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| WMT > SEC Filings for WMT > Form 10-Q on 9-Dec-2008 | All Recent SEC Filings |
9-Dec-2008
Quarterly Report
This discussion relates to Wal-Mart Stores, Inc. and its consolidated subsidiaries and should be read in conjunction with our condensed consolidated financial statements as of October 31, 2008, and the period then ended and accompanying notes included under Part I, Item 1, of this Quarterly Report on Form 10-Q, as well as our consolidated financial statements as of January 31, 2008, and for the year then ended and the accompanying notes, and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report to Shareholders for the year ended January 31, 2008, and incorporated by reference in and included as an exhibit to our Annual Report on Form 10-K for the year ended January 31, 2008.
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 year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements. The discussion also provides information about the financial results of the various segments of our business to provide a better understanding of how those segments and their results 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 and comparable store sales. Segment operating income refers to income from continuing operations before net interest expense, income taxes and minority interest and excludes unallocated corporate overhead. At February 1, 2008, the Company reclassified certain unallocated corporate expenses to be included within each segment's measurement of operating income. As a result, all prior year measurements of segment operating income have been restated for comparative purposes.
Comparable store sales is a measure which indicates the performance of our existing stores by measuring the growth in sales for such stores for a particular period over the corresponding period in the prior year. Comparable store sales is also referred to as "same-store" sales by others within the retail industry. The method of calculating comparable store sales varies across the retail industry. As a result, our calculation of comparable store sales is not necessarily comparable to similarly titled measures reported by other companies.
During fiscal year 2008, the Company reviewed its definition of comparable store sales for consistency with other retailers. For fiscal year 2009, beginning February 1, 2008, Wal-Mart Stores, Inc. has revised its definition of comparable store sales to include sales from stores and clubs open for the previous 12 months, including remodels, relocations and expansions. Changes in format continue to be excluded from comparable store sales when the conversion is accompanied by a relocation or expansion that results in a change in square footage of more than five percent. Since the impact of this revision is inconsequential, the Company will not restate comparable store sales results for previously reported years.
Company Performance Metrics
Management uses a number of metrics to assess the Company's performance including:
• Total sales;
• Comparable store sales;
• Operating income;
• Diluted net income per common share from continuing operations;
• Return on investment; and
• Free cash flow.
Total Sales
(Amounts in millions)
Three Months Ended Nine Months Ended
October 31, October 31,
Percent Percent Percent Percent Percent Percent Percent Percent
2008 of Total Change 2007 of Total Change 2008 of Total Change 2007 of Total Change
Net Sales:
Walmart U.S. $ 61,155 62.6 % 6.1 % $ 57,651 63.5 % 6.4 % $ 184,281 62.9 % 7.1 % $ 172,101 64.2 % 6.2 %
International 24,857 25.5 % 11.2 % 22,349 24.6 % 17.0 % 73,949 25.2 % 16.5 % 63,472 23.7 % 17.1 %
Sam's Club 11,622 11.9 % 7.4 % 10,826 11.9 % 6.1 % 35,018 11.9 % 7.7 % 32,526 12.1 % 6.8 %
Total Company $ 97,634 100.0 % 7.5 % $ 90,826 100.0 % 8.8 % $ 293,248 100.0 % 9.4 % $ 268,099 100.0 % 8.7 %
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Our total net sales increased by 7.5 % and 9.4% for the three and nine months ended October 31, 2008, respectively, compared to corresponding periods in the prior year. The increases resulted from our global store expansion programs and comparable store sales increases. Changes in foreign currency exchange rates had a $25 million and a $2.4 billion favorable impact on the International segment's net sales for the three and nine months ended October 31, 2008, respectively. For the three and nine months ended October 31, 2007, changes in foreign currency exchange rates had a favorable impact of $1.1 billion and $2.7 billion, respectively, on the International segment's net sales. Changes in foreign currency exchange rates had less of a favorable impact on the International segment net sales for the three months ended October, 31, 2008, compared to the corresponding prior period due to the strengthening of the U.S. dollar against all major currencies except the Japanese yen and Chinese yuan renminbi. Although movements in foreign currency exchange rates cannot reasonably be predicted, volatility in foreign currency exchange rates, when compared to prior periods, may continue to impact the International segment's reported sales in the foreseeable future.
