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Wal-Mart 10-Q 2007
wmt3q08.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x            Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended October 31, 2007.

or

¨            Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from __________ to __________.

Commission file number 1-6991


WAL-MART STORES, INC.
(Exact name of registrant as specified in its charter)

Delaware
71-0415188
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
702 S.W. 8th Street
Bentonville, Arkansas
72716
(Address of principal executive offices)
(Zip Code)
(479) 273-4000
(Registrant’s telephone number, including area code)

Not applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (See definition of “accelerated filer and large accelerated filer” as defined in Rule 12b-2 of the Exchange Act).   Check One:

Large Accelerated Filer   x                                                      Accelerated Filer  ¨                                            Non-Accelerated Filer   ¨

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes¨ Nox

Applicable Only to Corporate Issuers

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.
Common Stock, $.10 Par Value – 4,004,809,178  shares as of November 23, 2007.



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

WAL-MART STORES, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
(Unaudited)
 
(Amounts in millions except per share data)
 
 
 
 
   
 
   
 
   
 
 
 
 
Three Months Ended
   
Nine Months Ended
 
 
 
October 31,
   
October 31,
 
 
 
2007
   
2006
   
2007
   
2006
 
Revenues:
 
 
   
 
   
 
   
 
 
Net sales
  $
90,880
    $
83,543
    $
268,257
    $
246,902
 
Membership and other income
   
1,069
     
924
     
3,114
     
2,670
 
     
91,949
     
84,467
     
271,371
     
249,572
 
 
                               
Costs and expenses:
                               
Cost of sales
   
69,292
     
63,765
     
205,192
     
188,587
 
Operating, selling, general and administrative expenses
   
17,685
     
16,237
     
51,064
     
46,920
 
Operating income
   
4,972
     
4,465
     
15,115
     
14,065
 
 
                               
Interest:
                               
Debt
   
474
     
434
     
1,326
     
1,188
 
Capital leases
   
63
     
55
     
174
     
192
 
Interest income
    (78 )     (65 )     (243 )     (196 )
Interest, net
   
459
     
424
     
1,257
     
1,184
 
 
                               
Income from continuing operations before income taxes and minority interest
   
4,513
     
4,041
     
13,858
     
12,881
 
 
                               
Provision for income taxes
   
1,557
     
1,363
     
4,765
     
4,388
 
Income from continuing operations before minority interest
   
2,956
     
2,678
     
9,093
     
8,493
 
Minority interest
    (99 )     (84 )     (305 )     (254 )
Income from continuing operations
   
2,857
     
2,594
     
8,788
     
8,239
 
Income (loss) from discontinued operations, net of tax
   
-
     
53
      (153 )     (894 )
Net income
  $
2,857
    $
2,647
    $
8,635
    $
7,345
 
 
                               
Net income per common share:
                               
Basic income per common share from continuing operations
  $
0.71
    $
0.62
    $
2.15
    $
1.98
 
Basic income (loss) per common share from discontinued operations
   
-
     
0.01
      (0.04 )     (0.22 )
Basic net income per common share
  $
0.71
    $
0.63
    $
2.11
    $
1.76
 
 
                               
Diluted income per common share from continuing operations
  $
0.70
    $
0.62
    $
2.14
    $
1.97
 
Diluted income (loss) per common share from discontinued operations
   
-
     
0.01
      (0.03 )     (0.21 )
Diluted net income per common share
  $
0.70
    $
0.63
    $
2.11
    $
1.76
 
 
                               
Weighted-average number of common shares:
                               
Basic
   
4,051
     
4,169
     
4,092
     
4,168
 
Diluted
   
4,056
     
4,173
     
4,097
     
4,172
 
 
                               
Dividends declared per common share
  $
-
    $
-
    $
0.88
    $
0.67
 

1


WAL-MART STORES, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
(Amounts in millions)
 
 
 
 
   
 
   
 
 
 
 
October 31,
   
October 31,
   
January 31,
 
 
 
2007
   
2006
   
2007
 
ASSETS
 
 
   
 
   
 
 
Current assets:
 
 
   
 
   
 
 
Cash and cash equivalents
  $
4,950
    $
5,908
    $
7,373
 
Receivables
   
3,070
     
2,477
     
2,840
 
Inventories
   
39,555
     
38,531
     
33,685
 
Prepaid expenses and other
   
3,337
     
2,707
     
2,690
 
Total current assets
   
50,912
     
49,623
     
46,588
 
 
                       
Property and equipment, at cost
   
120,775
     
107,073
     
109,798
 
Less accumulated depreciation
    (27,771 )     (24,159 )     (24,408 )
Property and equipment, net
   
93,004
     
82,914
     
85,390
 
 
                       
Property under capital leases
   
5,690
     
5,421
     
5,392
 
Less accumulated amortization
    (2,563 )     (2,313 )     (2,342 )
Property under capital leases, net
   
3,127
     
3,108
     
3,050
 
 
                       
Goodwill
   
14,898
     
13,257
     
13,759
 
Other assets and deferred charges
   
3,123
     
2,217
     
2,406
 
Total assets
  $
165,064
    $
151,119
    $
151,193
 
 
                       
LIABILITIES AND SHAREHOLDERS’ EQUITY
                       
Current liabilities:
                       
Commercial paper
  $
9,126
    $
7,968
    $
2,570
 
Accounts payable
   
30,800
     
29,263
     
28,090
 
Dividends payable
   
896
     
607
     
-
 
Accrued liabilities
   
14,806
     
14,283
     
14,675
 
Accrued income taxes
   
-
     
252
     
706
 
Long-term debt due within one year
   
4,412
     
5,490
     
5,428
 
Obligations under capital leases due within one year
   
309
     
300
     
285
 
Total current liabilities
   
60,349
     
58,163
     
51,754
 
 
                       
Long-term debt
   
30,070
     
24,154
     
27,222
 
Long-term obligations under capital leases
   
3,520
     
3,622
     
3,513
 
Deferred income taxes and other
   
5,614
     
4,785
     
4,971
 
Minority interest
   
2,432
     
1,632
     
2,160
 
 
                       
Commitments and contingencies
                       
 
                       
Shareholders' equity:
                       
