WALMART INC. Overview
This discussion, which presentsWalmart Inc.'s ("Walmart ," the "Company," "our," or "we") results for periods occurring in the fiscal year endingJanuary 31, 2020 ("fiscal 2020") and the fiscal year endedJanuary 31, 2019 ("fiscal 2019"), should be read in conjunction with our Condensed Consolidated Financial Statements as of and for the three and nine months endedOctober 31, 2019 , and the accompanying notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q, as well as our Consolidated Financial Statements as of and for the year endedJanuary 31, 2019 , the accompanying notes and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, contained in our Annual Report on Form 10-K for the year endedJanuary 31, 2019 incorporated by reference. We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from period to period and the primary factors that accounted for those changes. We also discuss certain performance metrics that management uses to assess the Company's performance. Additionally, the discussion provides information about the financial results of each of the three segments of our business to provide a better understanding of how each of those segments and its results of operations affect the financial condition and results of operations of the Company as a whole. Throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations, we discuss segment operating income, comparable store and club sales and other measures. Management measures the results of the Company's segments using each segment's operating income, including certain corporate overhead allocations, as well as other measures. From time to time, we revise the measurement of each segment's operating income and other measures as determined by the information regularly reviewed by our chief operating decision maker. Comparable store and club sales, or comparable sales, is a metric that indicates the performance of our existing stores and clubs by measuring the change in sales for such stores and clubs, including eCommerce sales, for a particular period from the corresponding period in the previous year.Walmart 's definition of comparable sales includes sales from stores and clubs open for the previous 12 months, including remodels, relocations, expansions and conversions, as well as eCommerce sales. We measure the eCommerce sales impact by including all sales initiated online or through mobile applications, including omni-channel transactions which are fulfilled through our stores and clubs. Sales at a store that has changed in format are excluded from comparable sales when the conversion of that store is accompanied by a relocation or expansion that results in a change in the store's retail square feet of more than five percent. Additionally, sales related to acquisitions are excluded until such acquisitions have been owned for 12 months. Comparable sales are also referred to as "same-store" sales by others within the retail industry. The method of calculating comparable sales varies across the retail industry. As a result, our calculation of comparable sales is not necessarily comparable to similarly titled measures reported by other companies. Beginning with the first quarter of the current fiscal year, we updated our definition of what was previously referred to as traffic (a component, along with ticket, of comparable sales). Traffic 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. Each of our segments contributes to the Company's operating results differently. Each, however, has generally maintained a consistent contribution rate to the Company's net sales and operating income in recent years other than minor changes to the contribution rate for theWalmart International segment due to fluctuations in currency exchange rates. We recently took 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
Refer to Note 8 for additional information on the transaction.
• Divestiture of 80 percent of
("Advent") in
billion in fiscal 2019, substantially all of which was recorded during the
second quarter of fiscal 2019. Refer to Note 8 for additional
information on the transaction.
• Divestiture of banking operations in
December 2018 andApril 2019 , respectively. 20
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• Entered into an agreement in the fourth quarter of fiscal 2020 between
Asda, Walmart and the Trustee of the Asda Group Pension Scheme (the
"Plan") pursuant to which Asda made a $1.1 billion cash contribution to
the Plan. This cash contribution enabled the Plan to purchase a bulk
insurance annuity contract for the benefit of Plan participants in
anticipation that each Plan participant is issued individual annuity
contracts. 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 Plan
participants have been issued individual annuity contracts, we will
recognize a total, pre-tax charge of approximately
the pension settlement in late fiscal 2021 or early fiscal 2022. Refer to
Note 11 for additional information on the transaction.
The Retail Industry
We operate in the highly competitive omni-channel retail industry in all of the
markets we serve. We face strong sales competition from other discount,
department, drug, dollar, variety and specialty stores, warehouse clubs and
supermarkets, as well as eCommerce businesses. Many of these competitors are
national, regional or international chains or have a national or international
omni-channel or eCommerce presence. We compete with a number of companies for
attracting and retaining quality employees ("associates"). We, along with other
retail companies, are influenced by a number of factors including, but not
limited to: catastrophic events, weather, competitive pressures, consumer
disposable income, consumer debt levels and buying patterns, consumer credit
availability, cost of goods, currency exchange rate fluctuations, customer
preferences, deflation, inflation, fuel and energy prices, general economic
conditions, insurance costs, interest rates, labor costs, tax rates, the
imposition of tariffs, cybersecurity attacks and unemployment.
