Summary of WAL MART STORES INC

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Wal-Mart Stores, Inc. ("Walmart," the "Company" or "we") operates retail stores in various formats around the world and is committed to saving people money so they can live better. We earn the trust of our customers every day by providing a broad assortment of quality merchandise and services at everyday low prices ("EDLP"), while fostering a culture that rewards and embraces mutual respect, integrity and diversity. EDLP is our pricing philosophy under which we price items at a low price every day so that our customers trust that our prices will not change under frequent promotional activities. Our focus for Sam's Club is to provide exceptional value on brand name and private label merchandise at "members only" prices for both business and personal use. Internationally, we operate with similar philosophies.
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 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.
This discussion relates to Walmart and its consolidated subsidiaries and should be read in conjunction with our Condensed Consolidated Financial Statements as of October 31, 2012, 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 January 31, 2012, the accompanying notes and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, contained in our Annual Report to Shareholders for the year ended January 31, 2012, and incorporated by reference in, and included as an exhibit to, our Annual Report on Form 10-K for the fiscal year ended January 31, 2012. Our fiscal year ends on January 31 for our United States ("U.S.") and Canadian operations. We consolidate all other operations generally using a one-month lag and on a calendar basis.
Currently, our operations consist of three reportable business segments: Walmart U.S., Walmart International, and Sam's Club. The Walmart U.S. segment includes the Company's mass merchant concept in the U.S., operating under the "Walmart" or "Wal-Mart" brand, as well as walmart.com. The Walmart International segment consists of the Company's operations outside of the U.S., including various websites. The Sam's Club segment includes the warehouse membership clubs in the U.S., as well as samsclub.com.
Our business is seasonal to a certain extent due to different calendar events and national and religious holidays, as well as different climatic conditions. Historically, our highest sales volume and operating income occur in the fiscal quarter ending January 31, which includes the holiday season, and our lowest sales volume and operating income occur during the fiscal quarter ending April 30.
Throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations, we discuss segment operating income and comparable store and club sales. The Company measures the results of its segments using, among other measures, each segment's operating income, including certain corporate overhead allocations. From time to time, we revise the measurement of each segment's operating income, including any corporate overhead allocations, as dictated by the information regularly reviewed by our chief operating decision maker. When we do so, the previous period amounts for segment operating income are reclassified to conform to the current period's presentation. The amounts disclosed for "Other unallocated" in the leverage discussion of the Company's performance metrics consist of corporate overhead and other items not allocated to any of the Company's segments.
Comparable store and club sales is a metric which indicates the performance of our existing U.S. stores and clubs by measuring the change in sales for such stores and clubs for a particular period from the corresponding period in the previous year. Walmart's definition of comparable store and club sales includes sales from stores and clubs open for the previous 12 months, including remodels, relocations and expansions, as well as sales initiated online. Changes in format are excluded from comparable store and club sales when the conversion is accompanied by a relocation or expansion that results in a change in retail square feet of more than five percent. Comparable store and club sales are also referred to as "same-store" sales by others within the retail industry. The method of calculating comparable store and club sales varies across the retail industry. As a result, our calculation of comparable store and club sales is not necessarily comparable to similarly titled measures reported by other companies. In discussing our operating results, we sometimes refer to the impact of changes in currency exchange rates that we use to convert the operating results for all countries where the functional currency is not the U.S. dollar. 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. Throughout our discussion, we refer to the results of this calculation as the impact of currency exchange rate fluctuations. When we refer to constant currency operating results, we are referring to our operating results without the impact of the currency exchange rate fluctuations and without the impact of acquisitions until the acquisitions are included in both comparable periods. The disclosure of constant

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currency amounts or results permits investors to understand better our underlying performance without the effects of currency exchange rate fluctuations or acquisitions.
We made certain reclassifications to prior period amounts or balances to conform to the presentation in the current fiscal year. These reclassifications did not impact the Company's operating income or consolidated net income. Additionally, certain prior period segment asset and expense allocations have been reclassified among segments to be comparable with the current period presentation.
Company Performance Metrics
The Company's performance metrics emphasize three priorities for improving shareholder value: growth, leverage and returns. The Company's priority of growth focuses on sales through comparable store or club sales and unit square feet growth; the priority of leverage encompasses the Company's objective to increase its operating income at a faster rate than the growth in net sales by growing its operating, selling, general and administrative expenses ("operating expenses") at a slower rate than the growth of its net sales; and the priority of returns focuses on how efficiently the Company employs its assets through return on investment ("ROI") and how effectively the Company manages working capital through free cash flow.