Common stock and capital in excess of par value
   
3,421
     
3,237
     
3,247
 
Retained earnings
   
55,519
     
53,738
     
55,818
 
Accumulated other comprehensive income
   
4,139
     
1,788
     
2,508
 
Total shareholders’ equity
   
63,079
     
58,763
     
61,573
 
Total liabilities and shareholders’ equity
  $
165,064
    $
151,119
    $
151,193
 


2


WAL-MART STORES, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited)
 
(Amounts in millions)
 
       
 
 
Nine Months Ended
 
 
 
October 31,
 
 
 
2007
   
2006
 
Cash flows from operating activities:
 
 
   
 
 
Net income
  $
8,635
    $
7,345
 
Loss from discontinued operations, net of tax
   
153
     
894
 
Income from continuing operations
   
8,788
     
8,239
 
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
               
Depreciation and amortization
   
4,656
     
4,013
 
Other
   
285
     
427
 
Changes in certain assets and liabilities, net of effects of acquisitions:
               
Decrease in accounts receivable
   
31
     
103
 
Increase in inventories
    (5,037 )     (6,198 )
Increase in accounts payable
   
1,450
     
3,501
 
(Decrease) increase in accrued liabilities
    (753 )    
25
 
Net cash provided by operating activities of continuing operations
   
9,420
     
10,110
 
Net cash used in operating activities of discontinued operations
   
-
      (45 )
Net cash provided by operating activities
   
9,420
     
10,065
 
 
               
Cash flows from investing activities:
               
Payments for property and equipment
    (10,896 )     (11,417 )
Proceeds from disposal of property and equipment
   
478
     
262
 
(Payments for) proceeds from disposal of certain international operations, net
    (257 )    
610
 
Investment in international operations, net of cash acquired
    (461 )     (68 )
Other investing activities
    (87 )     (142 )
Net cash used in investing activities of continuing operations
    (11,223 )     (10,755 )
Net cash provided by investing activities of discontinued operations
   
-
     
44
 
Net cash used in investing activities
    (11,223 )     (10,711 )
 
               
Cash flows from financing activities:
               
Increase in commercial paper
   
6,481
     
4,200
 
Proceeds from issuance of long-term debt
   
7,967
     
3,282
 
Payment of long-term debt
    (6,671 )     (4,847 )
Dividends paid
    (2,707 )     (2,118 )
Purchase of Company stock
    (5,279 )    
-
 
Other financing activities
    (669 )     (424 )
Net cash (used in) provided by financing activities
    (878 )    
93
 
 
               
Effect of exchange rates on cash
   
258
     
47
 
Net decrease in cash and cash equivalents
    (2,423 )     (506 )
Cash and cash equivalents at beginning of year (1)
   
7,373
     
6,414
 
Cash and cash equivalents at end of period
  $
4,950
    $
5,908
 
 
               
(1) Includes cash and cash equivalents of discontinued operations of $221 million at January 31, 2006.
         

3


WAL-MART STORES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. Basis of Presentation

The Condensed Consolidated Balance Sheets of Wal-Mart Stores, Inc. and its subsidiaries (the “Company”) as of October 31, 2007 and 2006, and the related Condensed Consolidated Statements of Income for the three and nine months ended October 31, 2007 and 2006, and Condensed Consolidated Statements of Cash Flows for the nine-month periods ended October 31, 2007 and 2006, are unaudited. The Condensed Consolidated Balance Sheet as of January 31, 2007, is derived from the Company’s audited Consolidated Balance Sheet as of that date.

In the opinion of management, all adjustments necessary for a fair presentation of the condensed consolidated financial statements have been included. Such adjustments are of a normal recurring nature. Interim results are not necessarily indicative of results for a full year.

The condensed consolidated financial statements and notes thereto are presented in accordance with the rules and regulations of the Securities and Exchange Commission and do not contain certain information included in the Company’s Annual Report to Shareholders for the fiscal year ended January 31, 2007. Therefore, the interim condensed consolidated financial statements should be read in conjunction with that Annual Report to Shareholders.

General Liability and Workers’ Compensation Change in Estimate

Liabilities associated with general liability and workers’ compensation claims against the Company are estimated by considering the Company’s historical claims experience, including frequency and severity of claims, and certain actuarial assumptions. In estimating our liability for such claims, we periodically analyze our historical trends, including loss development, and apply appropriate loss development factors to the incurred costs associated with the claims.  During the last few years, we have enhanced how we manage claims.  As a result, our loss experience with respect to such claims has improved and the actuarially determined ultimate loss estimates, primarily for fiscal year 2004 through 2007 claims, were reduced during the quarter ended July 31, 2007. The reductions in ultimate loss estimates resulted primarily from improved claims handling experience, which impacts loss development factors and other actuarial assumptions.  Due to the beneficial change in estimate of our ultimate losses, accrued liabilities for general liability and workers’ compensation claims were reduced by $196 million after tax, resulting in an increase in net income per basic and diluted common share of $0.05 for the quarter ended July 31, 2007 and the nine months ended October 31, 2007.

NOTE 2. Net Income Per Common Share

Basic net income per common share is based on the weighted-average number of outstanding common shares. Diluted net income per common share is based on the weighted-average number of outstanding common shares adjusted for the dilutive effect of outstanding stock options and restricted stock grants. The dilutive effect of outstanding stock options and restricted stock was 5 million shares for the third quarter and first nine months of fiscal 2008 and 4 million shares for the third quarter and first nine months of fiscal 2007, respectively. The Company had options outstanding of approximately 68 million shares and 62 million shares at October 31, 2007 and 2006, respectively, which were not included in the diluted net income per common share calculation because their effect would be antidilutive.

NOTE 3. Inventories

The Company values inventories at the lower of cost or market as determined primarily by the retail method of accounting, using the last-in, first-out (“LIFO”) method for substantially all of the Wal-Mart Stores segment’s merchandise inventories. The Sam’s Club segment’s merchandise and merchandise in our distribution warehouses are valued based on the weighted-average cost using the LIFO method. Inventories of foreign operations are primarily valued by the retail method of accounting, using the first-in, first-out (“FIFO”) method. At October 31, 2007 and 2006, our inventories valued at LIFO approximated those inventories had they been valued at FIFO.

NOTE 4. Discontinued Operations
 
During fiscal 2007, the Company disposed of its operations in South Korea and Germany, which had been included in our International segment. Consequently, the net losses and cash flows related to these operations are presented as discontinued operations in our Condensed Consolidated Statements of Income and our Condensed Consolidated Statements of Cash Flows for the appropriate periods presented.