Company Performance Metrics
We are committed to helping customers save money and live better through
everyday low prices, supported by everyday low costs. At times, we adjust our
business strategies to maintain and strengthen our competitive positions in the
countries in which we operate. We define our financial framework as:
• strong, efficient growth;
• consistent operating discipline; and
• strategic capital allocation.
As we execute on this financial framework, we believe our returns on capital will improve over time. Strong, Efficient Growth Our objective of prioritizing strong, efficient growth means we will focus on the most productive growth opportunities, increasing comparable store and club sales, accelerating eCommerce sales growth and expansion of omni-channel initiatives while slowing the rate of growth of new stores and clubs. At times, we make strategic investments which are focused on the long-term growth of the Company. Comparable sales is a metric that indicates the performance of our existing stores and clubs by measuring the change in sales for such stores and clubs, including eCommerce sales, for a particular period over the corresponding period in the previous year. The retail industry generally reports comparable sales using the retail calendar (also known as the 4-5-4 calendar). To be consistent with the retail industry, we provide comparable sales using the retail calendar in our quarterly earnings releases. However, when we discuss our comparable sales below, we are referring to our calendar comparable sales calculated using our fiscal calendar. As our fiscal calendar differs from the retail calendar, our fiscal calendar comparable sales also differ from the retail calendar comparable sales provided in our quarterly earnings releases. Calendar comparable sales, as well as the impact of fuel, for the three and nine months endedOctober 31, 2019 , were as follows: Three Months EndedOctober 31 , Nine Months
Ended
2019 2018 2019 2018 2019 2018 2019 2018
With Fuel Fuel Impact With Fuel Fuel Impact
Walmart U.S . 3.3 % 3.4 % 0.0 % 0.1 % 3.1 % 3.5 % 0.0 % 0.1 %
Sam's Club 0.6 % 5.4 % 0.1 % 2.1 % 1.3 % 6.1 % 0.6 % 2.1 %
Total U.S. 2.9 % 3.7 % 0.0 % 0.4 % 2.8 % 3.9 % 0.0 % 0.4 %
Comparable sales in the U.S. , including fuel, increased 2.9% and 2.8% for the
three and nine months ended October 31, 2019 , respectively, when compared to the
same period in the previous fiscal year. The Walmart U.S . segment had comparable
sales growth of 3.3% and 3.1% for the three and nine months ended October 31,
2019 , respectively, driven by growth in ticket and transactions. Walmart U.S .
segment's eCommerce sales positively contributed approximately 1.7% and 1.5% to
comparable sales for the three and nine months ended October 31, 2019 ,
respectively.
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Comparable sales at theSam's Club segment were 0.6% and 1.3% for the three and nine months endedOctober 31, 2019 , respectively. TheSam's Club segment's 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. TheSam's Club segment's eCommerce sales positively contributed approximately 1.5% and 1.4% to comparable sales, respectively, for the three and nine months endedOctober 31, 2019 . Consistent Operating Discipline We operate with discipline by managing expenses and optimizing the efficiency of how we work and creating an environment in which we have sustainable lowest cost to serve. We invest in technology and process improvements to increase productivity, manage inventory and reduce costs. We measure operating discipline through expense leverage, which we define as net sales growing at a faster rate than operating, selling, general and administrative ("operating") expenses. Three Months Ended October 31, Nine Months Ended October 31, (Amounts in millions) 2019 2018 2019 2018 Net sales$ 126,981
2.5 % 1.4 % 1.8 % 3.3 %
Operating, selling, general and administrative
2.2 % (0.3 )% 1.1 % 2.6 %
Operating, selling, general and administrative 21.6 % 21.6 % 21.1 % 21.3 %
expenses as a percentage of net sales
For the three and nine months endedOctober 31, 2019 we leveraged operating expenses, decreasing operating expenses as a percentage of net sales by 6 and 15 basis points when compared to the same period in the previous fiscal year, respectively. The primary drivers of the expense leverage for the three and nine months endedOctober 31, 2019 were strong sales and productivity improvements in theWalmart U.S . segment partially offset by a$0.3 billion non-cash trade name impairment charge in theWalmart International segment. Strategic Capital Allocation We are allocating more capital to eCommerce, technology and supply chain as well as store remodels and less to new store and club openings, when compared to prior years. Our strategy includes initiatives to improve our customer proposition in stores and clubs and integrate our digital and physical shopping experience. As such, we have been allocating more capital in recent years to eCommerce, technology and supply chain, as well as store remodels, and less capital to new stores and clubs openings. The following table presents our capital allocation for the nine months endedOctober 31, 2019 and 2018: (Amounts in millions) Nine Months Ended October 31, Allocation of Capital Expenditures 2019 2018 eCommerce, technology, supply chain and other $ 3,859$ 3,355 Store remodels 1,855 1,734 New stores and clubs, including expansions and relocations 67 230 Total U.S. 5,781 5,319Walmart International 1,984 1,695 Total capital expenditures $ 7,765$ 7,014 22
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Returns
As we execute our financial framework, we believe our return on capital will
improve over time. We measure return on capital with our return on investment
and free cash flow metrics. In addition, we provide returns in the form of share
repurchases and dividends, which are discussed in the Liquidity and Capital
Resources section.
