01—Abstract
Summary
Summary of the 10-K filed March 30, 2016. Cited figures are marked; the original filing is the authoritative source.
Walmart's fiscal 2016 10-K (year ended January 31, 2016) shows a company in a deliberate investment phase.
Total revenues fell 0.7% to $482.1 billion and net sales declined to $478.6 billiona, but the decline was driven largely by $17.1 billion of unfavorable currency translation and a $1.9 billion drop in fuel sales, not by weakness in the core U.S. business. Walmart U.S. net sales grew 3.6% to $298.4 billion, with comparable sales up 1.0%, while Walmart International fell 9.4% (almost entirely from currency) and Sam's Club fell 2.1% on lower fuel prices. Consolidated operating income dropped 11.2% to $24.1 billion, and diluted EPS fell to $4.57 from $4.99, reflecting roughly $0.9 billion of store-closure charges announced in January 2016, higher associate wage costs tied to the new U.S. pay structure, and continued digital and IT spending.
Management has explicitly shifted its financial priorities toward growth, balanced by returns, and warned that operating expenses may grow at or above the rate of net sales in the near term. Cash generation remained solid, with operating cash flow of $27.4 billionb and free cash flow of $15.9 billion, though both declined year over year. Walmart returned capital through $6.3 billion in dividends and $4.1 billion in buybacks, and it raised the fiscal 2017 dividend to $2.00 per share.
A new $20.0 billionc repurchase program was authorized, with $17.5 billion remaining at year-end. Total debt was reduced by about $4.7 billion to $41.0 billion, and the company retains AA / Aa2 / AA credit ratings. Investors should weigh several risk items.
The company disclosed a material weakness in lease accounting during fiscal 2016, which it reports as remediated in the fourth quarter. Ongoing FCPA investigations by the DOJ and SEC, along with related shareholder suits, carry unquantifiable potential losses that management nonetheless describes as probable. The ASDA UK "equal value" pay claims involve more than 7,000 employees and remain unresolved.
Finally, the Brazilian labor and tax exposures are significant. Management expects fiscal 2017 wage increases of about $1.5 billiond to weigh on margins further.
02—Key points
Key Highlights
- Revenue and net sales declined 0.7% to $482.1B and $478.6B, but excluding a $17.1B currency headwind, the underlying business grew.
- Walmart U.S. net sales rose 3.6% to $298.4B with comparable sales up 1.0%, driven by traffic gains and e-commerce, and it now represents about 62% of net sales.
- Operating income fell 11.2% to $24.1B (operating margin 5.0% vs. 5.6%), and diluted EPS dropped to $4.57 from $4.99, pressured by wage investments and about $0.9B of store-closure charges.
- Operating cash flow was $27.4B and free cash flow $15.9B, both lower year over year; dividends of $6.3B and buybacks of $4.1B were fully covered by free cash flow.
- The fiscal 2017 dividend was raised to $2.00 per share (from $1.96), and a new $20.0B buyback authorization leaves $17.5B available.
- Management shifted its priority to growth over leverage and plans about $11.0B of fiscal 2017 capex, with roughly $1.5B of incremental wage costs and $1.1B of e-commerce investment.
- Key legal and regulatory exposures include ongoing DOJ/SEC FCPA investigations, 7,000+ ASDA equal-value pay claims in the UK, and Brazilian labor and tax claims; a lease-accounting material weakness was identified and remediated.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2016, Walmart Inc. kept $0.03.
- Revenue$482.13B100.0%
- Cost of revenue−$360.98B74.9%
- Gross profit$121.15B25.1%
- Operating costs−$97.04B20.1%
- Operating income$24.11B5.0%
- Interest, other & tax−$9.41B2.0%
- Net income$14.69B3.0%
Where FY2016 revenue went
$482.13B- Cost of revenue: $360.98B, 75% of revenue
- SG&A: $97.04B, 20% of revenue
- Net income: $14.69B, 3.0% of revenue
- Interest, other & tax: $9.41B, 2.0% of revenue
Kept 3.0% as net incomeNet income $14.69B · 3.0%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2016filed March 30, 2016Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $482.13B$485.65B | −0.7% |
| Cost of Revenue | $360.98B$365.09B | −1.1% |
| Gross Profit | $121.15B$120.56B | +0.5% |
| SG&A Expenses | $97.04B$93.42B | +3.9% |
| Operating Income | $24.11B$27.15B | −11.2% |
| Interest Expense | $2.03B$2.16B | −6.2% |
| Net Income | $14.69B$16.36B | −10.2% |
| EPS (Basic) | $1.53$1.69 | −9.7% |
| EPS (Diluted) | $1.52$1.68 | −9.5% |
| Shares Outstanding (Basic) | 9.62B9.69B | −0.7% |
| Shares Outstanding (Diluted) | 9.65B9.73B | −0.8% |
05—Questions
Frequently Asked Questions
Why did Walmart's revenue and operating income decline in fiscal 2016 if the U.S. business grew?
The decline was mainly due to currency translation, which reduced net sales by $17.1B (3.5%), and a $1.9B drop in fuel sales at Sam's Club. Operating income fell further because of wage increases in the U.S., roughly $0.9B in store-closure charges, and continued investment in digital retail and technology. Walmart U.S. sales and comparable sales both grew.
How strong is Walmart's cash flow and dividend coverage?
Operating cash flow was $27.4B and free cash flow was $15.9B. Dividends paid totaled $6.3B and share repurchases $4.1B, so shareholder returns were covered by free cash flow. Free cash flow was still lower than fiscal 2015's $16.4B, and the company has said it will fund its growth investments through operating cash flow and future debt.
What should investors expect for margins and earnings in the near term?
Management said that during this investment phase, operating expenses may grow at or faster than net sales, and operating income may grow at or below the rate of sales. The fiscal 2017 wage investment of about $1.5B adds further pressure, so margin recovery depends on offsetting these costs through gross margin gains and expense controls.
What are the most significant legal and regulatory risks?
The most material items are the ongoing DOJ and SEC investigations into possible FCPA violations, related shareholder lawsuits, and the ASDA equal-value claims in the UK, which involve more than 7,000 employees. Walmart says a loss from the FCPA matters is probable but cannot reasonably estimate its size, and it has also disclosed Brazilian labor and tax exposures.
Is the balance sheet under pressure?
Not materially. Long-term debt declined to $41.0B from $45.7B, and the company keeps AA (S&P), Aa2 (Moody's) and AA (Fitch) ratings with $15.0B of undrawn committed credit lines. The working capital deficit widened to $4.4B, which the company says reflects efficient use of cash rather than stress.
06—Continue