The Company recorded a pretax gain on the sale of its retail business in South Korea of $103 million, and tax expense of $63 million during the third quarter of fiscal 2007. In determining the gain on the disposition of our South Korean operations, the Company allocated $206 million of goodwill from the International reporting unit.

As previously reported, in July 2006 the Company agreed to dispose of its German operations to Metro AG (“Metro”), reported the disposal as discontinued operations and recorded a loss of $863 million during the second quarter ended July 31, 2006.  An additional loss of $55 million on the disposal was recorded in the third quarter of fiscal 2007 as a result of various closing adjustments.  In addition, the Company recognized a tax benefit of $126 million related to this transaction in the third quarter of fiscal 2007.  The Company recorded a second quarter fiscal 2008 charge of $153 million to discontinued operations related to the settlement of a post-closing adjustment and certain other indemnification obligations.

In addition to the gain and loss on the dispositions noted above, discontinued operations as presented in the Company's Condensed Consolidated Statements of Income also include net sales and net operating losses from our South Korean and German operations as follows (in millions):

 
 
Three Months Ended
   
Nine Months Ended
 
 
 
October 31, 2006
   
October 31, 2006
 
 
 
 
   
 
 
Net Sales
  $
868
    $
2,489
 
Net Losses
    (58 )     (142 )

4

 
NOTE 5. Acquisitions and Investments
 
In February 2007, the Company announced the purchase of a 35% interest in Bounteous Company Ltd. (“BCL”). BCL operates 101 hypermarkets in 34 cities in China under the Trust-Mart banner. The purchase price for the 35% interest was $264 million. Also in February 2007, the Company paid $376 million to purchase a loan issued to the selling BCL shareholders that is secured by the pledge of the remaining equity of BCL. Concurrent with its initial investment in BCL, the Company entered into a stockholders agreement which provides the Company with voting rights associated with a portion of the common stock of BCL securing the loan, amounting to an additional 30% of the aggregate outstanding shares. Pursuant to the purchase agreement, the Company is committed to purchase the remaining interest in BCL on or before February 2010 subject to certain conditions. The final purchase price for the remaining interest will be approximately $320 million, net of loan repayments and subject to reduction under certain circumstances.

After closing on the acquisition, the Company began consolidating BCL using a December 31 fiscal year-end.  The Company’s Condensed Consolidated Statements of Income for the quarter and nine months ended October 31, 2007 include the results of BCL for the period commencing upon the acquisition of the Company’s interest in BCL and ending September 30, 2007.  BCL’s results of operations were not material to the Company.   Assets recorded in the acquisition were approximately $1.2 billion, including approximately $438 million in goodwill, and liabilities assumed were approximately $908 million.  The consolidated financial statements of BCL, as well as the allocation of the purchase price are preliminary.

In August 2007, the Company announced the signing of an agreement between Wal-Mart and Bharti Enterprises, an Indian company, to establish a joint venture called Bharti Wal-Mart Private Limited for wholesale cash-and-carry and back-end supply chain management operations in India, in compliance with Government of India guidelines.  The first wholesale facility is targeted to open late next year.  The venture was formed to establish wholesale warehouse facilities to serve retailers and business owners by selling them merchandise at wholesale prices.  The joint venture was also formed to serve Bharti Retail, a wholly-owned subsidiary of Bharti Enterprises, that is developing a chain of retail stores in India. In addition, Bharti Retail has entered into a franchise agreement with Wal-Mart under which we will provide technical support to its retail business.

In October 2007, the Company announced the launch of a tender offer to acquire the remaining outstanding common and preferred shares of our Japanese subsidiary, The Seiyu, Ltd. ("Seiyu").  The Company currently owns 50.9% of Seiyu and the offer is being made with the full backing of independent members of the Seiyu board of directors.  The tender offer commenced on October 23 and will be open for 30 business days, expiring on December 4, 2007, and closing on December 11, 2007, unless extended by the Company.  The tender offer price is 140 yen per common share, which represents a premium of 60.9% over the closing price on the Tokyo Stock Exchange on October 19, and a premium of 34.6% over the average closing price for the prior three months.   The tender offer price is 1,000 yen per preferred share.  If all of the Seiyu common and preferred shares not owned by the Company are tendered, then the aggregate purchase price to be paid by the Company would be approximately 100 billion yen or approximately $900 million.

NOTE 6. Significant Long-term Debt Transactions
 
In April 2007, the Company issued $500 million of 5.000% Notes Due 2012, $1 billion of 5.375% Notes Due 2017 and $750 million of 5.875% Notes Due 2027.   Interest started accruing on the notes of each series on April 5, 2007.  The Company will pay interest on the notes of each series on April 5 and October 5 of each year, beginning on October 5, 2007. The 2012 notes will mature on April 5, 2012; the 2017 notes will mature on April 5, 2017; and the 2027 notes will mature on April 5, 2027.  Such notes are senior, unsecured and unsubordinated obligations of the Company.

In August 2007, the Company issued $500 million of 5.800% Notes Due 2018 and $2.25 billion of 6.500% Notes Due 2037.   Interest started accruing on the notes of each series on August 24, 2007.  The Company will pay interest on the notes of each series on February 15 and August 15 of each year, beginning on February 15, 2008.  The 2018 notes will mature on February 15, 2018, and the 2037 notes will mature on August 15, 2037.  Such notes are senior, unsecured and unsubordinated obligations of the Company.

Additionally, the Company repaid $6.7 billion in principal for certain notes that matured during the first nine months of fiscal 2008.

NOTE 7. Segments

The Company is engaged in the operations of retail stores located in all 50 states of the United States, Argentina, Brazil, Canada, Puerto Rico and the United Kingdom and through majority-owned subsidiaries in Central America, Japan, and Mexico.  The Company operates retail stores in China through joint ventures and through its controlling interest in BCL. The Company identifies segments based on the information used by our chief operating decision maker to analyze performance and to allocate resources among business units of the Company.

The Wal-Mart Stores segment includes the Company’s supercenters, discount stores and Neighborhood Markets in the United States, as well as walmart.com. The Sam’s Club segment includes the warehouse membership clubs in the United States as well as samsclub.com. The International segment consists of the Company’s operations outside of the United States. The amounts under the caption “Other” in the table below relating to operating income are unallocated corporate overhead items.