Growth
Net Sales
                                     Three Months Ended October 31,                                     Nine Months Ended October 31,
                                    2012                              2011                            2012                              2011
(Dollar amounts in                  Percent     Percent                    Percent                    Percent     Percent                    Percent
millions)             Net Sales     of Total     Change      Net Sales     of Total     Net Sales     of Total     Change      Net Sales     of Total
Walmart U.S.         $   66,127        58.4 %      3.6 %    $   63,835        58.3 %   $  199,825        58.9 %      4.4 %    $  191,397        59.5 %
Walmart
International            33,159        29.3 %      2.4 %        32,383        29.6 %       97,252        28.7 %      7.6 %        90,387        28.1 %
Sam's Club               13,918        12.3 %      4.7 %        13,298        12.1 %       41,933        12.4 %      5.4 %        39,785        12.4 %
Net sales            $  113,204       100.0 %      3.4 %    $  109,516       100.0 %   $  339,010       100.0 %      5.4 %    $  321,569       100.0 %

Our consolidated net sales increased 3.4% and 5.4% for the three and nine months ended October 31, 2012, respectively, when compared to the same periods in the previous year, due to 3.6% year-over-year growth in retail square feet and positive comparable store and club sales across the Company. In addition, net sales of the fiscal 2012 acquisitions, through their respective anniversary dates in fiscal 2013, accounted for $3.8 billion of the increase in net sales for the nine months ended October 31, 2012, when compared to the same period in the previous year. These increases were partially offset by $1.7 billion and $4.7 billion of negative impact from fluctuations in currency exchange rates for the three and nine months ended October 31, 2012, respectively. Calendar Comparable Store and Club Sales Comparable store and club sales is a metric which indicates the performance of our existing U.S. stores and clubs by measuring the change in sales for such stores and clubs for a particular period over the corresponding period in the previous year. The retail industry generally reports comparable store and club sales using the retail calendar (also known as the 4-5-4 calendar) and, to be consistent with the retail industry, we provide comparable store and club sales using the retail calendar in our quarterly earnings releases. However, when we discuss our comparable store and club sales below, we are referring to our calendar comparable store and club sales calculated using our fiscal calendar. As our fiscal calendar differs from the retail calendar, our calendar comparable store and club sales also differ from the retail calendar comparable store and club sales provided in our quarterly earnings releases. Calendar comparable store and club sales, as well as the impact of fuel, for the three and nine months ended October 31, 2012 and 2011, were as follows:

                    Three Months Ended October 31,              Nine Months Ended October 31,
                 2012        2011        2012     2011      2012         2011        2012     2011
                    With Fuel            Fuel Impact            With Fuel             Fuel Impact
Walmart U.S.     1.5 %       1.2 %       0.0 %    0.0 %     2.5 %       (0.3 )%      0.0 %    0.0 %
Sam's Club       3.8 %       9.2 %       1.0 %    3.3 %     4.8 %        9.0  %      0.4 %    4.1 %
Total U.S.       1.9 %       2.6 %       0.2 %    0.6 %     2.9 %        1.3  %      0.1 %    0.8 %

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Leverage
Operating Income
                                         Three Months Ended October 31,                                         Nine Months Ended October 31,
                                     2012                                   2011                               2012                             2011
(Dollar amounts in                      Percent     Percent                         Percent      Operating     Percent     Percent     Operating     Percent
millions)           Operating Income    of Total     Change     Operating Income    of Total       Income      of Total     Change       Income      of Total
Walmart U.S.       $          4,844       79.2  %      4.5 %   $          4,634       78.8  %   $  15,128        78.8  %      5.9 %   $  14,280        78.7  %
Walmart
International                 1,455       23.8  %      4.8 %              1,389       23.6  %       4,258        22.2  %      9.6 %       3,885        21.4  %
Sam's Club                      435        7.1  %     12.7 %                386        6.6  %       1,461         7.6  %     10.0 %       1,328         7.3  %
Other unallocated              (618 )    (10.1 )%     16.4 %               (531 )     (9.0 )%      (1,646 )      (8.6 )%     23.2 %      (1,336 )      (7.4 )%
Total operating    $          6,116      100.0  %      4.0 %   $          5,878      100.0  %   $  19,201       100.0  %      5.7 %   $  18,157       100.0  %
income

