WMT: Income Statement Analysis for the July 2010 Quarter

Wal-Mart Stores (NYSE: WMT) earned $0.97 per diluted share on a GAAP basis in fiscal 2011's second quarter, which ended on 31 July 2010.  Earnings per share increased 9 percent when compared to the $0.89 Walmart made in the same quarter of 2009.

This post examines Walmart's Income Statement for the quarter and compares the entries on each line to our "look-ahead" estimates.  Reported Net Income of $3.596 billion exactly matched our estimate (a rarity), but fewer shares outstanding allowed earnings per share to exceed by $0.01 the $0.96 we had forecast.

The principal sources for this income statement analysis were the earnings announcement and the transcript [pdf] of management's audio review of the quarter.

In a second article, we will report Walmart's scores as measured by the GCFR financial gauges.  The follow-up post will also provide the latest figures for the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value.

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

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

Walmart has three reportable business segments: Walmart U.S., International and Sam’s Club.  At last count, Walmart operated 4304 stores in the U.S. (including Sam's Club) and 8416 in other countries.

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

Additional background information about Walmart and the business environment in which it is currently operating can be found in the look-ahead.


Please click here to see a normalized depiction of the actual and projected results for the just-concluded quarter, as well as the quarterly Income Statements for the last couple of years.  Please note that our organization of revenues, expenses, gains, and losses, which we use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

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

Revenue (Net sales and some other income) in the July quarter increased 2.8 percent, from $100.9 billion to $103.7 billion. Fluctuations in currency conversion rates added about $860 million to Net Sales, or 0.8 percent to the Revenue growth rate.

Reported revenue was 2.6 percent less than our most recent $106.5 billion estimate for the quarter.  Our projection was derived from government reports on retail sales, competitor news, and seasonal patterns.

Walmart U.S., which is the company's largest business segment for financial reporting, provided 62.8 percent of total Net Sales in the latest quarter.  Walmart U.S. sales of $65.65 billion were unchanged from the July 2009 quarter.  On a same-store basis, Walmart U.S. sales fell 1.8 percent.  The company stated that sales on this basis improved during the course of the quarter.

The International business did well: sales increased a robust 11.0 percent from last year's second quarter to $25.9 billion.  On a constant currency basis, sales rose 7.3 percent.

Sam's Club sales were up 2.2 percent, from $12.19 billion to $12.46 billion.

The composite Cost of Goods Sold (i.e., Cost of Sales) increased to $77.5 billion (74.7 percent of Revenue) from $75.1 billion in the year-earlier quarter.  The latest amount translates into a Gross Margin of 25.3 percent, about 30 basis points less profitable than the 25.6-percent margin in last year's second quarter.  Price cuts put pressure on the margin.

Walmart beat our 25.0-percent estimate for the Gross Margin by 30 basis points.

Sales, General, and Administrative expenses increased a paltry 0.6 percent, from $19.9 billion to $20.0 billion.  Since these expenses rose at a slower pace than sales, SG&A decreased from 19.7 percent of Revenue to 19.3 percent.

SG&A expenses were 2.1 percent less than the $20.45 billion we had estimated.

Subtracting the various operating expenses discussed above from Revenue yields Operating Income of $6.19 billion, up 4.4 percent from $5.93 billion in the year-earlier quarter.  The increase is due to greater Revenue, a modest Gross Margin improvement, and good control of SG&A expenses.

Operating Income squeaked above of our $6.177 billion estimate by 0.2 percent.

Segment Operating Income, which excludes unallocated corporate overhead expenses, totaled $6.61 billion.  Walmart U.S. was responsible for 73.9 percent of Segment Operating Income.  Walmart has had success cutting corporate overhead, which boosts profitability.

The Net Interest expense of $485 million was up 2.5 percent from last year.  We had expected $475 million.

The effective Income Tax Rate in the quarter was 34.3 percent, which was the same as last year and which matched our expectation.

Excluding income attributable to noncontrolling interests trimmed the bottom-line Net Income attributable to Walmart shareholders to $3.596 billion ($0.97 per share). Compared to last year's $3.472 billion ($0.89 per share), the latest quarter was 3.6 percent more profitable on a Net Income basis and 9.0 percent more profitable on an EPS basis.

The reported figure for Net Income attributable to shareholders matched our estimate exactly --  we should have played the lottery the day the estimate was made! -- but the number of diluted shares outstanding was 3.71 billion instead of the 3.75 billion we expected.  This enabled the reported EPS of $0.97 to exceed our $0.96 estimate by a penny.

Full disclosure: Long WMT at time of writing.