The Company measures the profit of its segments as “segment operating income,” which is defined as income from continuing operations before net interest expense, income taxes and minority interest and excludes unallocated corporate overhead and results of discontinued operations.  At the beginning of fiscal 2008, the Company revised the measurement of each segment’s operating income.  The measurement now includes within each operating segment certain direct income and expense items that had previously been accounted for as unallocated corporate overhead.  All prior year measurements of segment operating income have been restated for comparative purposes. Information on segments and the reconciliation to income from continuing operations before income taxes, minority interest and discontinued operations appears in the following tables.

Net sales by operating segment were as follows (in millions):

 
 
Three Months Ended
   
Nine Months Ended
 
 
 
October 31,
   
October 31,
 
 
 
2007
   
2006
   
2007
   
2006
 
Net Sales:
 
 
   
 
   
 
   
 
 
Wal-Mart Stores
  $
57,651
    $
54,179
    $
172,101
    $
162,067
 
Sam's Club
   
10,826
     
10,206
     
32,526
     
30,453
 
International
   
22,403
     
19,158
     
63,630
     
54,382
 
Total Company
  $
90,880
    $
83,543
    $
268,257
    $
246,902
 
 
                               

 
5


Segment operating income and the reconciliation to income from continuing operations before income taxes, minority interest and discontinued operations are as follows (in millions):

 
 
Three Months Ended
   
Nine Months Ended
 
 
 
October 31,
   
October 31,
 
 
 
2007
   
2006
   
2007
   
2006
 
Operating Income:
 
 
   
 
   
 
   
 
 
Wal-Mart Stores
  $
4,013
    $
3,611
    $
12,214
    $
11,585
 
Sam's Club
   
362
     
341
     
1,172
     
1,045
 
International
   
1,081
     
995
     
3,026
     
2,743
 
Other
    (484 )     (482 )     (1,297 )     (1,308 )
Operating income
   
4,972
     
4,465
     
15,115
     
14,065
 
Interest expense, net
    (459 )     (424 )     (1,257 )     (1,184 )
Income from continuing operations before income taxes,
minority interest and discontinued operations
  $
4,513
    $
4,041
    $
13,858
    $
12,881
 
 
                               


Goodwill is recorded on the Condensed Consolidated Balance Sheets in the operating segments as follows (in millions):

   
October 31,
   
October 31,
   
January 31,
 
 
 
2007
   
2006
   
2007
 
International
  $
14,593
    $
12,952
    $
13,454
 
Sam’s Club
   
305
     
305
     
305
 
Total goodwill
  $
14,898
    $
13,257
    $
13,759
 

 
The change in the International segment’s goodwill since the third quarter of fiscal 2007 is primarily the result of the acquisition of BCL and foreign exchange rate fluctuations.

NOTE 8. Comprehensive Income

Comprehensive income is net income plus certain other items that are recorded directly to shareholders’ equity. Amounts included in accumulated other comprehensive income for the Company’s derivative instruments and minimum pension liabilities are recorded net of the related income tax effects.  Comprehensive income was $3.6 billion and $10.3 billion for the three and nine months ended October 31, 2007 and $2.3 billion and $8.1 billion for the three and nine months ended October 31, 2006, respectively.

NOTE 9. Common Stock Dividends

On March 8, 2007, the Company’s Board of Directors approved an increase in the Company’s annual dividend to $0.88 per share. The annual dividend is payable in four quarterly installments on April 2, 2007, June 4, 2007, September 4, 2007, and January 2, 2008 to holders of record on March 16, May 18, August 17 and December 14, 2007, respectively.  A $0.67 per share annual dividend was declared in the first quarter of fiscal 2007 and paid during fiscal year 2007 in four equal quarterly installments.

NOTE 10. Taxes

The Company's effective tax rate was 34.5% for the third quarter of fiscal 2008.  The Company expects the fiscal 2008 annual effective tax rate to be between 34% and 35%.  Significant factors that could impact the annual effective tax rate include management's assessment of certain tax matters and the composition of taxable income between domestic and international operations.

In determining the quarterly provision for income taxes, the Company uses an estimated annual effective tax rate based on forecasted annual income adjusted for revenues and expenses that do not have tax consequences (permanent items), statutory tax rates and tax planning opportunities in the various jurisdictions in which the Company operates.  The impact of significant discrete items is separately recognized in the quarter in which they occur.

The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”) effective February 1, 2007.  FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.  FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.  As a result of the implementation of FIN 48, the Company recognized a $236 million increase in the liability for unrecognized tax benefits relating to continuing operations and a $28 million increase in the related liability for interest and penalties for a total of $264 million.  Of this amount, $160 million was accounted for as a reduction to the February 1, 2007 balance of retained earnings, $70 million as an increase to non-current deferred tax assets, and $34 million as an increase to current deferred tax assets.

As of February 1, 2007, after implementation of FIN 48, the Company’s unrecognized tax benefits relating to continuing operations were $779 million.  The amount, if recognized, that would affect the Company’s effective tax rate is $529 million at February 1, 2007.  The difference relates to tax positions that are highly certain but there is some degree of uncertainty about the timing of their recognition.

Additionally, as of February 1, 2007, the Company had unrecognized tax benefits of $1.733 billion which if recognized would be recorded as discontinued operations.  Of this, $1.670 billion related to a worthless stock deduction to be claimed for the Company’s disposition of its German operations in the second quarter of fiscal 2007.   Unrecognized tax benefits relating to discontinued operations increased by $57 million in the second quarter of fiscal 2008 as a result of the final resolution of outstanding purchase price adjustment claims and certain indemnities in conjunction with the disposition of its German operations.  The Internal Revenue Service often challenges the characterization of a worthless stock deduction and the resolution of any challenges could result in recognition of all, part or none of the deduction.  If the deduction is re-characterized as a capital loss, any benefit from such capital loss could only be realized by offset against future capital gains and would expire in 2012.

The Company classifies interest on uncertain tax benefits as interest expense and income tax penalties as operating, selling, general and administrative expenses.  At February 1, 2007, before any tax benefits, the Company had $177 million of accrued interest and penalties on unrecognized tax benefits.

