WALMART INC. Overview
This discussion, which presents our results for the fiscal years endedJanuary 31, 2020 ("fiscal 2020"),January 31, 2019 ("fiscal 2019") andJanuary 31, 2018 ("fiscal 2018") should be read in conjunction with our Consolidated Financial Statements and the accompanying notes. 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 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 Item 7, 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. Management also measures the results of comparable store and club sales, or comparable sales, 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. Beginning with the first quarter of fiscal 2020, we updated our definition of what was previously referred to as traffic (a component, along with ticket, of comparable sales). Traffic is now referred to as "transactions" and measures a percentage change in the number of 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 theU.S. dollar intoU.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 theWalmart International segment in the future. Our business is seasonal to a certain extent due to calendar events and national and religious holidays, as well as weather patterns. Generally, our highest sales volume and operating income have occurred in the fiscal quarter endingJanuary 31 . We have taken strategic actions to strengthen our portfolio for the long-term, including: • Acquisition of 81 percent of the outstanding shares, or 77 percent of the
diluted shares, of
which negatively impacted fiscal 2020 and 2019 net income. Refer to
Note
12 for additional information on the transaction.
• Divestiture of 80 percent of
("Advent") in
billion in fiscal 2019. Refer to Note 12 for additional information on
the transaction.
• Divestiture of banking operations in
• Asda made a
Scheme (the "Plan") in
bulk insurance annuity contract for the benefit of Plan participants in
anticipation that each Plan participant will be issued an individual
annuity contract. The issuer of the individual annuity insurance
contracts will be solely responsible for paying each participant's
benefits in full and will release the Plan and Asda from any future
obligations. Once all Plan participants have been issued individual
annuity contracts, we currently
30
-------------------------------------------------------------------------------- estimate that we will recognize a total, pre-tax charge of approximately$2.2 billion related to the pension settlement in late fiscal 2021 or early fiscal 2022. Refer to Note 11 for additional information on the transaction. 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, global health epidemics, 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. Additionally, we are monitoring the potential impact of the recent coronavirus outbreak to our global business. Its financial impact is unknown at this time. Further information on the factors that can affect our operating results and on certain risks to our Company and an investment in its securities can be found herein under " Item 1A. Risk Factors ," and under " Cautionary Statement Regarding Forward-Looking Statements ." 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 expanding 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, which may result in differences when compared to comparable
sales using the retail calendar.
Calendar comparable sales, as well as the impact of fuel, for fiscal 2020 and
2019, were as follows:
Fiscal Years Ended January 31,
2020 2019 2020 2019
With Fuel Fuel Impact
Walmart U.S . 2.9% 3.7% 0.0% 0.1%
Sam's Club 1.6% 5.4% 0.8% 1.6%
Total U.S. 2.7% 4.0% 0.1% 0.4%
Walmart U.S . comparable sales increased 2.9% and 3.7% in fiscal 2020 and 2019,
respectively, driven by ticket and transactions growth. Walmart U.S . eCommerce
sales positively contributed approximately 1.7% and 1.3% to comparable sales for
fiscal 2020 and 2019, respectively, as we continue to focus on a seamless
omni-channel experience for our customers. Sam's Club comparable sales increased
1.6% and 5.4% in fiscal 2020 and 2019, respectively. Sam's Club comparable sales
for both fiscal 2020 and 2019 benefited from growth in transactions and higher
fuel sales, which were partially offset by lower ticket due to our decision to
remove tobacco from certain club locations. Sam's Club fiscal 2019 comparable
sales were further aided by transfers of sales from our closed clubs to our
existing clubs. Sam's Club eCommerce sales positively contributed approximately
1.5% and 0.9% to comparable sales for fiscal 2020 and 2019, respectively.
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Consistent Operating Discipline
We operate with discipline by managing expenses, 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 expenses.
Fiscal Years Ended January 31,
(Amounts in millions, except unit counts) 2020 2019
Net sales $ 519,926 $ 510,329
Percentage change from comparable period 1.9 % 2.9 %
Operating, selling, general and administrative expenses
$ 107,147 Percentage change from comparable period 1.5 % 0.6 % Operating, selling, general and administrative expenses 20.9 % 21.0 %
as a percentage of net sales
For fiscal 2020, operating, selling, general and administrative ("operating")
expenses as a percentage of net sales decreased 8 basis points, when compared to
the previous fiscal year due to our focus on expense management combined with
our growth in comparable store sales. These improvements were partially offset
by $0.9 billion in business restructuring charges consisting primarily of
non-cash impairment charges for certain trade names, acquired developed
technology, and other business restructuring charges due to strategic decisions
that resulted in the write down of certain assets in the Walmart U.S . and
Walmart International segments.
For fiscal 2019, operating expenses as a percentage of net sales decreased 48
basis points, when compared to the previous fiscal year. The primary drivers of
the expense leverage were strong sales performance in conjunction with
productivity improvements and lapping of certain fiscal 2018 charges. The
improvements in fiscal 2019 were partially offset by additional investments in
eCommerce and technology, as well as a $160 million charge related to a
securities class action lawsuit.