Return on Assets and Return on Investment
We include Return on Assets ("ROA"), the most directly comparable measure based
on our financial statements presented in accordance with generally accepted
accounting principles in the U.S. ("GAAP"), and Return on Investment ("ROI") as
metrics to assess returns on assets. While ROI is considered a non-GAAP
financial measure, management believes ROI is a meaningful metric to share with
investors because it helps investors assess how effectively Walmart is deploying
its assets. Trends in ROI can fluctuate over time as management balances
long-term strategic initiatives with possible short-term impacts. ROA was 6.3%
and 2.6% for the trailing twelve months ended October 31, 2019 and 2018,
respectively. The increase in ROA was primarily due to the increase in
consolidated net income over the trailing twelve months, primarily resulting
from lapping the $4.5 billion net loss in fiscal 2019 related to the sale of the
majority stake in Walmart Brazil, the change in fair value of the investment in
JD.com , and lapping the restructuring and impairment charges in the fourth
quarter of fiscal 2018, partially offset by the dilution to operating income
related to Flipkart . ROI was 13.7% and 13.4% for the trailing twelve months
ended October 31, 2019 and 2018, respectively. The increase in ROI was due to
the increase in operating income over the trailing twelve months primarily as a
result of lapping the restructuring and impairment charges in the fourth quarter
of fiscal 2018, offset by the dilution to operating income related to Flipkart .
The denominator remained relatively flat as the increase in average total assets
due to the acquisition of Flipkart 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.
We define ROI as adjusted operating income (operating income plus interest
income, depreciation and amortization, and rent expense) for the trailing 12
months divided by average invested capital during that period. We consider
average invested capital to be the average of our beginning and ending total
assets, plus average accumulated depreciation and average amortization, less
average accounts payable and average accrued liabilities for that period. Upon
adoption of ASU 2016-02, rent for the trailing 12 months multiplied by a factor
of 8 is no longer included in the calculation of ROI on a prospective basis as
operating lease assets are now capitalized. For fiscal 2020, lease related
assets and associated accumulated amortization are included in the denominator
at their carrying amount as of the current balance sheet date, rather than
averaged, because they are no longer directly comparable to the prior year
calculation which included rent for the trailing 12 months multiplied by a
factor of 8. A two-point average will be used for leased assets beginning in
fiscal 2021, after one full year from the date of adoption of the new lease
standard. Further, beginning prospectively in fiscal 2020, rent expense in the
numerator excludes short-term and variable lease costs as these costs are not
included in the operating lease right-of-use asset balance.
Prior to adoption of ASU 2016-02, we defined ROI as adjusted operating income
(operating income plus interest income, depreciation and amortization, and rent
expense) for the trailing 12 months divided by average invested capital during
that period. We considered average invested capital to be the average of our
beginning and ending total assets, plus average accumulated depreciation and
average amortization, less average accounts payable and average accrued
liabilities for that period, plus a rent factor equal to the rent for the fiscal
year or trailing 12 months multiplied by a factor of 8, which estimated the
hypothetical capitalization of our operating leases. Because the new lease
standard was adopted under the modified retrospective approach as of February 1,
2019 , our calculation of ROI for the comparable fiscal 2019 period was not
revised.
Our calculation of ROI is considered a non-GAAP financial measure because we
calculate ROI using financial measures that exclude and include amounts that are
included and excluded in the most directly comparable GAAP financial measure.
