outside of the U.S., as well as eCommerce and omni-channel initiatives. The Sam's Club segment includes the warehouse membership clubs in the U.S., as well as samsclub.com and omni-channel initiatives. Corporate and support consists of corporate overhead and other items not allocated to any of the Company's segments.
The Company measures the results of its segments using, among other measures, each segment's net sales and operating income, which includes certain corporate overhead allocations. From time to time, the Company revises the measurement of each segment's operating income, including any corporate overhead allocations, as determined by the information regularly reviewed by its CODM. When the measurement of a segment changes, previous period amounts and balances are reclassified to be comparable to the current period's presentation.
Net sales by segment are as follows:
Three Months Ended April 30, | ||||||||
(Amounts in millions) | 2019 | 2018 | ||||||
Net sales: | ||||||||
Walmart U.S. | $ | 80,344 | $ | 77,748 | ||||
Walmart International | 28,775 | 30,260 | ||||||
Sam's Club | 13,830 | 13,622 | ||||||
Net sales | $ | 122,949 | $ | 121,630 | ||||
Operating income by segment, as well as operating loss for corporate and support, interest, net and other gains and losses are as follows:
Three Months Ended April 30, | ||||||||
(Amounts in millions) | 2019 | 2018 | ||||||
Operating income (loss): | ||||||||
Walmart U.S. | $ | 4,142 | $ | 3,927 | ||||
Walmart International | 738 | 1,265 | ||||||
Sam's Club | 451 | 325 | ||||||
Corporate and support | (386 | ) | (363 | ) | ||||
Operating income | 4,945 | 5,154 | ||||||
Interest, net | 625 | 487 | ||||||
Other (gains) and losses | (837 | ) | 1,845 | |||||
Income before income taxes | $ | 5,157 | $ | 2,822 | ||||
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Disaggregated Revenues
In the following tables, segment net sales are disaggregated by either merchandise category or market. In addition, net sales related to eCommerce are provided for each segment, which include omni-channel sales, where a customer initiates an order online and the order is fulfilled through a store or club.
(Amounts in millions) | Three Months Ended April 30, | |||||||
Walmart U.S. net sales by merchandise category | 2019 | 2018 | ||||||
Grocery | $ | 45,404 | $ | 43,860 | ||||
General merchandise | 24,607 | 24,174 | ||||||
Health and wellness | 9,518 | 9,128 | ||||||
Other categories | 815 | 586 | ||||||
Total | $ | 80,344 | $ | 77,748 | ||||
Of Walmart U.S.'s total net sales, approximately $4.3 billion and $3.2 billion related to eCommerce for the three months ended April 30, 2019 and 2018, respectively.
(Amounts in millions) | Three Months Ended April 30, | |||||||
Walmart International net sales by market | 2019 | 2018 | ||||||
Mexico and Central America | $ | 7,837 | $ | 7,684 | ||||
United Kingdom | 7,077 | 7,515 | ||||||
Canada | 4,122 | 4,254 | ||||||
China | 3,063 | 3,205 | ||||||
Other | 6,676 | 7,602 | ||||||
Total | $ | 28,775 | $ | 30,260 | ||||
Of International's total net sales, approximately $2.5 billion and $1.0 billion related to eCommerce for the three months ended April 30, 2019 and 2018, respectively.
(Amounts in millions) | Three Months Ended April 30, | |||||||
Sam’s Club net sales by merchandise category | 2019 | 2018 | ||||||
Grocery and consumables | $ | 8,373 | $ | 8,012 | ||||
Fuel, tobacco and other categories | 2,777 | 2,919 | ||||||
Home and apparel | 1,178 | 1,202 | ||||||
Health and wellness | 827 | 801 | ||||||
Technology, office and entertainment | 675 | 688 | ||||||
Total | $ | 13,830 | $ | 13,622 | ||||
Of Sam's Club's total net sales, approximately $0.7 billion and $0.6 billion related to eCommerce for the three months ended April 30, 2019 and 2018, respectively.