Strategic Capital Allocation
Our strategy includes improving our customer-facing initiatives in stores and
clubs and creating a seamless omni-channel experience for our customers. As
such, we are allocating more capital to eCommerce, technology, supply chain, and
store remodels and less to new store and club openings, when compared to prior
years. Total fiscal 2020 capital expenditures increased slightly compared to the
prior year; the following table provides additional detail:
(Amounts in millions) Fiscal Years Ended January 31 ,
Allocation of Capital Expenditures 2020 2019
eCommerce, technology, supply chain and other $ 5,643$ 5,218 Remodels 2,184 2,152 New stores and clubs, including expansions and relocations 77 313 Total U.S. $ 7,904$ 7,683 Walmart International 2,801 2,661 Total capital expenditures$ 10,705 $ 10,344 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 assets, return on investment and free cash flow metrics. We also 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 theU.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 effectivelyWalmart 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 6.7% and 3.4% for fiscal 2020 and 2019, respectively. The increase in ROA was primarily due to the increase in consolidated net income primarily due to the change in fair value of the investment inJD.com and lapping the$4.5 billion net loss recorded in fiscal 2019 related to the sale of the majority stake inWalmart Brazil, partially offset by the dilution to operating income related toFlipkart . ROI was 13.4% and 14.2% for fiscal 2020 and 2019, respectively. The decrease in ROI was due to the decrease in operating income primarily as a result of the dilution fromFlipkart as well as business restructuring charges recorded in fiscal 2020. The denominator remained relatively flat as the increase in average total assets due to the acquisition ofFlipkart was 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") since operating lease right of use assets are now included in total assets. 32 -------------------------------------------------------------------------------- We define ROI as 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 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 ofFebruary 1, 2019 , our calculation of ROI for fiscal 2019 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; and 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. 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: Fiscal Years Ended January 31, (Amounts in millions) 2020 2019 CALCULATION OF RETURN ON ASSETS Numerator Consolidated net income$ 15,201 $ 7,179 Denominator Average total assets(1)$ 227,895 $ 211,909 Return on assets (ROA) 6.7 % 3.4 % CALCULATION OF RETURN ON INVESTMENT Numerator Operating income$ 20,568 $ 21,957 + Interest income 189 217 + Depreciation and amortization 10,987 10,678 + Rent 2,670 3,004 ROI operating income$ 34,414 $ 35,856 Denominator Average total assets(1), (2)$ 235,277 $ 211,909 + Average accumulated depreciation and amortization(1), (2) 90,351 85,107 - Average accounts payable(1) 47,017 46,576 - Average accrued liabilities(1) 22,228 22,141 + Rent x 8 N/A 24,032 Average invested capital$ 256,383 $ 252,331 Return on investment (ROI) 13.4 % 14.2 % 33
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As of January 31,
2020 2019 2018
Certain Balance Sheet Data
Total assets $ 236,495 $ 219,295 $ 204,522
Leased assets, net 21,841 7,078 NP
Total assets without leased assets, net 214,654 212,217 NP
Accumulated depreciation and amortization 94,514 87,175 83,039
Accumulated amortization on leased assets 4,694 5,682 NP Accumulated depreciation and amortization, 89,820 81,493 NP without leased assets Accounts payable 46,973 47,060 46,092 Accrued liabilities 22,296 22,159 22,122 (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 corresponding 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 fiscal 2020, 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 ofJanuary 31, 2020 . 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 ofJanuary 31, 2020 . NP = Not provided. 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$25.3 billion ,$27.8 billion and$28.3 billion for fiscal 2020, 2019 and 2018, respectively. We generated free cash flow of$14.6 billion ,$17.4 billion and$18.3 billion for fiscal 2020, 2019 and 2018, respectively. Net cash provided by operating activities for fiscal 2020 declined when compared to fiscal 2019 primarily due to the contribution to our Asda pension plan in anticipation of its future settlement, the inclusion of a full year ofFlipkart operations, and the timing of vendor payments. Free cash flow for fiscal 2020 declined when compared to fiscal 2019 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. Net cash provided by operating activities for fiscal 2019 declined when compared to fiscal 2018 was primarily due to timing of vendor payments, partially offset by lower tax payments mainly resulting from the Tax Act and the timing of tax payments. Free cash flow for fiscal 2019 declined when compared to fiscal 2018 due to the same reasons as the decline in net cash provided by operating activities, as well as$0.3 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 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. Fiscal Years Ended January
31,
(Amounts in millions) 2020 2019
2018
Net cash provided by operating activities
(10,705 ) (10,344 ) (10,051 )
Free cash flow $ 14,550 $ 17,409 $ 18,286
Net cash used in investing activities(1)
(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
Fiscal Years Ended January 31,
(Amounts in millions, except unit counts) 2020 2019 2018
Total revenues$ 523,964 $ 514,405 $ 500,343 Percentage change from comparable period 1.9 % 2.8 % 3.0 % Net sales$ 519,926 $ 510,329 $ 495,761 Percentage change from comparable period 1.9 % 2.9 % 3.0 % Total U.S. calendar comparable sales increase 2.7 % 4.0 % 2.2 % Gross profit rate 24.1 % 24.5 % 24.7 % Operating income$ 20,568 $ 21,957 $ 20,437 Operating income as a percentage of net sales 4.0 % 4.3 % 4.1 % Consolidated net income$ 15,201 $ 7,179 $ 10,523 Unit counts at period end(1) 11,501 11,361 11,718 Retail square feet at period end(1) 1,129 1,129
1,158