Comparable Store Sales
Without Fuel With Fuel Fuel Impact
Three Months Ended Three Months Ended Three Months Ended
October 31, October 31, October 31,
2008 2007 2008 2007 2008 2007
Walmart U.S. 2.7 % 1.0 % 2.7 % 1.0 % 0.0 % 0.0 %
Sam's Club 4.5 % 3.9 % 6.7 % 3.8 % 2.2 % -0.1 %
Total U.S. 3.0 % 1.5 % 3.3 % 1.5 % 0.3 % 0.0 %
Without Fuel With Fuel Fuel Impact
Nine Months Ended Nine Months Ended Nine Months Ended
October 31, October 31, October 31,
2008 2007 2008 2007 2008 2007
Walmart U.S. 3.4 % 0.7 % 3.4 % 0.7 % 0.0 % 0.0 %
Sam's Club 4.0 % 4.8 % 6.8 % 4.8 % 2.8 % 0.0 %
Total U.S. 3.5 % 1.4 % 3.9 % 1.4 % 0.4 % 0.0 %
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Comparable store sales in the United States, including fuel sales, increased 3.3% for the third quarter of fiscal 2009 compared to 1.5% for the third quarter of fiscal 2008. For the nine months ended October 31, 2008, comparable store sales in the United States, including fuel sales, increased 3.9% compared to 1.4% for the corresponding period in the prior year. Comparable store sales in fiscal 2009 were higher than fiscal 2008 due to strength in the grocery, entertainment and health and wellness categories, as well as increases in customer traffic and average transaction size per customer. The information regarding comparable store sales excluding fuel sales is included in the information above to permit investors to understand the effect of fuel sales on the comparable club sales for our Sam's Club segment and comparable stores sales in the United States for the periods shown.
Operating Income
(Amounts in millions)
Three Months Ended Nine Months Ended
October 31, October 31,
Percent Percent Percent Percent Percent Percent Percent Percent
2008 of Total Change 2007 of Total Change 2008 of Total Change 2007 of Total Change
Operating Income:
Walmart U.S. $ 4,286 81.0 % 7.3 % $ 3,995 80.6 % 10.8 % $ 13,363 81.4 % 9.3 % $ 12,230 81.1 % 5.4 %
International 1,182 22.3 % 10.6 % 1,069 21.5 % 6.8 % 3,450 21.0 % 15.5 % 2,986 19.8 % 8.8 %
Sam's Club 365 6.9 % 1.7 % 359 7.2 % 5.6 % 1,183 7.2 % 0.8 % 1,174 7.8 % 12.1 %
Other (541 ) -10.2 % 17.1 % (462 ) -9.3 % -3.8 % (1,575 ) -9.6 % 19.9 % (1,314 ) -8.7 % -1.4 %
$ 5,292 100.0 % 6.7 % $ 4,961 100.0 % 11.0 % $ 16,421 100.0 % 8.9 % $ 15,076 100.0 % 7.2 %
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Operating income growth compared to net sales growth is a meaningful metric to share with investors because it indicates how effectively we manage costs and leverage expenses. Our objective is to grow operating income faster than net sales. For the third quarter of fiscal 2009, our operating income increased 6.7% when compared to the prior year, while net sales increased by 7.5% over the same period. The Walmart U.S. segment met this objective; however, our International and Sam's Club segments did not. The International segment fell short of this objective due to the impact of foreign currency exchange rate fluctuations. The Sam's Club segment did not meet this objective primarily due to hurricane-related expenses and higher utility costs driving increases in operating expenses.
For the nine months ended October 31, 2008, our operating income increased by 8.9% when compared to the prior year, while net sales increased by 9.4 % over the same period. The Walmart U.S. segment met the objective of growing operating income faster than net sales; however, our International and Sam's Club segments did not. The International segment fell short of this objective due to accruals for certain legal matters. The Sam's Club segment fell short of this objective because the current year's growth in the lower-margin fuel business had a negative impact on the segment's gross profit as a percentage of segment net sales (our "gross profit"). Additionally, the Sam's Club segment recorded an excise tax refund of $39 million in the comparative nine month period of the prior year.
Diluted Income per Common Share from Continuing Operations
Three Months Ended Nine Months Ended
October 31, October 31,
2008 2007 2008 2007
Diluted income per common share from
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Diluted earnings per share from continuing operations increased 10.0% for the three months ended October 31, 2008, compared to the prior year period, resulting from a 6.6% increase in income from continuing operations and a decrease in the number of weighted-average shares outstanding, due to the impact of share repurchases.
Diluted earnings per share from continuing operations increased 11.7% for the nine months ended October 31, 2008, compared to the prior year period as a result of an 8.1% increase in income from continuing operations and a decrease in the number of weighted-average shares outstanding, due to the impact of share repurchases.
Return on Investment
Management believes return on investment ("ROI") is a meaningful metric to share with investors because it helps investors assess how efficiently Wal-Mart is employing its assets. ROI increased from 19.2% for the twelve months ended October 31, 2007 to 19.3% for the twelve months ended October 31, 2008 primarily due to a 6.7% increase in consolidated operating income.