In the normal course of business, the Company provides for uncertain tax positions and the related interest, and adjusts its unrecognized tax benefits and accrued interest accordingly. During the third quarter of fiscal 2008, unrecognized tax benefits related to continuing operations decreased by $36 million and accrued interest increased by $11 million. For the first nine months of fiscal 2008, unrecognized tax benefits related to continuing operations and accrued interest increased by $29 million and $31 million, respectively. During the next twelve months, tax audit resolutions could potentially reduce unrecognized tax benefits by up to approximately $150 million, either because our tax positions are sustained on audit or because the Company agrees to their disallowance. Such unrecognized tax benefits relate primarily to timing recognition issues and the resolution of the gain determination on a discontinued operation in fiscal year 2004.

The Company is subject to income tax examinations for its U.S. federal income taxes for the fiscal years 2004 through 2007, for non-U.S. income taxes for the tax years 2002 through 2006, and for state and local income taxes for the fiscal years 1997 through 2007.
 
Additionally, the Company is subject to tax examinations for payroll, value added, sales-based and other taxes. A number of these examinations are ongoing and, in many cases, have resulted in assessments from the taxing authorities. Where appropriate, the Company has made accruals for these matters which are reflected in the Company's consolidated financial statements. While these matters are individually immaterial, a group of related matters, if decided adversely to the Company, may result in liability material to the Company's financial condition or results of operations.

6

 
NOTE 11. Legal Proceedings

The Company is involved in a number of legal proceedings. In accordance with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies,” the Company has made accruals with respect to these matters, where appropriate, which are reflected in the Company's consolidated financial statements. The Company may enter into discussions regarding settlement of these matters, and may enter into settlement agreements, if it believes settlement is in the best interests of the Company's shareholders. The matters, or groups of related matters, discussed below, if decided adversely to or settled by the Company, individually or in the aggregate, may result in liability material to the Company's financial condition or results of operations.

Wage and Hour “Off the Clock” Class Actions: The Company is a defendant in numerous cases containing class-action allegations in which the plaintiffs are current and former hourly associates who allege that the Company forced them to work “off the clock” or failed to provide work breaks, or otherwise that they were not paid correctly for work performed. The complaints generally seek unspecified monetary damages, injunctive relief, or both. Class or collective-action certification has yet to be addressed by the court in a majority of these cases. Where it has been addressed, certification has been denied in nine of these cases; has been granted in whole or in part in nine of these cases; and has been conditionally granted for notice purposes only in two of these cases. In another nine such cases, certification was denied and the case was then dismissed, and in two additional such cases, certification was granted and the case was then dismissed. The Company cannot reasonably estimate the possible loss or range of loss that may arise from these lawsuits, except as noted below.

One of the class-action lawsuits described above is Savaglio v. Wal-Mart Stores, Inc., a class-action lawsuit in which the plaintiffs allege that they were not provided meal and rest breaks in accordance with California law, and seek monetary damages and injunctive relief. A trial on the plaintiffs' claims for monetary damages concluded on December 22, 2005. The jury returned a verdict of approximately $57 million in statutory penalties and $115 million in punitive damages. In June 2006, the judge entered an order allowing some, but not all, of the injunctive relief sought by the plaintiffs. On December 27, 2006, the judge entered an order awarding the plaintiffs an additional amount of approximately $26 million in costs and attorneys’ fees. The Company believes it has substantial factual and legal defenses to the claims at issue, and on January 31, 2007, the Company filed its Notice of Appeal.

In another of the class-action lawsuits described above, Braun/Hummel v. Wal-Mart Stores, Inc., a trial was commenced in September 2006, in Philadelphia, Pennsylvania. The plaintiffs allege that the Company failed to pay class members for all hours worked and prevented class members from taking their full meal and rest breaks. On October 13, 2006, the jury awarded back-pay damages to the plaintiffs of approximately $78 million on their claims for off-the-clock work and missed rest breaks.  The jury found in favor of the Company on the plaintiffs’ meal-period claims.  On November 14, 2007, the trial judge entered a final judgment in the approximate amount of $188 million, which included the jury’s back-pay award plus statutory penalties, prejudgment interest and attorneys’ fees. The Company believes it has substantial factual and legal defenses to the claims at issue, and intends to challenge the judgment on appeal.

Another of the class-action lawsuits described above, Braun v. Wal-Mart Stores, Inc., a trial commenced on September 24, 2007, in the First Judicial District Court for Dakota County, Minnesota. The plaintiffs allege that class members worked off the clock and were not provided meal and rest breaks in accordance with Minnesota law, and seek monetary damages in an unspecified amount, together with attorneys' fees, interest, statutory penalties, and punitive damages, if any. The Company believes that it has substantial factual and legal defenses to the claims at issue. The Company cannot reasonably estimate the possible loss or range of loss that may arise from this litigation.

Exempt Status Cases: The Company is currently a defendant in two putative class actions pending in federal court in California in which the plaintiffs seek certification of a class of salaried managers who challenge their exempt status under state and federal laws. In one of those cases (Sepulveda v. Wal-Mart Stores, Inc.), class certification has been denied and the ruling is now on appeal. In the other (Salvador v. Wal-Mart Stores, Inc. and Sam’s West, Inc.), certification has not yet been addressed by the trial court. The Company cannot reasonably estimate the possible loss or range of loss that may arise from these lawsuits.

Gender Discrimination Cases: The Company is a defendant in Dukes v. Wal-Mart Stores, Inc., a class-action lawsuit commenced in June 2001 and pending in the United States District Court for the Northern District of California. The case was brought on behalf of all past and present female employees in all of the Company's retail stores and warehouse clubs in the United States. The complaint alleges that the Company has engaged in a pattern and practice of discriminating against women in promotions, pay, training and job assignments. The complaint seeks, among other things, injunctive relief, front pay, back pay, punitive damages, and attorneys' fees. On June 21, 2004, the district court issued an order granting in part and denying in part the plaintiffs' motion for class certification. The class, which was certified by the district court for purposes of liability, injunctive and declaratory relief, punitive damages, and lost pay, subject to certain exceptions, includes all women employed at any Wal-Mart domestic retail store at any time since December 26, 1998, who have been or may be subjected to the pay and management track promotions policies and practices challenged by the plaintiffs. The class as certified currently includes approximately 1.6 million present and former female associates.