(1) Unit counts and associated retail square feet are presented for stores and clubs generally open as of period end. Permanently closed locations are not included. Our total revenues, which includes net sales and membership and other income, increased$9.6 billion or 1.9% and$14.1 billion or 2.8% for fiscal 2020 and 2019, respectively, when compared to the previous fiscal year. These increases in revenues were due to increases in net sales, which increased$9.6 billion or 1.9% and$14.6 billion or 2.9% for fiscal 2020 and 2019, respectively, when compared to the previous fiscal year. For fiscal 2020, net sales were positively impacted by overall positive comparable sales forWalmart U.S . andSam's Club segments, along with the addition of net sales fromFlipkart , which we acquired inAugust 2018 , and positive comparable sales in the majority of our international markets. These increases were partially offset by$4.1 billion of negative impact from fluctuations in currency exchange rates in fiscal 2020 and our sale of the majority stake inWalmart Brazil inAugust 2018 . For fiscal 2019, net sales were positively impacted by overall positive comparable sales forWalmart U.S . andSam's Club segments, along with positive comparable sales in the majority of our International markets and net sales fromFlipkart , which we acquired in the third quarter of fiscal 2019. Additionally, for fiscal 2019, the increase in net sales was partially offset by a$4.5 billion decrease in net sales due to club closures in theSam's Club segment during fiscal 2018, a$3.1 billion reduction in net sales due to the sale of the majority stake inWalmart Brazil in the International segment, and$0.7 billion of negative impact from fluctuations in currency exchange rates. Our gross profit rate decreased 40 and 18 basis points for fiscal 2020 and 2019, respectively, when compared to the previous fiscal year. For fiscal 2020, these decreases were primarily due to price investment in theWalmart U.S . segment and the addition ofFlipkart in theWalmart International segment, partially offset by favorable merchandise mix including strength in private brands and less pressure from transportation costs in theWalmart U.S . segment. For fiscal 2019, the decrease was due to the mix effects from our growing eCommerce business, the acquisition ofFlipkart , our planned pricing strategy and increased transportation expenses. For fiscal 2020, operating expenses as a percentage of net sales decreased 8 basis points, when compared to the same period in the previous fiscal year due to our focus on expense management combined with our growth in comparable store sales. These improvements were partially offset by$0.9 billion in business restructuring charges consisting primarily of non-cash impairment charges for certain trade names, acquired developed technology, and other business restructuring charges due to strategic decisions that resulted in the write down of certain assets in theWalmart U.S . andWalmart International segments. For fiscal 2019, operating expenses as a percentage of net sales decreased 48 basis points, when compared to the previous fiscal year. The primary drivers of the expense leverage were strong sales performance in conjunction with productivity improvements and lapping approximately$1.8 billion in certain charges in fiscal 2018. The improvements in fiscal 2019 were partially offset by additional investments in eCommerce and technology, as well as a$0.2 billion charge related to a securities class action lawsuit. Other gains and losses consisted of a gain of$2.0 billion for fiscal 2020 and a loss of$8.4 billion for fiscal 2019. The gain in fiscal 2020 was primarily the result of a$1.9 billion increase in the market value of our investment inJD.com . The loss in fiscal 2019 is primarily the result of the$4.8 billion pre-tax loss on the sale of the majority stake inWalmart Brazil and a$3.5 billion decrease in the market value of our investment inJD.com . Fiscal 2018 results included loss on extinguishment of debt of$3.1 billion . 35 -------------------------------------------------------------------------------- Our effective income tax rate was 24.4% for fiscal 2020, 37.4% for fiscal 2019, and 30.4% for fiscal 2018. The decrease in our effective tax rate for fiscal 2020 is primarily due to the fiscal 2019 loss on sale of a majority stake inWalmart Brazil, which increased the comparative period's effective tax rate, as it provided minimal realizable tax benefit. The increase in our effective tax rate for fiscal 2019 is primarily due to the aforementioned loss on sale of a majority stake inWalmart Brazil andFlipkart 's results. Additionally, our effective income tax rate may also fluctuate as a result of various factors, including changes in our assessment of certain tax contingencies, valuation allowances, changes in tax law, outcomes of administrative audits, the impact of discrete items and the mix and size of earnings among ourU.S. operations and international operations, which are subject to statutory rates that, beginning in fiscal 2019, are generally higher than theU.S. statutory rate. The reconciliation from theU.S. statutory rate to the effective income tax rates for fiscal 2020, 2019 and 2018 is presented in Note 9 to our Notes to Consolidated Financial Statements . As a result of the factors discussed above, we reported$15.2 billion and$7.2 billion of consolidated net income for fiscal 2020 and 2019, respectively, which represents an increase of$8.0 billion and a decrease of$3.3 billion for fiscal 2020 and 2019, respectively, when compared to the previous fiscal year. Diluted net income per common share attributable toWalmart ("EPS") was$5.19 ,$2.26 and$3.28 for fiscal 2020, 2019 and 2018, respectively.Walmart U.S . Segment Fiscal Years Ended January 31, (Amounts in millions, except unit counts) 2020 2019
2018
Net sales$ 341,004 $ 331,666 $ 318,477 Percentage change from comparable period 2.8 % 4.1 % 3.5 % Calendar comparable sales increase 2.9 % 3.7 % 2.1 % Operating income$ 17,380 $ 17,386 $ 16,995 Operating income as a percentage of net sales 5.1 % 5.2 % 5.3 % Unit counts at period end 4,756 4,769
4,761
Retail square feet at period end 703 705
705
Net sales for theWalmart U.S . segment increased$9.3 billion or 2.8% and$13.2 billion or 4.1% for fiscal 2020 and 2019, respectively, when compared to the previous fiscal year. The increases in net sales were primarily due to increases in comparable store sales of 2.9% and 3.7% for fiscal 2020 and 2019, respectively, driven by ticket and transaction growth.Walmart U.S . eCommerce sales positively contributed approximately 1.7% and 1.3% to comparable sales for fiscal 2020 and 2019. Gross profit rate decreased 14 and 28 basis points for fiscal 2020 and 2019, respectively, when compared to the previous fiscal year. For fiscal 2020, the decreases were primarily the result of continued price investments which were partially offset by better merchandise mix, including strength in private brands, and less pressure from transportation costs. For fiscal 2019, the decrease was primarily due to our planned pricing strategy, increased transportation expenses, and the mix effects from our growing eCommerce business. Operating expenses as a percentage of segment net sales decreased 4 basis points for fiscal 2020 and decreased 23 basis points for fiscal 2019, when compared to the previous fiscal year. We leveraged operating expenses in fiscal 2020 as a result of strong sales and productivity improvements which were mostly offset by business restructuring charges of$0.5 billion consisting primarily of non-cash impairment charges for certain trade names, acquired developed technology and other business restructuring charges due to decisions that resulted in the write down of certain eCommerce assets. The decrease in fiscal 2019 was primarily due to strong sales performance in conjunction with productivity improvements and the prior year comparable period including charges related to discontinued real estate projects of$0.2 billion . These improvements more than offset investments in eCommerce, technology and omni-channel initiatives and raising the starting wage rate at the beginning of fiscal 2019. As a result of the factors discussed above, segment operating income decreased$6 million and increased$391 million for fiscal 2020 and 2019, respectively, when compared to the same periods in the previous fiscal year. 36 --------------------------------------------------------------------------------