We define ROI as adjusted operating income (operating income plus interest income, depreciation and amortization and rent expense) for the fiscal year or trailing twelve 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 of continuing operations plus accumulated depreciation and amortization less accounts payable and accrued liabilities for that period, plus a rent factor equal to the rent for the fiscal year or trailing twelve months multiplied by a factor of eight.
ROI is considered a non-GAAP financial measure under the SEC's rules. We
consider return on assets ("ROA") to be the financial measure computed in
accordance with generally accepted accounting principles that is the most
directly comparable financial measure to ROI as we calculate that financial
measure. ROI differs from ROA (which is income from continuing operations before
minority interest for the fiscal year or the trailing twelve months divided by
average of total assets of continuing operations for the period) because ROI:
adjusts operating income to exclude certain expense items and add interest
income; adjusts total assets from continuing operations for the impact of
accumulated depreciation and amortization, accounts payable and accrued
liabilities; and incorporates a factor of rent to arrive at total invested
capital.
The calculation of ROI along with a reconciliation to the calculation of ROA, the most comparable GAAP financial measurement, is as follows:
For the Twelve Months Ended
October 31,
(Dollar amounts in millions) 2008 2007
Calculation of Return on Investment
NUMERATOR
Operating income (1) $ 23,298 $ 21,508
+ Interest income (1) 279 331
+ Depreciation and amortization (1) 6,725 6,099
+ Rent (1) 1,752 1,548
= Adjusted operating income $ 32,054 $ 29,486
DENOMINATOR
Average total assets of continuing operations (2) $ 166,246 $ 157,983
+ Average accumulated depreciation and
amortization (2) 32,074 28,176
- Average accounts payable (2) 31,079 30,615
- Average accrued liabilities (2) 15,058 14,518
+ Rent * 8 14,016 12,384
= Invested capital $ 166,199 $ 153,410
RETURN ON INVESTMENT (ROI) 19.3 % 19.2 %
Calculation of Return on Assets
NUMERATOR
Income from continuing operations before minority
interest (1) $ 14,043 $ 13,174
DENOMINATOR
Average total assets of continuing operations (2) $ 166,246 $ 157,983
RETURN ON ASSET (ROA) 8.4 % 8.3 %
As of October 31,
CERTAIN BALANCE SHEET DATA 2008 2007 2006
Total assets of continuing operations (1) $ 167,581 $ 164,910 $ 151,056
Accumulated depreciation and amortization (1) 34,048 30,100 26,252
Accounts payable (1) 30,782 31,376 29,853
Accrued liabilities (1) 15,343 14,773 14,262
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(1) Based on continuing operations only, and therefore, excludes the impact of Gazeley Limited which was sold in July 2008, and the closure of 23 stores and divestiture of other properties of The Seiyu, Ltd. in Japan during the third quarter of fiscal 2009. All of these activities have been disclosed as discontinued operations. Total assets as of October 31, 2008, 2007, and 2006 in the table above exclude assets of discontinued operations that are reflected in the Consolidated Balance Sheets of $262 million, $749 million and $663 million, respectively.
(2) 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.
Free Cash Flow
We define free cash flow as net cash provided by operating activities in the period minus payments for property and equipment made in the period. We generated positive free cash flow of $2.0 billion for the nine months ended October 31, 2008, compared to a
Free cash flow is considered a non-GAAP financial measure under the SEC's rules. Management believes, however, that free cash flow is an important financial measure for use in evaluating the Company's financial performance, which measures our ability to generate additional cash from our business operations. Free cash flow should be considered in addition to, rather than as a substitute for, net income as a measure of our performance and net cash provided by operating activities as a measure of our liquidity.
Our definition of free cash flow is limited, in that it does not represent residual cash flows available for discretionary expenditures because the measure does not deduct the payments required for debt service and other contractual obligations. Therefore, we believe it is important to view free cash flow as a measure that provides supplemental information to our entire statement of cash flows.
The following table reconciles net cash provided by operating activities, a GAAP measure, to free cash flow, a non-GAAP measure.
Nine Months Ended
(Amounts in millions) October 31, 2008 October 31, 2007
Net cash provided by operating activities $ 10,173 $ 9,623
Payments for property and equipment (8,174 ) (10,896 )
Free cash flow $ 1,999 $ (1,273 )
Net cash used in investing activities $ (6,797 ) $ (11,223 )
Net cash used in financing activities $ (2,794 ) $ (878 )
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Results of Operations
The following discussion of our Results of Operations is based on our continuing operations and excludes any results or discussion of our discontinued operations.