Note 10. Leases
The Company leases certain retail locations, distribution and fulfillment centers, warehouses, office spaces, land and equipment throughout the U.S. and internationally.
The Company's lease cost consists of the following:
(Amounts in millions) | Three Months Ended April 30, 2019 | |||
Operating lease cost | $ | 636 | ||
Finance lease cost | ||||
Amortization of right-of-use assets | 111 | |||
Interest on lease obligations | 77 | |||
Variable lease cost | 167 | |||
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Other lease information is as follows:
(Dollar amounts in millions) | Three Months Ended April 30, 2019 | |||
Cash paid for amounts included in measurement of lease obligations: | ||||
Operating cash flows from operating leases | $ | 639 | ||
Operating cash flows from finance leases | 49 | |||
Financing cash flows from finance leases | 134 | |||
Assets obtained in exchange for operating lease obligations | 189 | |||
Assets obtained in exchange for finance lease obligations | 95 | |||
Weighted-average remaining lease term - operating leases | 15.8 years | |||
Weighted-average remaining lease term - finance leases | 14.4 years | |||
Weighted-average discount rate - operating leases | 5.3 | % | ||
Weighted-average discount rate - finance leases | 9.5 | % | ||
The aggregate annual lease obligations at April 30, 2019 are as follows:
(Amounts in millions) | ||||||||
Fiscal Year | Operating Leases | Finance Leases | ||||||
Remainder of 2020 | $ | 1,819 | $ | 533 | ||||
2021 | 2,346 | 676 | ||||||
2022 | 2,105 | 621 | ||||||
2023 | 1,903 | 506 | ||||||
2024 | 1,718 | 447 | ||||||
Thereafter | 15,699 | 5,367 | ||||||
Total undiscounted lease obligations | 25,590 | 8,150 | ||||||
Less imputed interest | (8,123 | ) | (3,905 | ) | ||||
Net lease obligations | $ | 17,467 | $ | 4,245 | ||||
Upon adoption of ASU 2016-02, Leases (Topic 842), the Company's aggregate annual lease obligations includes leases with reasonably assured renewals. The aggregate minimum annual lease rentals as of January 31, 2019 for the remaining contractual term of non-cancelable leases under ASC 840 were as follows:
(Amounts in millions) | ||||||||
Fiscal Year | Operating Leases(1) | Capital Lease and Financing Obligations | ||||||
2020 | $ | 1,856 | $ | 917 | ||||
2021 | 1,655 | 856 | ||||||
2022 | 1,420 | 794 | ||||||
2023 | 1,233 | 667 | ||||||
2024 | 1,063 | 593 | ||||||
Thereafter | 6,891 | 6,069 | ||||||
Total minimum rentals | $ | 14,118 | $ | 9,896 | ||||
Less estimated executory costs | 23 | |||||||
Net minimum lease payments | 9,873 | |||||||
Financing obligation noncash gains and other | 2,278 | |||||||
Less imputed interest | (4,739 | ) | ||||||
Present value of minimum lease payments | $ | 7,412 | ||||||
(1) | Represents minimum contractual obligation for non-cancelable leases with initial or remaining terms greater than 12 months as of January 31, 2019. |
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
This discussion, which presents Walmart Inc.'s ("Walmart," the "Company," "our," or "we") results for periods occurring in the fiscal year ending January 31, 2020 ("fiscal 2020") and the fiscal year ended January 31, 2019 ("fiscal 2019"), should be read in conjunction with our Condensed Consolidated Financial Statements as of and for the three months ended April 30, 2019 and 2018, and the accompanying notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q, as well as our Consolidated Financial Statements as of and for the year ended January 31, 2019, the accompanying notes and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, contained in our Annual Report on Form 10-K for the year ended January 31, 2019 incorporated by reference.