Fiscal Years Ended January 31,
(Amounts in millions, except unit counts) 2020 2019 2018
Net sales$ 120,130 $ 120,824 $ 118,068 Percentage change from comparable period (0.6 )% 2.3 % 1.7 % Operating income$ 3,370 $ 4,883 $ 5,229 Operating income as a percentage of net sales 2.8 % 4.0 % 4.4 % Unit counts at period end 6,146 5,993
6,360
Retail square feet at period end 345 344
373
Net sales for theWalmart International segment decreased$0.7 billion or 0.6% and increased$2.8 billion or 2.3% for fiscal 2020 and 2019, respectively, when compared to the previous fiscal year. For fiscal 2020, the decrease was primarily due to negative fluctuations in currency exchange rates of$4.1 billion as well as a reduction in sales due to our sale of the majority stake inWalmart Brazil inAugust 2018 , offset by a full year of net sales fromFlipkart and positive comparable sales growth in the majority of our markets. For fiscal 2019, the increase was primarily due to positive comparable sales in the majority of our markets and net sales fromFlipkart , which we acquired in the third quarter of fiscal 2019. These increases were partially offset by a$3.1 billion reduction in net sales due to our sale of the majority stake inWalmart Brazil, a$0.7 billion negative impact from fluctuations in currency exchange rates, the continued wind down of our first partyBrazil eCommerce operations and a reduction in net sales of$140 million due to divesting our Suburbia business in the second quarter of fiscal 2018. Gross profit rate decreased 136 and 41 basis points for fiscal 2020 and 2019, respectively, when compared to the previous fiscal year. For fiscal 2020, the decrease was primarily due toFlipkart , as well as a change in merchandise mix. For fiscal 2019, the decrease was due toFlipkart and strategic price investments in certain markets. Membership and other income decreased 1.1% and 22.4% for fiscal 2020 and 2019, respectively, when compared to the previous fiscal year. The decrease in fiscal 2020 was primarily due to currency while fiscal 2019 decreased due to the prior year recognition of a$387 million gain from the sale of Suburbia. Operating expenses as a percentage of segment net sales decreased 13 basis points for fiscal 2020 and 37 basis points for 2019, when compared to the previous fiscal year. The decrease in operating expenses as a percentage of segment net sales for fiscal 2020 was primarily due to positive comparable sales in the majority of our markets and cost discipline across multiple markets, partially offset by$0.4 billion in impairment charges which was due primarily to the write-off of the carrying value of one ofFlipkart 's two fashion trade names, Jabong.com, as a result of a strategic decision to focus our efforts on a single fashion platform in order to simplify the business and customer proposition. Fiscal 2019 decreased primarily due to impairment charges in the previous fiscal year of approximately$0.5 billion , which included charges from decisions to exit certain properties and wind down the first partyBrazil eCommerce operations; this decrease in operating expenses was partially offset by the addition of operating expenses fromFlipkart in fiscal 2019. As a result of the factors discussed above, segment operating income decreased$1.5 billion and$0.3 billion for fiscal 2020 and 2019, respectively. Sam's Club Segment Fiscal Years Ended January 31, (Amounts in millions, except unit counts) 2020 2019
2018
Including Fuel Net sales$ 58,792 $ 57,839 $ 59,216 Percentage change from comparable period 1.6 % (2.3 )% 3.2 % Calendar comparable sales increase 1.6 % 5.4 % 2.8 % Operating income$ 1,642 $ 1,520 $ 915 Operating income as a percentage of net sales 2.8 % 2.6 % 1.5 % Unit counts at period end 599 599
597
Retail square feet at period end 80 80 80 Excluding Fuel (1) Net sales$ 52,792 $ 52,332 $ 54,456 Percentage change from comparable period 0.9 % (3.9 )% 2.2 % Operating income$ 1,486 $ 1,383 $ 797 Operating income as a percentage of net sales 2.8 % 2.6 %
1.5 %
(1) We believe the "Excluding Fuel" information is useful to investors because it permits investors to understand the effect of theSam's Club segment's fuel sales on its results of operations, which are impacted by the volatility of fuel prices. Volatility in fuel prices may continue to impact the operating results of theSam's Club segment in the future. Management uses such information to better measure underlying operating results in the segment. 37 -------------------------------------------------------------------------------- Net sales for theSam's Club segment increased$1.0 billion or 1.6% for fiscal 2020 and decreased$1.4 billion or 2.3% for fiscal 2019, when compared to the previous fiscal year. For fiscal 2020, the increases were primarily due to comparable sales, including fuel, of 1.6%. Comparable sales benefited from growth in transactions and higher fuel sales, which were partially offset by lower ticket due to our decision to remove tobacco from certain club locations.Sam's Club eCommerce sales positively contributed approximately 1.5% to comparable sales. For fiscal 2019, the decrease was primarily due to a$4.5 billion decrease in net sales resulting from the net closure of 63 clubs during fiscal 2018, as well as reduced tobacco sales due to our decision to remove tobacco from certain locations. These decreases were partially offset by increases in comparable sales, which were benefited by transfers of sales from our closed clubs to our existing clubs.Sam's Club eCommerce sales positively contributed approximately 0.9% to comparable sales for fiscal 2019. Additional fuel sales of$0.7 billion partially offset the decreases in net sales for fiscal 2019. Gross profit rate decreased 11 basis points for fiscal 2020 and remained relatively flat for fiscal 2019, when compared to the previous fiscal year. The gross profit rate decreased due to investments in price and higher eCommerce fulfillment costs, partially offset by reduced tobacco sales, which have lower margins. For fiscal 2019, gross profit rate was benefited by lapping the impact of markdowns to liquidate inventory related to club closures in fiscal 2018 and decreased tobacco sales in fiscal 2019. This benefit to the gross profit rate was offset by higher transportation costs and eCommerce shipping costs, investments in price and increased shrink in fiscal 2019. Membership and other income increased 4.7% and 2.6% for fiscal 2020 and 2019, respectively, when compared to the previous fiscal year. For fiscal 2020, the increase was primarily due to growth in total members, which benefited from higher overall renewal rates and higher Plus Member penetration along with gains on property sales and other income. For fiscal 2019, the increase was due to an increase of 1.5% in membership income resulting from increased Plus Member penetration and gains on property sales. These increases were partially offset by lower recycling income when compared to the previous fiscal