The Company believes that the district court's ruling is incorrect. On August 31, 2004, the United States Court of Appeals for the Ninth Circuit granted the Company's petition for discretionary review of the ruling. On February 6, 2007, a divided three-judge panel of the Court of Appeals issued a decision affirming the district court’s certification order. On February 20, 2007, the Company filed a petition asking that the decision be reconsidered by a larger panel of the court. If the Company is not successful in its appeal of class certification, or an appellate court issues a ruling that allows for the certification of a class or classes with a different size or scope, and if there is a subsequent adverse verdict on the merits from which there is no successful appeal, or in the event of a negotiated settlement of the litigation, the resulting liability could be material to the Company. The plaintiffs also seek punitive damages which, if awarded, could result in the payment of additional amounts material to the Company. However, because of the uncertainty of the outcome of the appeal from the district court's certification decision, because of the uncertainty of the balance of the proceedings contemplated by the district court, and because the Company's liability, if any, arising from the litigation, including the size of any damages award if plaintiffs are successful in the litigation or any negotiated settlement, could vary widely, the Company cannot reasonably estimate the possible loss or range of loss that may arise from the litigation.

The Company is a defendant in a lawsuit that was filed on August 24, 2001, in the United States District Court for the Eastern District of Kentucky.  EEOC (Janice Smith) v. Wal-Mart Stores, Inc. is an action brought by the EEOC on behalf of Janice Smith and all other females who made application or transfer requests at the London, Kentucky, distribution center from 1995 to the present, and who were not hired or transferred into the warehouse positions for which they applied. The class seeks back pay for those females not selected for hire or transfer during the relevant time period. The class also seeks injunctive and prospective affirmative relief. The complaint alleges that the Company based hiring decisions on gender in violation of Title VII of the 1964 Civil Rights Act as amended. The EEOC can maintain this action as a class without certification. The Company cannot reasonably estimate the possible loss or range of loss that may arise from this litigation.

California Hazardous Materials Investigations: On November 8, 2005, the Company received a grand jury subpoena from the United States Attorney's Office for the Central District of California, seeking documents and information relating to the Company's receipt, transportation, handling, identification, recycling, treatment, storage and disposal of certain merchandise that constitutes hazardous materials or hazardous waste. The Company has been informed by the U.S. Attorney's Office for the Central District of California that it is a target of a criminal investigation into potential violations of the Resource Conservation and Recovery Act (“RCRA”), the Clean Water Act, and the Hazardous Materials Transportation Statute. This U.S. Attorney's Office contends, among other things, that the use of Company trucks to transport certain returned merchandise from the Company's stores to its return centers is prohibited by RCRA because those materials may be considered hazardous waste. The government alleges that, to comply with RCRA, the Company must ship from the store certain materials as “hazardous waste” directly to a certified disposal facility using a certified hazardous waste carrier. The Company contends that the practice of transporting returned merchandise to its return centers for subsequent disposition, including disposal by certified facilities, is compliant with applicable laws and regulations. While management cannot predict the ultimate outcome of this matter, management does not believe the outcome will have a material effect on the Company’s financial condition or results of operations.

Additionally, the U.S. Attorney's Office in the Northern District of California has initiated its own investigation regarding the Company's handling of hazardous materials and hazardous waste and the Company has received administrative document requests from the California Department of Toxic Substances Control requesting documents and information with respect to two of the Company's distribution facilities. Further, the Company also received a subpoena from the Los Angeles County District Attorney's Office for documents and administrative interrogatories requesting information, among other things, regarding the Company's handling of materials and hazardous waste. California state and local government authorities and the State of Nevada have also initiated investigations into these matters. The Company is cooperating fully with the respective authorities. While management cannot predict the ultimate outcome of this matter, management does not believe the outcome will have a material effect on the Company’s financial condition or results of operations.

7

 
NOTE 12. Recent Accounting Pronouncements

 
In June 2006, the Emerging Issues Task Force reached a consensus on Issue No. 06-3 (“EITF 06-3”), “Disclosure Requirements for Taxes Assessed by a Governmental Authority on Revenue-Producing Transactions.” The consensus allows an entity to choose between two acceptable alternatives based on their accounting policies for transactions in which the entity collects taxes on behalf of a governmental authority, such as sales taxes. Under the gross method, taxes collected are accounted for as a component of sales revenue with an offsetting expense. Conversely, the net method allows a reduction to sales revenue. Entities should disclose the method selected pursuant to APB No. 22, “Disclosure of Accounting Policies.” If such taxes are reported gross and are significant, entities should disclose the amount of those taxes. The Company adopted the guidance during the first quarter of fiscal 2008 and consistent with its historical accounting policies the Company has presented sales net of tax collected.
 
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). This standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands required disclosures about fair value measurements. The Company will adopt SFAS 157 on February 1, 2008, as required. The adoption of SFAS 157 is not expected to have a material impact on the Company’s financial condition and results of operations.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities–Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits companies to measure many financial instruments and certain other items at fair value at specified election dates. SFAS 159 will be effective beginning February 1, 2008. The Company is currently assessing the impact of SFAS 159 on its financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion relates to Wal-Mart Stores, Inc. and its consolidated subsidiaries (the “Company”) and should be read in conjunction with our condensed consolidated financial statements included under Part I, Item 1, of this Quarterly Report on Form 10-Q, as well as our financial statements as of January 31, 2007, and for the year then ended, and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report to Shareholders for the year ended January 31, 2007, and included as an exhibit to our Annual Report on Form 10-K for the year ended January 31, 2007.

We intend for this discussion to provide the reader with information that will assist the reader in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements. The discussion also provides information about the financial results of the various operating segments of our business to provide a better understanding of how those segments and their results affect the financial condition and results of operations of the Company as a whole.

Throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations, we discuss segment operating income and comparable store sales. Segment operating income refers to income from continuing operations before net interest expense, income taxes and minority interest. Segment operating income does not include unallocated corporate overhead and discontinued operations. Comparable store sales is a measure which indicates the performance of our existing stores by measuring the growth in sales for such stores for a particular period over the corresponding period in the prior year.  We include in our measure of comparable store sales all stores and clubs that have been open for at least the previous 12 months. Additionally, stores and clubs that are relocated, converted or expanded are excluded from comparable store sales for the first 12 months following the relocation, conversion or expansion. Comparable store sales is also referred to as “same-store” sales by others within the retail industry. The method of calculating comparable store sales varies across the retail industry. As a result, our calculation of comparable store sales is not necessarily comparable to similarly titled measures reported by other companies.

