How did Wal-Mart perform financially in fiscal 2005?

Net sales increased 11.3% to $285.2 billion, and income from continuing operations increased 15.9% to $10.3 billion. Diluted EPS was $2.41, compared with $2.07 in fiscal 2004 (which included discontinued operations). Operating income grew 13.8%, outpacing sales growth, and return on assets was 9.3%.

What drove growth, and what were the weak spots?

Growth came from new store openings (36 Discount Stores, 242 Supercenters, and 21 Neighborhood Markets in the U.S., plus 232 net international units) and from the International segment, which benefited from Mexico, the U.K., and currency. The weak spot was U.S. comparative store sales, which slowed to 2.9% from 3.9%. Management also noted that inventory growth (10.7%) was faster than it would prefer relative to sales growth.

What are the main legal risks investors should be aware of?

The largest is Dukes v. Wal-Mart Stores, a class action alleging pay and promotion discrimination against women, which covers about 1.6 million current and former female Associates. The company is appealing the class certification, and management said the potential loss could be material but cannot be reasonably estimated. Wage-and-hour class actions across many states, the Mauldin and EEOC suits, and immigration and environmental matters also add to the exposure.

How is Wal-Mart returning capital to shareholders?

In fiscal 2005 the company repurchased $4.5 billion of stock and paid $2.2 billion in dividends. It approved a new $10.0 billion buyback program in September 2004, with about $9.7 billion remaining at January 31, 2005. The Board also raised the annual dividend to $0.60 per share, payable in quarterly installments during fiscal 2006.

What is the outlook for capital spending and debt?

Fiscal 2006 capital expenditures are expected to be about $14 billion, including approximately 40-45 new Discount Stores, 240-250 Supercenters, 25-30 Neighborhood Markets, 30-40 SAM'S CLUBs, and 155-165 International units. Long-term debt was $23.8 billion at year-end, with a debt-to-capitalization ratio of 39% against a target of about 40%. The company expects to fund expansion mainly from operating cash flow, commercial paper, and long-term debt.

WMT 10-K FY2005 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 31, 2005. Cited figures are marked; the original filing is the authoritative source.

Wal-Mart Stores, Inc. (WMT) reported a strong fiscal 2005 (year ended January 31, 2005), with net sales up 11.3% to $285.2 billion^a and income from continuing operations up 15.9% to $10.3 billion (diluted EPS $2.41, versus $2.03 from continuing operations in fiscal 2004).

Growth was driven by store expansion and International performance: the International segment's sales rose 18.3% to $56.3 billion^b and its operating income rose 26.1%, helped by Mexico, the United Kingdom, and a $3.2 billion favorable currency impact on sales. Wal-Mart Stores segment sales grew 10.1%, but comparative U.S. store sales slowed to 2.9% from 3.9%, which management attributed to a softer economy and higher fuel and utility costs for customers. Operating income grew 13.8%, ahead of sales growth, though the Wal-Mart Stores segment fell slightly short of that benchmark.

Cash generation remained robust, with $15.0 billion^c of operating cash flow against $12.9 billion of capital expenditures. The company returned capital to shareholders through $4.5 billion of buybacks and $2.2 billion of dividends, and it approved a new $10.0 billion repurchase program and a dividend increase to $0.60 per share for fiscal 2006. Total debt rose to about $23.8 billion of long-term debt, with the debt-to-capitalization ratio at 39% against a target of about 40%.

Return on assets was 9.3%^d and return on equity 22.1%. Investors should weigh several risks: a pending class-action gender discrimination suit (Dukes v. Wal-Mart) covering roughly 1.6 million current and former female Associates, with potentially material but currently unquantifiable liability; a broad set of wage-and-hour class actions; and an inventory-to-sales growth ratio that was affected by weaker-than-expected sales.

Management also flagged that the upcoming S&P float adjustment could prompt index funds to sell a portion of their holdings. Fiscal 2006 capital spending is planned at about $14 billion.

02—Key points

Key Highlights

Net sales rose 11.3% to $285.2 billion; income from continuing operations rose 15.9% to $10.3 billion, with diluted EPS of $2.41 versus $2.03 in fiscal 2004.
International segment was the standout performer: sales up 18.3% to $56.3 billion and operating income up 26.1%, led by Mexico and the United Kingdom (ASDA), with $3.2 billion of favorable currency impact on sales.
U.S. comparative store sales slowed to 2.9% (from 3.9%), which management attributed to a softer economy and higher fuel and utility costs for customers.
Strong cash generation: $15.0 billion operating cash flow funded $12.9 billion of capex, $4.5 billion of share buybacks and $2.2 billion of dividends.
Capital returns expanded: a new $10.0 billion repurchase program was approved in September 2004, and the annual dividend was raised to $0.60 per share for fiscal 2006 (up from $0.52).
Store footprint grew to 3,151 Wal-Mart Stores segment units and 1,587 international units, with fiscal 2006 capex guidance of about $14 billion for further expansion.
Material legal exposure remains: the Dukes gender discrimination class action (about 1.6 million women) and numerous wage-and-hour suits, for which management said it cannot reasonably estimate potential losses.

03—Questions

Frequently Asked Questions

How did Wal-Mart perform financially in fiscal 2005?
Net sales increased 11.3% to $285.2 billion, and income from continuing operations increased 15.9% to $10.3 billion. Diluted EPS was $2.41, compared with $2.07 in fiscal 2004 (which included discontinued operations). Operating income grew 13.8%, outpacing sales growth, and return on assets was 9.3%.
What drove growth, and what were the weak spots?
Growth came from new store openings (36 Discount Stores, 242 Supercenters, and 21 Neighborhood Markets in the U.S., plus 232 net international units) and from the International segment, which benefited from Mexico, the U.K., and currency. The weak spot was U.S. comparative store sales, which slowed to 2.9% from 3.9%. Management also noted that inventory growth (10.7%) was faster than it would prefer relative to sales growth.
What are the main legal risks investors should be aware of?
The largest is Dukes v. Wal-Mart Stores, a class action alleging pay and promotion discrimination against women, which covers about 1.6 million current and former female Associates. The company is appealing the class certification, and management said the potential loss could be material but cannot be reasonably estimated. Wage-and-hour class actions across many states, the Mauldin and EEOC suits, and immigration and environmental matters also add to the exposure.
How is Wal-Mart returning capital to shareholders?
In fiscal 2005 the company repurchased $4.5 billion of stock and paid $2.2 billion in dividends. It approved a new $10.0 billion buyback program in September 2004, with about $9.7 billion remaining at January 31, 2005. The Board also raised the annual dividend to $0.60 per share, payable in quarterly installments during fiscal 2006.
What is the outlook for capital spending and debt?
Fiscal 2006 capital expenditures are expected to be about $14 billion, including approximately 40-45 new Discount Stores, 240-250 Supercenters, 25-30 Neighborhood Markets, 30-40 SAM'S CLUBs, and 155-165 International units. Long-term debt was $23.8 billion at year-end, with a debt-to-capitalization ratio of 39% against a target of about 40%. The company expects to fund expansion mainly from operating cash flow, commercial paper, and long-term debt.

04—Continue

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