For example, we exclude the impact of depreciation and amortization from our
reported operating income in calculating the numerator of our calculation of
ROI. As mentioned above, we consider ROA to be the financial measure computed in
accordance with generally accepted accounting principles most directly
comparable to our calculation of ROI. ROI differs from ROA (which is
consolidated net income for the period divided by average total assets for the
period) because ROI: adjusts operating income to exclude certain expense items
and adds interest income; adjusts total assets for the impact of accumulated
depreciation and amortization, accounts payable and accrued liabilities to
arrive at total invested capital. Because of the adjustments mentioned above, we
believe ROI more accurately measures how we are deploying our key assets and is
more meaningful to investors than ROA. Although ROI is a standard financial
measure, numerous methods exist for calculating a company's ROI. As a result,
the method used by management to calculate our ROI may differ from the methods
used by other companies to calculate their ROI.
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The calculation of ROA and ROI, along with a reconciliation of ROI to the
calculation of ROA, the most comparable GAAP financial measure, is as follows:
For the Trailing Twelve Months
Ending October 31,
(Amounts in millions) 2019 2018
CALCULATION OF RETURN ON ASSETS
Numerator
Consolidated net income $ 14,720 $ 5,729
Denominator
Average total assets(1) $ 233,207 $ 217,999
Return on assets (ROA) 6.3 % 2.6 %
CALCULATION OF RETURN ON INVESTMENT
Numerator
Operating income $ 21,313 $ 20,357
+ Interest income 212 190
+ Depreciation and amortization 10,889 10,649
+ Rent 2,733 3,053
= Adjusted operating income $ 35,147 $ 34,249
Denominator
Average total assets(1),(2) $ 240,261 $ 217,999
+ Average accumulated depreciation and amortization(1), (2) 87,982 84,136
- Average accounts payable(1) 49,740 48,658
- Average accrued liabilities(1) 21,884 22,276
+ Rent x 8 N/A 24,424
= Average invested capital $ 256,619 $ 255,625
Return on investment (ROI) 13.7 % 13.4 %
As of October 31,
2019 2018 2017
Certain Balance Sheet Data
Total assets $ 239,830 $ 226,583 $ 209,414
Leased assets, net 21,099 6,991 7,144
Total assets without leased assets, net 218,731 219,592 202,270
Accumulated depreciation and amortization 91,697 85,827
82,445
Accumulated amortization on leased assets 4,140 5,701
5,497
Accumulated depreciation and amortization, 87,557 80,126 76,948 without leased assets Accounts payable 49,750 49,729 47,587 Accrued liabilities 20,973 22,795 21,757 (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 the twelve months endedOctober 31, 2019 , as a result of adopting ASU 2016-02, average total assets is based on the average of total assets without leased assets, net plus leased assets, net as ofOctober 31, 2019 . Average accumulated depreciation and amortization is based on the average of accumulated depreciation and amortization, without leased assets plus accumulated amortization on leased assets as ofOctober 31, 2019 . 24
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Free Cash Flow Free cash flow is considered a non-GAAP financial measure. Management believes, however, that free cash flow, which measures our ability to generate 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$14.5 billion for the nine months endedOctober 31, 2019 , which decreased when compared to$17.3 billion for the nine months endedOctober 31, 2018 primarily due to the timing of vendor payments andU.S. associate payroll, as well as the inclusion ofFlipkart operations. We generated free cash flow of$6.8 billion for the nine months endedOctober 31, 2019 , which decreased when compared to$10.3 billion for the nine months endedOctober 31, 2018 due to the same reasons as the decline in net cash provided by operating activities, as well as$0.8 billion in increased capital expenditures.Walmart 's definition of free cash flow is limited in that it does not represent residual cash flows available for discretionary expenditures due to the fact that the measure does not deduct the payments required for debt service and other contractual obligations or payments made for business acquisitions. Therefore, we believe it is important to view free cash flow as a measure that provides supplemental information to our Condensed Consolidated Statements of Cash Flows. Although other companies report their free cash flow, numerous methods may exist for calculating a company's free cash flow. As a result, the method used by management to calculate our free cash flow may differ from the methods used by other companies to calculate their free cash flow. The following table sets forth a reconciliation of free cash flow, a non-GAAP financial measure, to net cash provided by operating activities, which we believe to be the GAAP financial measure most directly comparable to free cash flow, as well as information regarding net cash used in investing activities and net cash used in financing activities. Nine Months Ended October 31, (Amounts in millions) 2019 2018 Net cash provided by operating activities$ 14,539 $ 17,308 Payments for property and equipment (7,765 ) (7,014 ) Free cash flow$ 6,774
Net cash used in investing activities(1)$ (6,285 ) $ (20,554 ) Net cash provided by (used in) financing activities (7,213 ) 5,921
(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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