year. Operating expenses as a percentage of segment net sales decreased 19 and 99 basis points for fiscal 2020 and 2019, respectively, when compared to the previous fiscal year. For fiscal 2020, the decrease was primarily the result of lower labor-related costs and a charge of approximately$50 million related to lease exit costs in the prior comparable period. These benefits were partially offset by a reduction in sales of tobacco and a higher level of technology investment. For fiscal 2019, the decrease in operating expenses as a percentage of segment net sales was primarily due to a charge of approximately$0.6 billion in the prior year's comparable period related to club closures and discontinued real estate projects. As a result of the factors discussed above, segment operating income increased$122 million for fiscal 2020 and increased$605 million for fiscal 2019, when compared to the previous fiscal year. Liquidity and Capital Resources Liquidity The strength and stability of our operations have historically supplied us with a significant source of liquidity. Our cash flows provided by operating activities, supplemented with our long-term debt and short-term borrowings, have been sufficient to fund our operations while allowing us to invest in activities that support the long-term growth of our operations. Generally, some or all of the remaining available cash flow has been used to fund dividends on our common stock and share repurchases. We believe our sources of liquidity will continue to be adequate to fund operations, finance our global investment and expansion activities, pay dividends and fund our share repurchases for the foreseeable future. Net Cash Provided by Operating Activities Fiscal Years Ended January 31, (Amounts in millions) 2020 2019
2018
Net cash provided by operating activities$ 25,255 $ 27,753
Net cash provided by operating activities was$25.3 billion ,$27.8 billion and$28.3 billion for fiscal 2020, 2019 and 2018, respectively. Net cash provided by operating activities for fiscal 2020 decreased when compared to the previous fiscal year primarily due to the contribution to our Asda pension plan in anticipation of its future settlement, the inclusion of a full year ofFlipkart operations, and the timing of vendor payments. The decrease in net cash provided by operating activities for fiscal 2019, when compared to the previous fiscal year, was primarily due to timing of vendor payments, partially offset by lower tax payments mainly resulting from Tax Reform and the timing of tax payments. Cash Equivalents and Working Capital Deficit Cash and cash equivalents were$9.5 billion and$7.7 billion as ofJanuary 31, 2020 and 2019, respectively. Our working capital deficit, defined as total current assets less total current liabilities, was$16.0 billion and$15.6 billion as ofJanuary 31, 2020 and 2019, respectively. We generally operate with a working capital deficit due to our efficient use of cash in funding operations, consistent access to the capital markets and returns provided to our shareholders in the form of payments of cash dividends and share repurchases. 38 -------------------------------------------------------------------------------- We use intercompany financing arrangements in an effort to ensure cash can be made available in the country in which it is needed with the minimum cost possible. Additionally, from time-to-time, we repatriate earnings and related cash from jurisdictions outside of theU.S. Historically,U.S. taxes were due upon repatriation of foreign earnings. Due to the enactment ofU.S. tax reform, repatriations of foreign earnings will generally be free ofU.S. federal tax, but may incur other taxes such as withholding or state taxes. While we are awaiting anticipated technical guidance from theIRS and theU.S. Treasury department, we do not expect current local laws, other existing limitations or potential taxes on anticipated future repatriations of cash amounts held outside theU.S. to have a material effect on our overall liquidity, financial condition or results of operations. As ofJanuary 31, 2020 and 2019, cash and cash equivalents of$2.3 billion and$2.8 billion , respectively, may not be freely transferable to theU.S. due to local laws or other restrictions. Of the$2.3 billion as ofJanuary 31, 2020 , approximately$0.6 billion can only be accessed through dividends or intercompany financing arrangements subject to approval of theFlipkart minority shareholders; however, this cash is expected to be utilized to fund the operations ofFlipkart .Net Cash Used in Investing Activities Fiscal Years Ended January 31, (Amounts in millions) 2020 2019
2018
Net cash used in investing activities
Net cash used in investing activities was$9.1 billion ,$24.0 billion and$9.1 billion for fiscal 2020, 2019 and 2018, respectively, and generally consisted of payments for business acquisitions and to expand our eCommerce capabilities, invest in other technologies, remodel existing stores and club and add new stores and clubs. Net cash used in investing activities decreased$14.9 billion for fiscal 2020 when compared to the previous fiscal year primarily as a result of the$13.8 billion payment for the acquisition ofFlipkart , net of cash acquired, as well as payments for other, smaller acquisitions in fiscal 2019. Net cash used in investing activities increased$15.0 billion for fiscal 2019 when compared to the previous fiscal year, primarily due to the previously mentioned fiscal 2019 acquisitions. Additionally, refer to the " Strategic Capital Allocation " section in our Company Performance Metrics for capital expenditure detail for fiscal 2020 and 2019. Growth Activities For the fiscal year endingJanuary 31, 2021 ("fiscal 2021"), we project capital expenditures will be approximately$11 billion , with a focus on store remodels and customer initiatives, eCommerce, technology, and supply chain. We also expect to add approximately 250 new stores inWalmart International , primarily inMexico andChina .Net Cash Used in Financing Activities Fiscal Years Ended January 31, (Amounts in millions) 2020 2019
2018
Net cash used in financing activities
Net cash used in financing activities generally consists of transactions related to our short-term and long-term debt, financing obligations, dividends paid and the repurchase of Company stock. Transactions with noncontrolling interest shareholders are also classified as cash flows from financing activities. Fiscal 2020 net cash used in financing activities increased$11.8 billion when compared to the same period in the previous fiscal year. The increase was primarily due to the$15.9 billion of net proceeds received in the prior year from the issuance of long-term debt to fund a portion of the purchase price forFlipkart partially offset by$5.5 billion of additional long-term debt in the current year to fund general business operations. Fiscal 2019 net cash used in financing activities decreased$17.3 billion for fiscal 2019 when compared to the same period in the previous fiscal year. The decrease was primarily due to the$15.9 billion of net proceeds received from the issuance of long-term debt to fund a portion of the purchase price forFlipkart and for general corporate purposes, as well as a decrease in share repurchases due to the suspension of repurchases in anticipation of theFlipkart announcement. Short-term Borrowings Net cash flows used in short-term borrowings increased in fiscal 2020 and were relatively flat in fiscal 2019. We generally utilize the liquidity provided by short-term borrowings to provide funding for our operations, dividend payments, share repurchases, capital expenditures and other cash requirements. For fiscal 2020, the additional cash used in short-term borrowings was primarily due to long-term debt issuances being used to pay down short-term borrowings. The following table includes additional information related to the Company's short-term borrowings for fiscal 2020, 2019 and 2018: 39 --------------------------------------------------------------------------------