We believe comparing the growth of our operating expenses to the growth of our net sales and comparing the growth of our operating income to the growth of our net sales are meaningful measures as they indicate how effectively we manage costs and leverage operating expenses. Our objective is to grow operating expenses at a slower rate than net sales and to grow operating income at a faster rate than net sales. On occasion, we may make strategic growth investments that may, at times, cause our operating expenses to grow at a faster rate than net sales and that may result in our operating income growing at a slower rate than net sales.
Operating Expenses
For the three and nine months ended October 31, 2012, operating expenses increased 2.5% and 4.1%, respectively, when compared to the same periods in the previous year, while net sales increased 3.4% and 5.4%, respectively, when compared to the same periods in the previous year. Operating expenses increased primarily due to additional associate incentive payments and continued investment in our Global eCommerce initiatives for the three and nine months ended October 31, 2012. Additionally, operating expenses included costs related to third-party advisors reviewing matters involving the Foreign Corrupt Practices Act ("FCPA") of $48 million and $99 million for the three and nine months ended October 31, 2012, respectively. Fiscal 2012 acquisitions also increased operating expenses for the nine months ended October 31, 2012. We met our objective of leveraging operating expenses for the three and nine months ended October 31, 2012.
Operating Income
For the three and nine months ended October 31, 2012, operating income grew by 4.0% and 5.7%, respectively, when compared to the same periods in the previous year, while net sales increased by 3.4% and 5.4%, respectively, when compared to the same periods in the previous year. Although fluctuations in currency exchange rates negatively impacted operating income by $29 million and $189 million for the three and nine months ended October 31, 2012, respectively, we met our objective of growing operating income at a faster rate than net sales for the three and nine months ended October 31, 2012. Returns
Return on Investment
Management believes return on investment ("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 potential strategic initiatives with possible short-term impacts. ROI was 18.0% and 18.2% for the trailing twelve-month periods ended October 31, 2012 and 2011, respectively. The slight reduction in ROI is primarily due to the negative impact of currency exchange rate fluctuations, the effect of which was partially offset by a reduction in investing activities as a result of our focus on capital discipline.
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 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 twelve months multiplied by a factor of eight. ROI is considered a non-GAAP financial measure. We consider return on assets ("ROA") to be the financial measure computed in accordance with generally accepted accounting principles ("GAAP") 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 for the fiscal year or trailing twelve months divided by average total assets of continuing operations for the period) because ROI: adjusts operating income to exclude certain expense items and adds 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.

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Although ROI is a standard financial metric, 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 other companies use to calculate their ROI. We urge you to understand the methods used by other companies to calculate their ROI before comparing our ROI to that of such other companies. The calculation of ROI, along with a reconciliation to the calculation of ROA, the most comparable GAAP financial measure, is as follows:

                                                             For the Trailing Twelve Months
                                                                   Ending October 31,
(Dollar amounts in millions)                                     2012                2011
CALCULATION OF RETURN ON INVESTMENT
Numerator
Operating income                                           $     27,602         $     26,161
+ Interest income                                                   163                  171
+ Depreciation and amortization                                   8,385                8,073
+ Rent                                                            2,575                2,253
= Adjusted operating income                                $     38,725         $     36,658

Denominator
Average total assets of continuing operations (1)          $    200,447         $    190,954
+ Average accumulated depreciation and amortization (1)          50,382               46,040
- Average accounts payable (1)                                   38,914               36,882
- Average accrued liabilities (1)                                17,713               17,204
+ Rent x 8                                                       20,600               18,024
= Average invested capital                                 $    214,802         $    200,932
Return on investment (ROI)                                         18.0 %               18.2 %

CALCULATION OF RETURN ON ASSETS
Numerator
Income from continuing operations                          $     17,318         $     16,195
Denominator
Average total assets of continuing operations (1)          $    200,447         $    190,954
Return on assets (ROA)                                              8.6 %                8.5 %



                                                     As of October 31,
                                               2012         2011         2010
Certain Balance Sheet Data
Total assets of continuing operations (2)   $ 205,738    $ 195,155    $ 186,753
Accumulated depreciation and amortization      53,658       47,106       44,974
Accounts payable                               40,272       37,555       36,208
Accrued liabilities                            18,536       16,890       17,518

(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.
(2) Total assets of continuing operations as of October 31, 2012, 2011 and 2010 in the table above exclude assets of discontinued operations that are reflected in the Company's Condensed Consolidated Balance Sheets of $80 million, $89 million and $137 million, respectively.

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Free Cash Flow
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 generated free cash flow of $7.0 billion for the nine months ended October 31, 2012, compared to free cash flow of $3.4 billion for the same period in the previous year. The increase in free cash flow was primarily due to the timing of payments for accrued incentives, improved operating results and a more disciplined approach to capital investment.
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, income from continuing operations as a measure of our performance and net cash provided by operating activities as a measure of our liquidity.
Additionally, our definition of free cash flow is limited, in that it does not represent residual cash flows available for discretionary expenditures as 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 entire statement 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 our management to calculate our free cash flow may differ from the methods other companies use to calculate their free cash flow. We urge you to understand the methods used by other companies to calculate their free cash flow before comparing our free cash flow to that of such other companies.
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.

                                                Nine Months Ended October 31,
(Amounts in millions)                             2012                2011
Net cash provided by operating activities   $      15,907       $        12,914
Payments for property and equipment                (8,921 )              (9,543 )
Free cash flow                              $       6,986       $         3,371

Net cash used in investing activities (1)   $      (9,352 )     $       (12,814 )
Net cash used in financing activities              (4,694 )                (284 )

(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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