01—Abstract
Summary
Summary of the 10-K filed March 29, 2006. Cited figures are marked; the original filing is the authoritative source.
Wal-Mart Stores, Inc. (WMT) reported fiscal 2006 (year ended January 31, 2006) net sales of $312.4 billiona, up 9.5%, and net income of $11.2 billion, up 9.4%, with diluted EPS of $2.68 versus $2.41 a year earlier.
Growth was driven by the Wal-Mart Stores segment (67.2% of sales, 9.4% sales growth, 3.0% comparative store sales), the International segment (20.1% of sales, 11.4% growth, aided by $1.5 billionb of favorable currency effects), and SAM'S CLUB (12.7% of sales, 7.2% growth). Operating income rose 8.4%, slower than sales, and the company acknowledged that the Wal-Mart Stores segment's operating margin slipped slightly, reflecting lower-margin food mix, rising transportation costs, and higher utility and advertising expenses. Return on assets fell to 8.9% from 9.3%, partly due to acquisition activity in the fourth quarter.
Balance sheet and cash flow shifted toward leverage and expansion. Total assets rose 15% to $138.2 billionc. Operating cash flow was $17.6 billion, while capital expenditures reached $14.6 billion, leaving limited free cash flow after dividends of $2.5 billion and buybacks of $3.6 billion.
Long-term debt rose to $31.0 billiond from $23.8 billion, and the debt-to-total-capitalization ratio increased to 42% from 39%, above management's roughly 40% target. Working capital was negative, with current liabilities exceeding current assets by $5.0 billion, a pattern typical of the company's inventory-driven model. Management guided fiscal 2007 capital expenditures to about $17.5 billion and announced a dividend increase to $0.67 per share annually.
Investors should also weigh legal and regulatory exposure disclosed in the filing. The Dukes gender discrimination class action covers approximately 1.6 million current and former female associates, and the Savaglio meal-break case produced a jury verdict of roughly $172 million including punitive damages.
Wage-and-hour class actions are numerous, and a federal criminal investigation under hazardous waste laws is ongoing. The company states it cannot estimate the potential loss from several of these matters, so the financial impact remains uncertain.
02—Key points
Key Highlights
- Net sales reached $312.4 billion (+9.5%), and net income reached $11.2 billion (+9.4%), with diluted EPS of $2.68 versus $2.41.
- International segment sales grew 11.4% to $62.7 billion, supported by acquisitions (Seiyu consolidation in Japan, Sonae in Brazil) and about $1.5 billion of favorable currency effects.
- Comparative store sales in the U.S. rose 3.0% for Wal-Mart Stores and 5.0% for SAM'S CLUB, though management noted that new store openings reduce comparable sales by roughly 1% per year.
- Return on assets declined to 8.9% from 9.3%, and the debt-to-total-capitalization ratio rose to 42% from 39%, above the company's roughly 40% target.
- Long-term debt increased to $31.0 billion from $23.8 billion, while $3.6 billion in buybacks and $2.5 billion in dividends were funded alongside $14.6 billion in capex.
- Fiscal 2007 capex is guided to about $17.5 billion, with 270-280 new Supercenters planned, and the annual dividend was raised to $0.67 per share.
- Material litigation remains, including the Dukes class action (about 1.6 million plaintiffs), a $172 million Savaglio verdict, and a federal hazardous waste criminal investigation with no estimable loss range.
03—Questions
Frequently Asked Questions
How strong was Walmart's fiscal 2006 growth, and where did it come from?
Net sales grew 9.5% to $312.4 billion and net income grew 9.4% to $11.2 billion. The International segment grew fastest at 11.4%, helped by acquisitions and roughly $1.5 billion of favorable currency effects. The Wal-Mart Stores segment grew 9.4% on 3.0% comparative store sales and new store openings, and SAM'S CLUB grew 7.2%.
Are margins and returns improving or deteriorating?
Mixed. Operating income grew 8.4%, slower than sales, so margins were under pressure. The Wal-Mart Stores segment's operating margin dipped slightly to 7.3% from 7.4%, due to a shift toward lower-margin food, higher transportation costs, and rising utilities and advertising expenses. Return on assets fell to 8.9% from 9.3%, partly reflecting fourth-quarter acquisitions.
How is Walmart funding its expansion, and is the balance sheet becoming more leveraged?
Operating cash flow of $17.6 billion covered most of the $14.6 billion in capex and $2.5 billion in dividends, but buybacks of $3.6 billion and acquisitions were partly funded with debt. Long-term debt rose to $31.0 billion from $23.8 billion, and the debt-to-capitalization ratio reached 42%, above management's target of about 40%. Working capital remains negative, with current liabilities exceeding current assets by $5.0 billion.
What are the most significant legal and regulatory risks disclosed?
The Dukes gender discrimination class action covers about 1.6 million current and former female employees, and the company disputes the class certification ruling on appeal. The Savaglio meal-break case produced a jury verdict of about $57 million in statutory penalties and $115 million in punitive damages, which the company plans to challenge. Numerous wage-and-hour class actions are pending. A federal criminal investigation under RCRA and related statutes concerns the handling of returned merchandise, and the company says it cannot estimate potential losses from these matters.
What is the outlook for shareholder returns?
The board raised the annual dividend to $0.67 per share from $0.60, a 15.4% increase in the prior year's payout. The company had $6.1 billion remaining under its $10.0 billion buyback authorization, but made no repurchases in the third or fourth quarters of fiscal 2006. Future buybacks will depend on cash needs, leverage targets, borrowing costs, and the stock price.
04—Continue