Fiscal Years Ended January 31,
(Amounts in millions) 2020 2019 2018
Maximum amount outstanding at any month-end
7,120 10,625 8,131
Annual weighted-average interest rate 2.5 % 2.4 %
1.3 %
In addition to our short-term borrowings, we have$15.0 billion of various undrawn committed lines of credit in theU.S. and approximately$2.9 billion of various undrawn committed lines of credit outside of theU.S. , as ofJanuary 31, 2020 , that provide additional liquidity, if needed. Long-term Debt The following table provides the changes in our long-term debt for fiscal 2020: Long-term debt due (Amounts in millions) 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 - 5,492 5,492 Payments of long-term debt (1,907 ) - (1,907 ) Reclassifications of long-term debt 5,378 (5,378 ) - Other 15 80 95 Balances as of January 31, 2020 $ 5,362 $
43,714
Our total long-term debt increased$3.7 billion for fiscal 2020, primarily due to the net proceeds from issuance of long-term debt in bothApril 2019 andSeptember 2019 to fund general business operations, partially offset by repayments of long-term debt. Dividends Our total dividend payments were$6.0 billion ,$6.1 billion and$6.1 billion for fiscal 2020, 2019 and 2018, respectively. The Board of Directors approved, effectiveFebruary 18, 2020 , the fiscal 2021 annual dividend of$2.16 per share, an increase over the fiscal 2020 annual dividend of$2.12 per share. For fiscal 2021, the annual dividend will be paid in four quarterly installments of$0.54 per share, according to the following record and payable dates: Record Date Payable Date March 20, 2020 April 6, 2020 May 8, 2020 June 1, 2020 August 14, 2020 September 8, 2020 December 11, 2020 January 4, 2021 Company Share Repurchase Program From time to time, the Company repurchases shares of its common stock under share repurchase programs authorized by the Company's Board of Directors. All repurchases made during fiscal 2020 were made under the current$20 billion share repurchase program approved inOctober 2017 , which has no expiration date or other restrictions limiting the period over which the Company can make share repurchases. As ofJanuary 31, 2020 , authorization for$5.7 billion of share repurchases remained under the share repurchase program. Any repurchased shares are constructively retired and returned to an unissued status. We regularly review share repurchase activity and consider several factors in determining when to execute share repurchases, including, among other things, current cash needs, capacity for leverage, cost of borrowings, our results of operations and the market price of our common stock. We anticipate that a majority of the ongoing share repurchase program will be funded through the Company's free cash flow. The following table provides, on a settlement date basis, the number of shares repurchased, average price paid per share and total amount paid for share repurchases for fiscal 2020, 2019 and 2018: Fiscal Years Ended January 31, (Amounts in millions, except per share data) 2020 2019 2018 Total number of shares repurchased 53.9 79.5 104.9 Average price paid per share$ 105.98 $ 93.18 $ 79.11 Total amount paid for share repurchases$ 5,717 $
7,410
Capital Resources
We believe cash flows from operations, our current cash position and access to
capital markets will continue to be sufficient to meet our anticipated operating
cash needs, which include funding seasonal buildups in merchandise inventories
and funding our capital expenditures, acquisitions, dividend payments and share
repurchases.
40
-------------------------------------------------------------------------------- We have strong commercial paper and long-term debt ratings that have enabled and should continue to enable us to refinance our debt as it becomes due at favorable rates in capital markets. As ofJanuary 31, 2020 , the ratings assigned to our commercial paper and rated series of our outstanding long-term debt were as follows: Rating agency Commercial paper Long-term debt Standard & Poor's A-1+ AA Moody's Investors Service P-1 Aa2 Fitch Ratings F1+ AA Credit rating agencies review their ratings periodically and, therefore, the credit ratings assigned to us by each agency may be subject to revision at any time. Accordingly, we are not able to predict whether our current credit ratings will remain consistent over time. Factors that could affect our credit ratings include changes in our operating performance, the general economic environment, conditions in the retail industry, our financial position, including our total debt and capitalization, and changes in our business strategy. Any downgrade of our credit ratings by a credit rating agency could increase our future borrowing costs or impair our ability to access capital and credit markets on terms commercially acceptable to us. In addition, any downgrade of our current short-term credit ratings could impair our ability to access the commercial paper markets with the same flexibility that we have experienced historically, potentially requiring us to rely more heavily on more expensive types of debt financing. The credit rating agency ratings are not recommendations to buy, sell or hold our commercial paper or debt securities. Each rating may be subject to revision or withdrawal at any time by the assigning rating organization and should be evaluated independently of any other rating. Moreover, each credit rating is specific to the security to which it applies. Contractual Obligations The following table sets forth certain information concerning our obligations to make contractual future payments, such as debt and lease agreements, and certain contingent commitments as ofJanuary 31, 2020 :
Payments Due During Fiscal Years Ending
Total 2021 2022-2023 2024-2025 Thereafter
Recorded contractual obligations(3):
Long-term debt(1) $ 49,180 $ 5,362 $ 5,839 $ 9,019 $ 28,960
Short-term borrowings 575 575 - - -
Operating lease obligations(2) 26,257 2,587 4,496 3,660 15,514
Finance lease obligations and other(2)(3) 10,254 1,000 1,729 1,298 6,227
Unrecorded contractual obligations:
Estimated interest on long-term debt 22,957 1,780 3,268 2,872 15,037
Syndicated and other letters of credit 1,987 1,987 - - -
Purchase obligations 12,782 5,912 4,318 1,480 1,072
Total contractual obligations $ 123,992 $ 19,203 $ 19,650 $ 18,329 $ 66,810 (1) Long-term debt includes the fair value of our derivatives designated as fair
value hedges.
