01—Abstract
Summary
Summary of the 10-K filed April 9, 2004. Cited figures are marked; the original filing is the authoritative source.
Wal-Mart Stores, Inc. (WMT) reported a strong fiscal 2004 (year ended January 31, 2004).
Net sales rose 12% to $256.3 billiona, and income from continuing operations increased 13.3% to $8.9 billion, with diluted EPS from continuing operations of $2.03 (diluted net EPS $2.07). Growth was driven by domestic expansion (139 new Discount Stores, Supercenters and Neighborhood Markets plus 130 Discount Store-to-Supercenter conversions/relocations) and by the International segment, whose sales grew 16.6% and operating profit grew 18.6%. Gross margin improved slightly to 22.5% from 22.3%, helped by product mix and global sourcing, though apparel markdowns and higher insurance and advertising costs weighed on SG&A.
The Wal-Mart Stores segment remains the core engine at 68% of sales, but its comparative store sales growth slowed to 3.9% from 5.7% amid a softer economy and weak apparel sales. Operating cash flow from continuing operations reached $15.9 billionb, against capital expenditures of $10.3 billion, $5.0 billion in share repurchases and $1.6 billion in dividends. The company sold McLane for $1.5 billion and recorded a $150 million German deferred tax valuation allowance charge.
Management plans roughly $12 billionc of fiscal 2005 capital spending and raised the fiscal 2005 dividend to $0.52 per share, a 44% increase. Investors should weigh the company's scale and consistent profit growth against several risk factors disclosed in the filing: a federal grand jury immigration investigation, multiple class actions alleging off-the-clock work and gender discrimination (including the Dukes case), and environmental enforcement matters. Leverage is moderate, with debt at 38% of total capitalization against a historical target of about 40%, and the company holds AA/Aa2/AA long-term ratings.
02—Key points
Key Highlights
- Net sales grew 12% to $256.3 billion in fiscal 2004; income from continuing operations rose 13.3% to $8.9 billion, with diluted EPS of $2.03 from continuing operations.
- Gross margin edged up to 22.5% from 22.3%, driven by favorable product mix and global sourcing, partly offset by apparel markdowns in the second half.
- International segment was the standout performer, with sales up 16.6% and operating profit up 18.6%, led by Canada, Mexico and the United Kingdom (ASDA).
- Wal-Mart Stores comparative store sales slowed to 3.9% from 5.7%, reflecting a softer economy and weak apparel sales; SAM'S CLUB comparable sales improved to 5.3% from 2.3%.
- Strong cash generation: operating cash flow of $15.9 billion funded $10.3 billion in capital expenditures, $5.0 billion in share buybacks and $1.6 billion in dividends.
- Management plans about 50 million sq. ft. of new space and roughly $12 billion in capex for fiscal 2005, and raised the dividend 44% to $0.52 per share.
- Material legal and regulatory exposure, including a federal grand jury immigration investigation (Wal-Mart named as a target), the Dukes gender discrimination class action, and multiple wage-and-hour class actions; the company states it cannot determine potential liability.
03—Questions
Frequently Asked Questions
How strong was Wal-Mart's fiscal 2004 growth and profitability?
Net sales increased 12% to $256.3 billion, and income from continuing operations rose 13.3% to $8.9 billion. Operating profit grew 13.0%, slightly ahead of sales growth, which management treats as a key measure of success. Return on assets was 9% and return on shareholders' equity was 21%.
What is driving future growth, and how much will the company invest?
Growth comes from store expansion: in fiscal 2005 the company plans to open 40-45 Discount Stores, 230-240 Supercenters, 20-25 Neighborhood Markets, 30-35 SAM'S CLUBs and 130-140 international units, adding about 50 million square feet. Capital expenditures are estimated at about $12 billion, funded mainly by operating cash flow and debt. The Bompreco acquisition in Brazil (118 units for about $300 million) adds to international growth from fiscal 2005.
How healthy is the balance sheet and how is cash being returned to shareholders?
Debt represented 38% of total capitalization at January 31, 2004, below the historical target of about 40%. Current liabilities exceeded current assets by $3 billion, a typical feature of this business model with fast inventory turns and supplier financing. The company repurchased $5 billion of stock during fiscal 2004, had about $6.6 billion remaining on its authorization, and approved a new $7 billion program in January 2004, alongside dividends of $0.36 per share.
What are the most significant risks disclosed in the filing?
Key risks include a federal grand jury investigation into the company's relationship with floor-cleaning contractors and potential immigration-related violations, plus the Zavala civil suit. The company also faces numerous wage-and-hour 'off the clock' class actions, the Dukes gender discrimination class action (which could result in a material liability if certified and lost), and the Mauldin and EEOC matters. Environmental enforcement actions in Connecticut, Colorado, Utah and Florida are also pending. Management says the potential liabilities cannot currently be determined.
Did the company's international and divestiture activities affect results?
The International segment contributed 18.5% of sales and benefited from roughly $2 billion of favorable currency translation. The company sold McLane for $1.5 billion in May 2003, recognizing a $151 million after-tax gain. It also recorded a $150 million valuation allowance on German deferred tax assets after new German tax legislation, which weighed on the effective tax rate, raising it to 36.1% from 35.2%.
04—Continue