We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from period to period and the primary factors that accounted for those changes. We also discuss certain performance metrics that management uses to assess the Company's performance. Additionally, the discussion provides information about the financial results of each of the three segments of our business to provide a better understanding of how each of those segments and its results of operations affect the financial condition and results of operations of the Company as a whole.
Throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations, we discuss segment operating income, comparable store and club sales and other measures. Management measures the results of the Company's segments using each segment's operating income, including certain corporate overhead allocations, as well as other measures. From time to time, we revise the measurement of each segment's operating income and other measures as determined by the information regularly reviewed by our chief operating decision maker.
Comparable store and club sales, or comparable sales, is a metric that indicates the performance of our existing stores and clubs by measuring the change in sales for such stores and clubs, including eCommerce sales, for a particular period from the corresponding period in the previous year. Walmart's definition of comparable sales includes sales from stores and clubs open for the previous 12 months, including remodels, relocations, expansions and conversions, as well as eCommerce sales. We measure the eCommerce sales impact by including all sales initiated online or through mobile applications, including omni-channel transactions which are fulfilled through our stores and clubs. Sales at a store that has changed in format are excluded from comparable sales when the conversion of that store is accompanied by a relocation or expansion that results in a change in the store's retail square feet of more than five percent. Additionally, sales related to acquisitions are excluded until such acquisitions have been owned for 12 months. Comparable sales are also referred to as "same-store" sales by others within the retail industry. The method of calculating comparable sales varies across the retail industry. As a result, our calculation of comparable sales is not necessarily comparable to similarly titled measures reported by other companies.
In the first quarter of the current fiscal year, we updated our definition of what was previously referred to as traffic (a component, along with ticket, of comparable sales). Traffic will now be referred to "transactions" and measures a percentage change in all sales transactions in our comparable stores, as well as for comparable eCommerce activity.
In discussing our operating results, the term currency exchange rates refers to the currency exchange rates we use to convert the operating results for countries where the functional currency is not the U.S. dollar into U.S. dollars or for countries experiencing hyperinflation. We calculate the effect of changes in currency exchange rates as the difference between current period activity translated using the current period's currency exchange rates and the comparable prior year period's currency exchange rates. Additionally, no currency exchange rate fluctuations are calculated for non-USD acquisitions until owned for 12 months. Throughout our discussion, we refer to the results of this calculation as the impact of currency exchange rate fluctuations. Volatility in currency exchange rates may impact the results, including net sales and operating income, of the Company and the Walmart International segment in the future.
Each of our segments contribute to the Company's operating results differently. Each, however, has generally maintained a consistent contribution rate to the Company's net sales and operating income in recent years other than minor changes to the contribution rate for the Walmart International segment due to fluctuations in currency exchange rates. We recently took some strategic actions to further position our portfolio for long-term growth, including:
• | Acquisition of 81 percent of the outstanding shares, or 77 percent of the diluted shares, of Flipkart Private Limited ("Flipkart") in August 2018. |
• | Divestiture of 80 percent of Walmart Brazil to Advent International ("Advent") in August 2018, for which we recorded a pre-tax loss of $4.8 billion in fiscal 2019, substantially all of which was recorded during the second quarter of fiscal 2019. |
• | Divestiture of banking operations in Walmart Chile and Walmart Canada in December 2018 and April 2019, respectively. |
19
In April 2019, we announced the termination of the previously announced merger agreement that would have provided for the combination of J Sainsbury plc and ASDA Group Limited, our U.K. subsidiary.
The Retail Industry
We operate in the highly competitive omni-channel retail industry in all of the markets we serve. We face strong sales competition from other discount, department, drug, dollar, variety and specialty stores, warehouse clubs and supermarkets, as well as eCommerce businesses. Many of these competitors are national, regional or international chains or have a national or international omni-channel or eCommerce presence. We compete with a number of companies for attracting and retaining quality employees ("associates"). We, along with other retail companies, are influenced by a number of factors including, but not limited to: catastrophic events, weather, competitive pressures, consumer disposable income, consumer debt levels and buying patterns, consumer credit availability, cost of goods, currency exchange rate fluctuations, customer preferences, deflation, inflation, fuel and energy prices, general economic conditions, insurance costs, interest rates, labor costs, tax rates, the imposition of tariffs, cybersecurity attacks and unemployment.