(2) Represents our contractual obligations to make future payments under
non-cancelable operating leases and finance lease agreements, both of which
are recorded on the balance sheet at their present value. Refer to Note 7
to our Consolidated Financial Statements for additional information regarding
operating and finance leases.
(3) Finance lease obligations and other includes contractual obligations under
other financing obligations of
Under the terms of the sale of the majority stake ofWalmart Brazil, we agreed to indemnify Advent for certain pre-closing tax and legal contingencies and other matters for up toR$2.3 billion , adjusted for interest based on the Brazilian interbank deposit rate. As ofJanuary 31, 2020 , the indemnification liability recorded was$0.7 billion and included in deferred income taxes and other in the Company's Consolidated Balance Sheet. Additionally, we have$15.0 billion of various undrawn committed lines of credit in theU.S. and approximately$2.9 billion of various undrawn committed lines of credit outside of theU.S. which, if drawn upon, would be included in the current liabilities section of the Company's Consolidated Balance Sheets. Estimated interest payments are based on our principal amounts and expected maturities of all debt outstanding as ofJanuary 31, 2020 , and assumes interest rates remain at current levels for our variable rate debt. Purchase obligations include legally binding contracts, such as firm commitments for inventory and utility purchases, as well as commitments to make capital expenditures, software acquisition and license commitments and legally binding service contracts. For the purposes of the above table, contractual obligations for the purchase of goods or services are defined as agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Contracts that specify the Company will purchase all or a portion of its requirements of a specific product or service from a supplier, but do not include a fixed or minimum quantity, are excluded from the table above. Accordingly, purchase orders for inventory are not included in the table above as purchase orders represent authorizations to purchase rather than binding agreements. Our purchase orders are based on our current inventory needs and are fulfilled by our suppliers within short time 41 -------------------------------------------------------------------------------- periods. We also enter into contracts for outsourced services; however, the obligations under these contracts are not significant and the contracts generally contain clauses allowing for cancellation without significant penalty. The expected timing for payment discussed above is estimated based on current information. Timing of payments and actual amounts paid may be different depending on the timing of receipt of goods or services or changes to agreed-upon amounts for some obligations. In addition to the amounts shown in the table above,$1.8 billion of unrecognized tax benefits are considered uncertain tax positions and have been recorded as liabilities. The timing of the payment, if any, associated with these liabilities is uncertain. Refer to Note 9 to our Consolidated Financial Statements for additional discussion of unrecognized tax benefits. Off Balance Sheet Arrangements As ofJanuary 31, 2020 , we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources. Other Matters We discuss our recently resolved FCPA investigation in Note 10 to our Consolidated Financial Statements, which is captioned "Contingencies," and appears elsewhere herein. We discuss our "Asda Equal Value Claims" which includes certain existing employment claims against ourUnited Kingdom subsidiary,ASDA Stores, Ltd. , including certain risks arising therefrom, in Part I, Item 1A of this Form 10-K under the caption "Risk Factors" and under the sub-caption "Legal Proceedings" in Note 10 to our Consolidated Financial Statements, which is captioned "Contingencies," and appears elsewhere herein. We also discuss the National Prescription Opiate Litigation and related matters including certain risks arising therefrom, in Part I, Item 1A of this Form 10-K under the caption "Risk Factors" and under the sub-caption "Legal Proceedings" in Note 10 to our Consolidated Financial Statements, which is captioned "Contingencies," and appears elsewhere herein. We also discuss various legal proceedings related to the Asda Equal Value Claims and National Prescription Opiate Litigation in Part I, Item 3 herein under the caption "Legal Proceedings." The foregoing matters and other matters described elsewhere in this Annual Report on Form 10-K represent contingencies of the Company that may or may not result in the Company incurring a material liability upon their final resolution. Summary of Critical Accounting Estimates Management strives to report our financial results in a clear and understandable manner, although in some cases accounting and disclosure rules are complex and require us to use technical terminology. In preparing the Company's Consolidated Financial Statements, we follow accounting principles generally accepted in theU.S. These principles require us to make certain estimates and apply judgments that affect our financial position and results of operations as reflected in our financial statements. These judgments and estimates are based on past events and expectations of future outcomes. Actual results may differ from our estimates. Management continually reviews our accounting policies, how they are applied and how they are reported and disclosed in our financial statements. Following is a summary of our critical accounting estimates and how they are applied in preparation of the financial statements. Inventories We value inventories at the lower of cost or market as determined primarily by the retail inventory method of accounting, using the last-in, first-out ("LIFO") method forWalmart U.S . segment's inventories. The inventory at theSam's Club segment is valued using the weighted-average cost LIFO method. When necessary, we record a LIFO provision for the estimated annual effect of inflation, and these estimates are adjusted to actual results determined at year-end. Our LIFO provision is calculated based on inventory levels, markup rates and internally generated retail price indices. As a measure of sensitivity, a 1% increase to our retail price indices would not have resulted in a decrease to the carrying value of inventory. As ofJanuary 31, 2020 and 2019, our inventories valued at LIFO approximated those inventories as if they were valued at FIFO. Impairment of Assets We evaluate long-lived assets for indicators of impairment whenever events or changes in circumstances indicate their carrying amounts may not be recoverable. Management's judgments regarding the existence of impairment indicators are based on market conditions and financial performance. The evaluation of long-lived assets is performed at the lowest level of identifiable cash flows, which is generally at the individual store level. The variability of these factors depends on a number of conditions, including uncertainty about future events and changes in demographics. Thus, our accounting estimates may change from period to period. These factors could cause management to conclude that indicators of impairment exist and require impairment tests be performed, which could result in management determining the value of long-lived assets is impaired, resulting in a write-down of the related long-lived assets. Impairment charges recorded in fiscal 2020 were 42 -------------------------------------------------------------------------------- immaterial. As