Key Items in the Third Quarter

Significant financial items related to the third quarter of fiscal 2008 include:
 
·  
Net sales for the third quarter of fiscal 2008 were approximately $90.9 billion, an increase of 8.8% over the third quarter of fiscal 2007.  Income from continuing operations for the quarter was $2.86 billion, an increase of 10.1%.
 
 
·  
Comparable store sales in the United States increased 1.5% for the quarter ended October 31, 2007. Comparable store sales at our Wal-Mart Stores segment increased 1.0% for the third quarter of fiscal 2008, while Sam’s Club’s comparable store sales increased 3.8%, including a negative 0.1 percentage point impact from fuel sales.
 
 
·  
Net cash provided by operating activities of continuing operations was $9.4 billion for the first nine months of fiscal 2008. Additionally, we paid $5.3 billion in cash to repurchase shares of our common stock, paid dividends of $2.7 billion, issued $8.0 billion in long-term debt, repaid $6.7 billion of long-term debt and increased our outstanding commercial paper by $6.5 billion (net of repayments).
 
 
·  
Total assets increased 9.2%, to $165.1 billion at October 31, 2007, compared to October 31, 2006. During the first nine months of fiscal 2008, we made $10.9 billion of capital expenditures, down 4.6% from the first nine months of fiscal 2007.
 
 
·  
Our Wal-Mart Stores segment experienced a 6.4% increase in segment net sales and a 11.1% increase in segment operating income.
 
 
·  
Sam’s Club produced a 6.1% increase in segment net sales and a 6.2% increase in segment operating income.
 
 
·  
Our International segment generated a 16.9% increase in segment net sales and an 8.6% increase in segment operating income.
 
 
·  
Income from continuing operations for the third quarter of fiscal 2008 included the recognition of $47 million in after-tax gains, or $0.01 per diluted share, from the sale of certain real estate properties.  The third quarter of fiscal 2007 included a favorable after-tax impact of $56 million, or $0.01 per diluted share, for property insurance-related gains ($52 million in our Wal-Mart Stores segment and $4 million in our Sam’s Club segment).
 

8


 
 Discontinued Operations and Acquisitions and Investments
 
Refer to Notes 4 and 5 of our condensed consolidated financial statements included under Part I, Item 1, of this Quarterly Report on Form 10-Q for a discussion of discontinued operations and acquisitions and investments.  

Results of Operations

The following discussion of our Results of Operations is based on our continuing operations and excludes any results or discussion of our discontinued operations in South Korea and Germany.

Quarter ended October 31, 2007

The Company and each of its operating segments had net sales for the quarters ended October 31, 2007 and 2006 as follows (dollars in millions):

 
 
Three Months Ended
   
Three Months Ended
   
 
 
 
 
October 31, 2007
   
October 31, 2006
   
 
 
 
 
2007
   
Percent of Total
   
2006
   
Percent of Total
   
Percent Change
 
Net Sales:
 
 
   
 
   
 
   
 
   
 
 
Wal-Mart Stores
  $
57,651
      63.4 %   $
54,179
      64.9 %     6.4 %
Sam's Club
   
10,826
      11.9 %    
10,206
      12.2 %     6.1 %
International
   
22,403
      24.7 %    
19,158
      22.9 %     16.9 %
Total net sales
  $
90,880
      100.0 %   $
83,543
      100.0 %     8.8 %


The increase in our net sales for the quarter ended October 31, 2007 compared with the quarter ended October 31, 2006 resulted primarily from our U.S. and global expansion programs and a comparable store sales increase of 1.5% in the United States. For the third quarter of fiscal 2008, foreign currency exchange rates favorably impacted net sales by $1.1 billion.

The decrease in Wal-Mart Stores segment’s net sales as a percentage of total net sales is due to lower comparable store sales in the third quarter of fiscal 2008 and the higher net sales increase in the International segment from the prior year period. The decrease in the Sam’s Club segment’s net sales as a percentage of total net sales resulted from the more rapid development of new stores in the Wal-Mart Stores and International segments than in the Sam’s Club segment. 

Our total gross margin as a percentage of net sales (our “gross margin”) increased from 23.7% in the third quarter of fiscal 2007 to 23.8% for the third quarter of fiscal 2008.  This increase is primarily due to improved gross margin performance in the International segment, the effect of which was partially offset by higher inventory shrink at the Wal-Mart Stores segment.
 
Operating, selling, general and administrative expenses (“operating expenses”) as a percentage of net sales were essentially flat compared to the corresponding quarter in fiscal 2007 as a result of effective expense leveraging in the Wal-Mart Stores and Sam’s Club segments.  Operating expenses for the third quarter of fiscal 2007 included the favorable impact of property insurance-related gains of $85 million.
 
Membership and other income, which includes a variety of non-sales income categories such as Sam’s Club membership fee revenues and tenant income, increased 15.7% in the third quarter of fiscal 2008 compared to the prior year due to continued growth in our financial services area, which includes money transfer, money order, bill payment and payroll check cashing services, and recycling income resulting from our sustainability efforts.  Membership and other income for the third quarter of fiscal 2008 also includes recognition of $71 million in pre-tax gains from the sale of certain real estate properties.

Interest, net, increased 8.3% in the third quarter of fiscal 2008 when compared with the same period last year largely due to higher borrowing levels in the third quarter of fiscal 2008.  Weighted-average effective interest rates for the quarter ended October 31, 2007, were relatively consistent with the prior year quarter.

Our effective income tax rate from continuing operations for the third quarter of fiscal 2008 was 34.5% which compares with 33.7% in the third quarter of fiscal 2007.  The rate increased due primarily to the mix of forecasted taxable income between our domestic and international operations and a corresponding decrease in expected foreign tax credits.


