How did Wal-Mart perform financially in fiscal 2007?

Net sales increased 11.7% to $345.0 billion and income from continuing operations rose 6.7% to $12.2 billion, or $2.92 per diluted share. Net income per diluted share was $2.71 after $894 million in losses from discontinued operations, mainly the sale of the German and South Korean businesses. Operating income grew 9.5%, slower than sales, reflecting the lower-margin acquired International operations.

Why did U.S. comparable store sales slow in fiscal 2007?

U.S. comparable store sales rose 2.0%, down from 3.4% in fiscal 2006. Management attributed the slowdown to a difficult comparison after hurricane-recovery sales in the prior year, softness in home and apparel categories, and cannibalization from new stores opened nearby, which it estimates reduced comparable sales by about 1 percentage point. The company expects this new-store effect to continue at a similar rate in fiscal 2008.

How strong is Wal-Mart's cash flow and capacity to return capital to shareholders?

Operating cash flow from continuing operations was $20.2 billion, up from $17.7 billion, and comfortably exceeded $15.7 billion of capital expenditures. The company paid $2.8 billion in dividends and repurchased $1.7 billion of stock. Its ratio of adjusted cash flow from operations to adjusted average debt was 43%, and it holds AA long-term ratings from S&P and Fitch. Fiscal 2008 capex is expected to be about $17 billion, financed primarily from operating cash flow.

What are the most significant legal and regulatory risks disclosed?

The largest is Dukes v. Wal-Mart, a gender discrimination class action covering about 1.6 million current and former female associates, which the Ninth Circuit panel has affirmed for class certification and is being reconsidered en banc. Other significant matters include numerous off-the-clock wage-and-hour class actions, such as Savaglio (about $172 million in verdict and penalties, under appeal) and Braun/Hummel (about $78 million in back pay, with additional penalties sought). A federal criminal investigation into hazardous waste handling is also active, and the company says it cannot reasonably estimate a possible loss.

What happened to the dividend and share repurchase program?

In fiscal 2007 the company paid $0.67 per share, an 11.7% increase. On March 8, 2007, the Board approved raising the annual dividend to $0.88 per share, a 31.3% increase, payable quarterly beginning April 2, 2007. The $10.0 billion repurchase program authorized in 2004 had approximately $4.3 billion remaining at January 31, 2007, and has no expiration date.

WMT 10-K FY2007 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 27, 2007. Cited figures are marked; the original filing is the authoritative source.

Wal-Mart Stores, Inc. (WMT) reported fiscal 2007 (year ended January 31, 2007) net sales of $345.0 billion^a, up 11.7% year over year, with income from continuing operations rising 6.7% to $12.2 billion and diluted EPS from continuing operations of $2.92 (diluted net income per share of $2.71 after $894 million of losses from discontinued operations, chiefly the German and South Korean exits).

Growth was driven largely by acquisitions and consolidations (Seiyu, CARHCO, Sonae) and a $1.5 billion^b favorable currency impact, while U.S. comparable store sales slowed to 2.0% from 3.4% as management cited a difficult hurricane-recovery benchmark, softness in home and apparel, and cannibalization from new stores. Operating income grew 9.5%, below the 11.7% sales growth, which management acknowledged the International segment did not meet because of newly consolidated, lower-margin operations. Cash generation remained strong, with operating cash flow from continuing operations of $20.2 billion against $15.7 billion of capital expenditures, leaving room for $2.8 billion of dividends and $1.7 billion of share repurchases.

Total assets reached $151.2 billion^c, and the balance sheet carries a working capital deficit typical of the business model, with current liabilities exceeding current assets by $5.2 billion. The company holds AA/Aa2 long-term ratings, and management plans roughly $17 billion of fiscal 2008 capital expenditures plus a dividend increase to $0.88 annualized. Investors should weigh the strong cash flow and dividend growth against several material risks disclosed in the filing: the Dukes gender discrimination class action covering about 1.6 million current and former female associates, multiple wage-and-hour class actions with large verdicts (Savaglio and Braun/Hummel), and an ongoing criminal investigation by the U.S. Attorney's Office into hazardous waste handling, for which the company states it cannot reasonably estimate a loss.