a measure of sensitivity, fiscal 2020 impairment would not change materially with a 10% decrease in the undiscounted cash flows for the stores or clubs with indicators of impairment. While fiscal 2019 included a pre-tax loss of$4.8 billion related to the sale of the majority stake inWalmart Brazil, which included full impairment of all related-assets, there were no other material impairment charges for fiscal 2019. Business Combinations,Goodwill , and Acquired Intangible Assets We account for business combinations using the acquisition method of accounting, which requires that once control is obtained, all the assets acquired and liabilities assumed, including amounts attributable to noncontrolling interests, are recorded at their respective fair values at the date of acquisition. The determination of fair values of identifiable assets and liabilities requires estimates and the use of valuation techniques when market value is not readily available. For intangible assets acquired in a business combination, we typically use the income method. Significant estimates in valuing certain intangible assets include, but are not limited to, the amount and timing of future cash flows, growth rates, discount rates and useful lives. The excess of the purchase price over fair values of identifiable assets and liabilities is recorded as goodwill.Goodwill is assigned to the reporting unit which consolidates the acquisition. Components within the same reportable segment are aggregated and deemed a single reporting unit if the components have similar economic characteristics. As ofJanuary 31, 2020 , our reporting units consisted ofWalmart U.S .,Walmart International andSam's Club .Goodwill and other indefinite-lived acquired intangible assets are not amortized, but are evaluated for impairment annually or whenever events or changes in circumstances indicate that the value of a certain asset may be impaired. Generally, this evaluation begins with a qualitative assessment to determine whether a quantitative impairment test is necessary. If we determine, after performing an assessment based on the qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, or that a fair value of the reporting unit substantially in excess of the carrying amount cannot be assured, then a quantitative impairment test would be performed. The quantitative test for impairment requires management to make judgments relating to future cash flows, growth rates and economic and market conditions. These evaluations are based on determining the fair value of a reporting unit or asset using a valuation method such as discounted cash flow or a relative, market-based approach. Historically, our reporting units have generated sufficient returns to recover the cost of goodwill, as the fair value significantly exceeded the carrying value. Our indefinite-lived acquired intangible assets have also historically generated sufficient returns to recover their cost; however, due to certain strategic restructuring decisions in fiscal 2020, we recorded approximately$0.7 billion in impairment related to acquired trade names and acquired developed software. Because of the nature of the factors used in these tests, if different conditions occur in future periods, future operating results could be materially impacted. Contingencies We are involved in a number of legal proceedings. We record a liability when it is probable that a loss has been incurred and the amount is reasonably estimable. We also perform an assessment of the materiality of loss contingencies where a loss is either not probable or it is reasonably possible that a loss could be incurred in excess of amounts accrued. If a loss or an additional loss has at least a reasonable possibility of occurring and the impact on the financial statements would be material, we provide disclosure of the loss contingency in the footnotes to our financial statements. We review all contingencies at least quarterly to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the loss or the range of the loss can be made. Although we are not able to predict the outcome or reasonably estimate a range of possible losses in certain matters described in Note 10 in the Notes to our Consolidated Financial Statements, and have not recorded an associated accrual related to these matters, an adverse judgment or negotiated resolution in any of these matters could have a material adverse effect on our business, financial position, results of operations or cash flows. Income Taxes Income taxes have a significant effect on our net earnings. We are subject to income taxes in theU.S. and numerous foreign jurisdictions. Accordingly, the determination of our provision for income taxes requires judgment, the use of estimates in certain cases and the interpretation and application of complex tax laws. Our effective income tax rate is affected by many factors, including changes in our assessment of certain tax contingencies, increases and decreases in valuation allowances, changes in tax law, outcomes of administrative audits, the impact of discrete items and the mix of earnings among ourU.S. and international operations where the statutory rates are generally higher than theU.S. statutory rate, and may fluctuate as a result. Our tax returns are routinely audited and settlements of issues raised in these audits sometimes affect our tax provisions. The benefits of uncertain tax positions are recorded in our financial statements only after determining a more likely than not probability that the uncertain tax positions will withstand challenge, if any, from taxing authorities. When facts and circumstances change, we reassess these probabilities and record any changes in the financial statements as appropriate. We account for uncertain tax positions by determining the minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. This determination requires the use of judgment in evaluating our tax positions and assessing the timing and amounts of deductible and taxable items. Deferred tax assets represent amounts available to reduce income taxes payable on taxable income in future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net 43
--------------------------------------------------------------------------------
operating loss and tax credit carryforwards. Deferred tax assets are evaluated for future realization and reduced by a valuation allowance to the extent that a portion is not more likely than not to be realized. Many factors are considered when assessing whether it is more likely than not that the deferred tax assets will be realized, including recent cumulative earnings, expectations of future taxable income, carryforward periods and other relevant quantitative and qualitative factors. The recoverability of the deferred tax assets is evaluated by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. This evaluation relies on estimates. OnDecember 22, 2017 , the Tax Cuts and Jobs Act of 2017 (the "Tax Act") was enacted and contains significant changes toU.S. income tax law. Effective beginningJanuary 2018 , the Tax Act reduced theU.S. statutory tax rate from 35% to 21% and created new taxes on foreign-sourced earnings and related-party payments. As discussed in Note 9 to our Consolidated Financial Statements, we completed our accounting for the tax effects of the Tax Act in fiscal 2019. As further guidance is issued by theU.S. Treasury Department , theIRS , and other standard-setting bodies, any resulting changes to our estimates will be treated in accordance with the relevant accounting guidance.
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