Company Performance Metrics
We are committed to helping customers save money and live better through everyday low prices, supported by everyday low costs. At times, we adjust our business strategies to maintain and strengthen our competitive positions in the countries in which we operate. We define our financial framework as:
• | strong, efficient growth; |
• | consistent operating discipline; and |
• | strategic capital allocation. |
As we execute on this financial framework, we believe our returns on capital will improve over time.
Strong, Efficient Growth
Our objective of prioritizing strong, efficient growth means we will focus on the most productive growth opportunities, increasing comparable store and club sales, accelerating eCommerce sales growth and expansion of omni-channel initiatives while slowing the rate of growth of new stores and clubs. At times, we make strategic investments which are focused on the long-term growth of the Company.
Comparable sales is a metric that indicates the performance of our existing stores and clubs by measuring the change in sales for such stores and clubs, including eCommerce sales, for a particular period over the corresponding period in the previous year. The retail industry generally reports comparable sales using the retail calendar (also known as the 4-5-4 calendar). To be consistent with the retail industry, we provide comparable sales using the retail calendar in our quarterly earnings releases. However, when we discuss our comparable sales below, we are referring to our calendar comparable sales calculated using our fiscal calendar. As our fiscal calendar differs from the retail calendar, our fiscal calendar comparable sales also differ from the retail calendar comparable sales provided in our quarterly earnings releases. Calendar comparable sales, as well as the impact of fuel, for the three months ended April 30, 2019 and 2018, were as follows:
Three Months Ended April 30, | ||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||
With Fuel | Fuel Impact | |||||||||||
Walmart U.S. | 3.3 | % | 2.4 | % | 0.0 | % | 0.1 | % | ||||
Sam's Club | 1.4 | % | 5.3 | % | 0.9 | % | 1.4 | % | ||||
Total U.S. | 3.0 | % | 2.8 | % | 0.1 | % | 0.3 | % | ||||
The Walmart U.S. segment had growth of 3.3% and 2.4% for the three months ended April 30, 2019 and 2018, respectively, driven by growth in ticket and transactions. For the three months ended April 30, 2019 and 2018, the Walmart U.S. segment's eCommerce sales positively contributed approximately 1.4% and 1.0% to comparable sales, respectively. Comparable sales at the Sam's Club segment were 1.4% and 5.3% for the three months ended April 30, 2019 and 2018, respectively. The Sam's Club segment's comparable sales benefited from increased transactions and higher fuel sales, which were partially offset by lower ticket. The Sam's Club segment's eCommerce sales positively contributed approximately 1.1% and 0.8% to comparable sales, respectively, for the three months ended April 30, 2019 and 2018. The increase in comparable sales at the Sam's Club segment was partially offset by reduced tobacco sales due to our decision to remove tobacco from certain locations.
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Consistent Operating Discipline
We operate with discipline by managing expenses and optimizing the efficiency of how we work and creating an environment in which we have sustainable lowest cost to serve. We invest in technology and process improvements to increase productivity, manage inventory and reduce costs. We measure operating discipline through expense leverage, which we define as net sales growing at a faster rate than operating, selling, general and administrative ("operating") expenses.
Three Months Ended April 30, | ||||||||
(Amounts in millions) | 2019 | 2018 | ||||||
Net sales | $ | 122,949 | $ | 121,630 | ||||
Percentage change from comparable period | 1.1 | % | 4.4 | % | ||||
Operating, selling, general and administrative expenses | $ | 25,946 | $ | 25,829 | ||||
Percentage change from comparable period | 0.5 | % | 4.9 | % | ||||
Operating, selling, general and administrative expenses as a percentage of net sales | 21.1 | % | 21.2 | % | ||||
For the three months ended April 30, 2019 we leveraged operating expenses, decreasing operating expenses as a percentage of net sales by 14 basis points when compared to the same period in the previous fiscal year. The primary drivers of the expense leverage for the three months ended April 30, 2019 were strong sales performance in conjunction with productivity improvements in our Walmart U.S. segment. Our International and Sam's Club segments also leveraged expenses when compared to the same period in the previous fiscal year.