02—Key points

Key Highlights

Net sales rose 11.7% to $345.0 billion, while income from continuing operations increased 6.7% to $12.2 billion; diluted EPS from continuing operations was $2.92 and net EPS was $2.71 after discontinued-operations losses of $894 million.
U.S. comparable store sales slowed to 2.0% in fiscal 2007 from 3.4% in fiscal 2006, and management estimates that new store openings reduced comparable sales by about 1 percentage point, with a similar effect expected in fiscal 2008.
International segment sales grew 30.2% to $77.1 billion (22.3% of total), but its operating income margin fell to 5.5% from 5.9% as newly consolidated entities (Seiyu, Sonae, CARHCO) diluted profitability; Wal-Mart Stores segment operating income grew 11.1%.
Operating cash flow from continuing operations reached $20.2 billion, funding $15.7 billion of capital expenditures, $2.8 billion of dividends and $1.7 billion of share buybacks, with $4.3 billion remaining under the $10.0 billion repurchase authorization.
The Board approved a 31.3% dividend increase to an annual rate of $0.88 per share, following a 11.7% increase in fiscal 2007 dividends paid; the company has raised its dividend every year since first declaring one in 1974.
Material legal exposure includes the Dukes class action (about 1.6 million female associates), multiple off-the-clock wage-and-hour class actions (including Savaglio, with about $172 million in verdict and penalty amounts, and Braun/Hummel, with about $78 million in back-pay damages), and a criminal investigation by the U.S. Attorney's Office into hazardous waste handling.
Total assets grew 9.4% to $151.2 billion and goodwill rose to $13.8 billion, reflecting acquisitions; the company maintains a working capital deficit of $5.2 billion, which management describes as a deliberate feature of its cash-efficient model.

03—Questions

Frequently Asked Questions

How did Wal-Mart perform financially in fiscal 2007?
Net sales increased 11.7% to $345.0 billion and income from continuing operations rose 6.7% to $12.2 billion, or $2.92 per diluted share. Net income per diluted share was $2.71 after $894 million in losses from discontinued operations, mainly the sale of the German and South Korean businesses. Operating income grew 9.5%, slower than sales, reflecting the lower-margin acquired International operations.
Why did U.S. comparable store sales slow in fiscal 2007?
U.S. comparable store sales rose 2.0%, down from 3.4% in fiscal 2006. Management attributed the slowdown to a difficult comparison after hurricane-recovery sales in the prior year, softness in home and apparel categories, and cannibalization from new stores opened nearby, which it estimates reduced comparable sales by about 1 percentage point. The company expects this new-store effect to continue at a similar rate in fiscal 2008.
How strong is Wal-Mart's cash flow and capacity to return capital to shareholders?
Operating cash flow from continuing operations was $20.2 billion, up from $17.7 billion, and comfortably exceeded $15.7 billion of capital expenditures. The company paid $2.8 billion in dividends and repurchased $1.7 billion of stock. Its ratio of adjusted cash flow from operations to adjusted average debt was 43%, and it holds AA long-term ratings from S&P and Fitch. Fiscal 2008 capex is expected to be about $17 billion, financed primarily from operating cash flow.
What are the most significant legal and regulatory risks disclosed?
The largest is Dukes v. Wal-Mart, a gender discrimination class action covering about 1.6 million current and former female associates, which the Ninth Circuit panel has affirmed for class certification and is being reconsidered en banc. Other significant matters include numerous off-the-clock wage-and-hour class actions, such as Savaglio (about $172 million in verdict and penalties, under appeal) and Braun/Hummel (about $78 million in back pay, with additional penalties sought). A federal criminal investigation into hazardous waste handling is also active, and the company says it cannot reasonably estimate a possible loss.
What happened to the dividend and share repurchase program?
In fiscal 2007 the company paid $0.67 per share, an 11.7% increase. On March 8, 2007, the Board approved raising the annual dividend to $0.88 per share, a 31.3% increase, payable quarterly beginning April 2, 2007. The $10.0 billion repurchase program authorized in 2004 had approximately $4.3 billion remaining at January 31, 2007, and has no expiration date.

04—Continue

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