Consolidated
Three Months Ended October 31, 2008
Our total net sales increased by 7.5% and 8.8% for the third quarter of fiscal 2009 and fiscal 2008, respectively, when compared to the prior year's third quarter. The increases resulted from our comparable stores sales increases and global store expansion programs. During the third quarter of fiscal 2009 and 2008, foreign currency exchange rates had a $25 million and $1.1 billion favorable impact, respectively, on the International segment's net sales, which contributed to the increase in the International segment's net sales as a percentage of total Company net sales.
Our gross profit increased from 23.8% for the third quarter of fiscal 2008 to 24.1% in the third quarter of fiscal 2009. This increase is primarily due to lower inventory shrink and less markdown activity as a result of more effective merchandising in our International and Walmart U.S. segments, as well as a favorable merchandise mix in our Walmart U.S. segment. Additionally, our Sam's Club segment experienced increases in gross profit largely due to a higher fuel gross profit rate.
Operating, selling, general and administrative expenses ("operating expenses") as a percentage of net sales increased 0.3 percentage points compared to the corresponding period in fiscal 2008. Operating expenses as a percentage of net sales increased in the third quarter of fiscal 2009 primarily due to hurricane-related expenses and increased corporate expenses compared to the corresponding quarter in fiscal 2008. Corporate expenses have increased primarily due to our long-term transformation projects to enhance our information systems for merchandising, finance and human resources, which contributed 10.8 percent to the increase in corporate operating expenses for the quarter. We expect these increased expenses from the transformation projects to continue for the foreseeable future.
Membership and other income, which includes a variety of income categories such as Sam's Club membership income, tenant lease, financial services and recycling income, decreased 3% in the third quarter of fiscal 2009 from the prior year's comparative third quarter. The decrease in membership and other income is primarily due to the recognition of $71 million in pre-tax gains from the sale of certain real estate properties in the third quarter of fiscal 2008.
Our effective income tax rate from continuing operations increased from 34.6% for the third quarter of fiscal 2008 to 34.9% for the third quarter of fiscal 2009. The recent fluctuations in foreign currency exchange rates, as well as changes in the mix of taxable income among our domestic and international operations, are the main drivers of this increase.
Nine Months Ended October 31, 2008
Our total net sales increased by 9.4% and 8.7% for the nine months ended October 31, 2008 and 2007, respectively, when compared to previous years. The increases resulted from our global store expansion programs and comparable store sales increases. During the first nine months of fiscal 2009 and 2008, foreign currency exchange rates had a $2.4 billion and $2.7 billion favorable impact, respectively, on the International segment's net sales, which contributed to the increase in the International segment's net sales as a percentage of total Company net sales.
Our gross profit increased from 23.5% for the nine months ended October 31, 2007 to 23.8% in the nine months ended October 31, 2008. This increase is primarily due to lower inventory shrinkage and less markdown activity as a result of more effective merchandising in the Walmart U.S. segment. Our gross margin for the nine months ended October 31, 2007 included a benefit of $97 million in excise tax refunds.
Operating expenses as a percentage of net sales increased 0.3 percentage points in the nine months ended October 31, 2008 compared to the corresponding period in fiscal 2008. Operating expenses for the nine months ended October 31, 2007, were favorably affected by the change in estimated losses associated with our general liability and workers' compensation claims, which reduced accrued liabilities for such claims by $298 million before tax, partially offset by pre-tax charges of $183 million for certain legal and other contingencies. The net favorable impact of these items reduced our operating expenses as a percentage of net sales in the comparable fiscal 2008 period by 0.1 percentage points. Otherwise, operating expenses as a percentage of net sales increased in the nine months ended October 31, 2008, primarily due to higher bonus expenses for store associates, higher utility costs and increased corporate expenses compared to the corresponding period in fiscal 2008. Corporate expenses have increased primarily due to our long-term transformation projects to enhance our information systems for merchandising, finance and human resources. We expect these increased expenses from the transformation projects to continue in the foreseeable future.
Membership and other income increased 6.9% for the first nine months of fiscal 2009 from the comparative period in fiscal 2008 due to continued growth in our financial services area and increases in recycling income resulting from our sustainability efforts. Membership and other income for the nine months ended October 31, 2007, includes recognition of $134 million in pre-tax gains from the sale of certain real estate properties.
Interest, net, increased 12.3% during the nine months ended October 31, 2008 when compared to the nine month period of the prior year largely due to higher borrowing levels, partially offset by lower short-term interest rates.
Our effective income tax rate from continuing operations for the first nine months of fiscal 2009 was 34.5% which was consistent with the first nine months of fiscal 2008.
Walmart U.S. Segment
Three Months Ended October 31, 2008
(Amounts in millions)
Segment net Segment operating Segment
sales increase income increase operating
from prior Segment from prior income as a percentage
Segment fiscal year operating fiscal year of segment
. . .
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