Strategic Capital Allocation
We are allocating more capital to store remodels, eCommerce, technology and supply chain and less to new store and club openings, when compared to prior years. This allocation aligns with our initiatives of improving our customer proposition in stores and clubs and integrating digital and physical shopping and is consistent with the capital expenditure detail provided in the following table:
(Amounts in millions) | Three Months Ended April 30, | |||||||
Allocation of Capital Expenditures | 2019 | 2018 | ||||||
eCommerce, technology, supply chain and other | $ | 1,003 | $ | 805 | ||||
Remodels | 595 | 475 | ||||||
New stores and clubs, including expansions and relocations | 23 | 103 | ||||||
Total U.S. | 1,621 | 1,383 | ||||||
Walmart International | 584 | 435 | ||||||
Total capital expenditures | $ | 2,205 | $ | 1,818 | ||||
Returns
As we execute our financial framework, we believe our return on capital will improve over time. We measure return on capital with our return on investment and free cash flow metrics. In addition, we provide returns in the form of share repurchases and dividends, which are discussed in the Liquidity and Capital Resources section.
Return on Assets and Return on Investment
We include Return on Assets ("ROA"), the most directly comparable measure based on our financial statements presented in accordance with generally accepted accounting principles in the U.S. ("GAAP"), and Return on Investment ("ROI") as metrics to assess returns on assets. While ROI is considered a non-GAAP financial measure, management believes ROI is a meaningful metric to share with investors because it helps investors assess how effectively Walmart is deploying its assets. Trends in ROI can fluctuate over time as management balances long-term strategic initiatives with possible short-term impacts. ROA was 4.0% and 4.8% for the trailing twelve months ended April 30, 2019 and 2018, respectively. The decline in ROA was primarily due to the decrease in consolidated net income over the trailing twelve months, primarily resulting from the $4.5 billion net loss in fiscal 2019 related to the sale of the majority stake in Walmart Brazil and net unrealized losses on our JD.com investment. ROI was 14.5% and 13.9% for the trailing twelve months ended April 30, 2019 and 2018, respectively. The increase in ROI was due to the increase in operating income over the trailing twelve months primarily as a result of lapping the restructuring and impairment charges in the fourth quarter of fiscal 2018. The denominator remained relatively flat as the increase in average total assets due to the Flipkart Acquisition was primarily offset by the decrease in average invested capital resulting from the removal of the eight times rent factor upon adoption of ASU 2016-02, Leases ("ASU 2016-02") as operating lease right-of-use assets are now included in total assets.
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We define ROI as adjusted operating income (operating income plus interest income, depreciation and amortization, and rent expense) for the trailing 12 months divided by average invested capital during that period. We consider average invested capital to be the average of our beginning and ending total assets, plus average accumulated depreciation and average amortization, less average accounts payable and average accrued liabilities for that period. Upon adoption of ASU 2016-02, rent for the trailing 12 months multiplied by a factor of 8 is no longer included in the calculation of ROI on a prospective basis as operating lease assets are now capitalized. For fiscal 2020, lease related assets and associated accumulated amortization are included in the denominator at their carrying amount as of the current balance sheet date, rather than averaged, because they are no longer directly comparable to the prior year calculation which included rent for the trailing 12 months multiplied by a factor of 8. A two-point average will be used for leased assets beginning in fiscal 2021, after one full year from the date of adoption of the new lease standard. Further, beginning prospectively in fiscal 2020, rent expense in the numerator excludes short-term and variable lease costs as these costs are not included in the operating lease right-of-use asset balance.
Prior to adoption of ASU 2016-02, we defined ROI as adjusted operating income (operating income plus interest income, depreciation and amortization, and rent expense) for the trailing 12 months divided by average invested capital during that period. We considered average invested capital to be the average of our beginning and ending total assets, plus average accumulated depreciation and average amortization, less average accounts payable and average accrued liabilities for that period, plus a rent factor equal to the rent for the fiscal year or trailing 12 months multiplied by a factor of 8, which estimated the hypothetical capitalization of our operating leases. Because the new lease standard was adopted under the modified retrospective approach as of February 1, 2019, our calculation of ROI for the comparable fiscal 2019 period was not revised.
Our calculation of ROI is considered a non-GAAP financial measure because we calculate ROI using financial measures that exclude and include amounts that are included and excluded in the most directly comparable GAAP financial measure. For example, we exclude the impact of depreciation and amortization from our reported operating income in calculating the numerator of our calculation of ROI. As mentioned above, we consider ROA to be the financial measure computed in accordance with generally accepted accounting principles most directly comparable to our calculation of ROI. ROI differs from ROA (which is consolidated net income for the period divided by average total assets for the period) because ROI: adjusts operating income to exclude certain expense items and adds interest income; adjusts total assets for the impact of accumulated depreciation and amortization, accounts payable and accrued liabilities to arrive at total invested capital. Because of the adjustments mentioned above, we believe ROI more accurately measures how we are deploying our key assets and is more meaningful to investors than ROA. Although ROI is a standard financial measure, numerous methods exist for calculating a company's ROI. As a result, the method used by management to calculate our ROI may differ from the methods used by other companies to calculate their ROI.
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The calculation of ROA and ROI, along with a reconciliation of ROI to the calculation of ROA, the most comparable GAAP financial measure, is as follows:
For the Trailing Twelve Months Ending April 30, | ||||||||
(Amounts in millions) | 2019 | 2018 | ||||||
CALCULATION OF RETURN ON ASSETS | ||||||||
Numerator | ||||||||
Consolidated net income | $ | 8,809 | $ | 9,647 | ||||
Denominator | ||||||||
Average total assets(1) | $ | 219,736 | $ | 202,323 | ||||
Return on assets (ROA) | 4.0 | % | 4.8 | % | ||||
CALCULATION OF RETURN ON INVESTMENT | ||||||||
Numerator | ||||||||
Operating income | $ | 21,748 | $ | 20,354 | ||||
+ Interest income | 222 | 160 | ||||||
+ Depreciation and amortization | 10,714 | 10,656 | ||||||
+ Rent | 2,866 | 3,036 | ||||||
= Adjusted operating income | $ | 35,550 | $ | 34,206 | ||||
Denominator | ||||||||
Average total assets(1),(2) | $ | 226,465 | $ | 202,323 | ||||
+ Average accumulated depreciation and amortization(1) ,(2) | 84,960 | 81,862 | ||||||
- Average accounts payable(1) | 44,861 | 42,990 | ||||||
- Average accrued liabilities(1) | 20,903 | 20,245 | ||||||
+ Rent x 8 | N/A | 24,288 | ||||||
= Average invested capital | $ | 245,661 | $ | 245,238 | ||||
Return on investment (ROI) | 14.5 | % | 13.9 | % | ||||
As of April 30, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Certain Balance Sheet Data | ||||||||||||
Total assets | $ | 234,544 | $ | 204,927 | $ | 199,718 | ||||||
Leased assets, net | 20,637 | 7,178 | NP | |||||||||
Total assets without leased assets, net | 213,907 | 197,749 | NP | |||||||||
Accumulated depreciation and amortization | 87,426 | 84,964 | 78,760 | |||||||||
Accumulated amortization on leased assets | 3,085 | 5,556 | NP | |||||||||
Accumulated depreciation and amortization, without leased assets | 84,341 | 79,408 | NP | |||||||||
Accounts payable | 45,110 | 44,612 | 41,367 | |||||||||
Accrued liabilities | 21,023 | 20,782 | 19,708 | |||||||||
(1) The average is based on the addition of the account balance at the end of the current period to the account balance at the end of the prior period and dividing by 2. Average total assets as used in ROA includes the average impact of the adoption of ASU 2016-02.
(2) For the twelve months ended April 30, 2019, as a result of adopting ASU 2016-02, average total assets is based on the average of total assets without leased assets, net plus leased assets, net as of April 30, 2019. Average accumulated depreciation and amortization is based on the average of accumulated depreciation and amortization, without leased assets plus accumulated amortization on leased assets as of April 30, 2019.
NP = Not provided.
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Free Cash Flow
Free cash flow is considered a non-GAAP financial measure. Management believes, however, that free cash flow, which measures our ability to generate additional cash from our business operations, is an important financial measure for use in evaluating the Company's financial performance. Free cash flow should be considered in addition to, rather than as a substitute for, consolidated net income as a measure of our performance and net cash provided by operating activities as a measure of our liquidity. See Liquidity and Capital Resources for discussions of GAAP metrics including net cash provided by operating activities, net cash used in investing activities and net cash used in financing activities.
We define free cash flow as net cash provided by operating activities in a period minus payments for property and equipment made in that period. We had net cash provided by operating activities of $3.6 billion for the three months ended April 30, 2019, which declined when compared to $5.2 billion for the three months ended April 30, 2018 primarily due to an increase in inventory related to accelerated buying in certain categories, the timing of sell through for summer seasonal merchandise and increased eCommerce fulfillment center mirroring, as well as the timing of payments. We generated free cash flow of $1.4 billion for the three months ended April 30, 2019, which declined when compared to $3.3 billion for the three months ended April 30, 2018 due to the same reasons as the decline in net cash provided by operating activities, as well as $0.4 billion in increased capital expenditures.
Walmart's definition of free cash flow is limited in that it does not represent residual cash flows available for discretionary expenditures due to the fact that the measure does not deduct the payments required for debt service and other contractual obligations or payments made for business acquisitions. Therefore, we believe it is important to view free cash flow as a measure that provides supplemental information to our Condensed Consolidated Statements of Cash Flows.
Although other companies report their free cash flow, numerous methods may exist for calculating a company's free cash flow. As a result, the method used by management to calculate our free cash flow may differ from the methods used by other companies to calculate their free cash flow.
The following table sets forth a reconciliation of free cash flow, a non-GAAP financial measure, to net cash provided by operating activities, which we believe to be the GAAP financial measure most directly comparable to free cash flow, as well as information regarding net cash used in investing activities and net cash used in financing activities.
Three Months Ended April 30, | ||||||||
(Amounts in millions) | 2019 | 2018 | ||||||
Net cash provided by operating activities | $ | 3,563 | $ | 5,161 | ||||
Payments for property and equipment | (2,205 | ) | (1,818 | ) | ||||
Free cash flow | $ | 1,358 | $ | 3,343 | ||||
Net cash used in investing activities(1) | $ | (1,135 | ) | $ | (1,682 | ) | ||
Net cash used in financing activities | (846 | ) | (2,486 | ) | ||||
(1) "Net cash used in investing activities" includes payments for property and equipment, which is also included in our computation of free cash flow.
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Results of Operations
Consolidated Results of Operations
Three Months Ended April 30, | ||||||||
(Amounts in millions, except unit counts) | 2019 | 2018 | ||||||
Total revenues | $ | 123,925 | $ | 122,690 | ||||
Percentage change from comparable period | 1.0 | % | 4.4 | % | ||||
Net sales | $ | 122,949 | $ | 121,630 | ||||
Percentage change from comparable period | 1.1 | % | 4.4 | % | ||||
Total U.S. calendar comparable sales increase | 3.0 | % | 2.8 | |||||