9


Nine months ended October31, 2007

The Company and each of its operating segments had net sales for the nine months ended October 31, 2007 and 2006 as follows (dollars in millions):

 
 
Nine Months Ended
   
Nine Months Ended
   
 
 
 
 
October 31,
   
October 31,
   
 
 
 
 
2007
   
Percent of Total
   
2006
   
Percent of Total
   
Percent Change
 
Net Sales:
 
 
   
 
   
 
   
 
   
 
 
Wal-Mart Stores
  $
172,101
      64.2 %   $
162,067
      65.7 %     6.2 %
Sam's Club
   
32,526
      12.1 %    
30,453
      12.3 %     6.8 %
International
   
63,630
      23.7 %    
54,382
      22.0 %     17.0 %
Total net sales
  $
268,257
      100.0 %   $
246,902
      100.0 %     8.6 %
 
                                       

The increase in our net sales for the nine months ended October 31, 2007 compared with the nine months ended October 31, 2006 resulted primarily from our U.S. and global expansion programs and a comparable store sales increase of 1.4% in the United States.  Foreign currency exchange rates favorably impacted net sales by $2.7 billion for the nine months ended October 31, 2007.

The decrease in Wal-Mart Stores segment’s net sales as a percentage of total net sales is due to lower comparable store sales for the Wal-Mart Stores segment in the first nine months of fiscal 2008 when compared to the prior year period and the increase in the International segment’s net sales. The decrease in the Sam’s Club segment’s net sales as a percentage of total net sales resulted from the more rapid development of new stores in the Wal-Mart Stores and International segments than in the Sam’s Club segment.

Our gross margin decreased from 23.6% in the first nine months of fiscal 2007 to 23.5% for the first nine months of fiscal 2008.  This decrease was primarily due to pressures on Wal-Mart Stores segment’s gross margin from higher inventory shrink, partially offset by the $97 million refund of excise taxes previously paid on past merchandise sales of prepaid phone cards and the stable gross margin performance in the International segment.

Operating expenses as a percentage of net sales in the first nine months of fiscal 2008 were essentially flat compared to the corresponding period in fiscal 2007.  Operating expenses for the first nine months of fiscal 2008 include the favorable impact of a change in estimated losses associated with our general liability and workers’ compensation claims which reduced our accrued liabilities for such claims by $298 million pre-tax, partially offset by $183 million in pre-tax charges for certain litigation and other contingencies. The net favorable impact of these items reduced our operating expenses as a percentage of net sales by 0.1 percentage points.  Otherwise, operating expenses as a percentage of net sales increased primarily due to lower segment net sales increases compared to the prior year for our Wal-Mart Stores and International segments.  Additionally, operating expenses for the first nine months of fiscal 2007 included the favorable impact of property insurance-related gains of $85 million.

Membership and other income, which includes a variety of non-sales income categories such as Sam’s Club membership fee revenues and tenant income, increased 16.6% for the first nine months of fiscal 2008 from the prior year period due to continued growth in our financial services area and recycling income.  Membership and other income for the first nine months of fiscal 2008 also includes the recognition of $134 million in pre-tax gains from the sale of certain real estate properties.

Interest, net, increased 6.2% in the first nine months of fiscal 2008 when compared with the same period last year largely due to higher borrowing levels in the first nine months of fiscal 2008.  Weighted-average effective interest rates for the nine months ended October 31, 2007, were relatively consistent with the prior year period.

Our effective income tax rate from continuing operations for the first nine months of fiscal 2008 was 34.4%, which compares with 34.1% for the first nine months of fiscal 2007.  The effective income tax rate increased primarily due to the mix of taxable income among our domestic and international operations.

10


Wal-Mart Stores Segment

Quarter ended October 31, 2007

 
 
 
   
Segment net
   
 
   
Segment operating
   
Segment operating
 
 
 
 
   
sales increase
   
Segment
   
income increase
   
income as a
 
 
 
Segment
   
from prior
   
operating
   
from prior fiscal
   
percentage
 
Quarter ended
 
net sales
   
fiscal year
   
income
   
year third
   
of segment
 
October 31,
 
(in millions)
   
third quarter
   
(in millions)
   
quarter
   
net sales
 
2007
  $
57,651
      6.4 %   $
4,013
      11.1 %     7.0 %
2006
  $
54,179
      7.8 %   $
3,611
      10.4 %     6.7 %

    The net sales increase for the Wal-Mart Stores segment in the third quarter of fiscal 2008 over the third quarter of fiscal 2007 resulted from our continued expansion activities, strength in the grocery, health and wellness and entertainment categories and a comparable store sales increase of 1.0%.  Comparable store sales for the third quarter of fiscal 2008 increased primarily due to an increase in average transaction size per customer, partially offset by a decrease in customer traffic in our comparable stores.

Gross margin was essentially flat due to higher initial margins and decreased markdown activity, offset by higher inventory shrink during the third quarter of fiscal 2008.
 
Operating expenses as a percentage of segment net sales for the third quarter of fiscal 2008 were 0.1 percentage point lower compared to the corresponding period in fiscal 2007 due to higher labor productivity and lower general liability and workers’ compensation claims cost.  Operating expenses for the third quarter of fiscal 2007 included the favorable impact of property insurance-related gains of $79 million.
 
Other income in the third quarter of fiscal 2008 increased from the third quarter of fiscal 2007 due to continued growth in our financial services area and increases in recycling income.  Other income, net, for the third quarter of fiscal 2008 also includes recognition of $71 million in pre-tax gains from the sale of certain real estate properties.

Nine months ended October 31, 2007

 
 
 
   
Segment net
   
 
   
 
   
Segment operating
 
 
 
 
   
sales increase
   
Segment
   
Segment operating
   
income as a
 
 
 
Segment
   
from prior
   
operating
   
income increase
   
percentage
 
Nine months ended
 
net sales
   
fiscal year
   
income
   
from prior fiscal
   
of segment
 
October 31,
 
(in millions)
   
period
   
(in millions)
   
year period
   
net sales
 
2007
  $
172,101
      6.2 %   $
12,214
      5.4 %     7.1 %
2006
  $
162,067
      8.3 %   $
11,585
      11.2 %     7.1 %

 
The net sales increase in the first nine months of fiscal 2008 over the first nine months of fiscal 2007 for the Wal-Mart Stores segment resulted from our continued expansion activities, strength in the grocery, health and wellness and entertainment categories and a comparable store sales increase of 0.7%.  Comparable store sales for the first nine months of fiscal 2008 increased primarily due to an increase in average transaction size per customer, partially offset by a decrease in customer traffic in our comparable stores.

Gross margin decreased 0.2 percentage points for the first nine months of fiscal 2008 primarily due to higher inventory shrink, partially offset by the $46 million excise tax refund on taxes previously paid on past prepaid phone card sales.
 
    Operating expenses as a percentage of segment net sales for the first nine months of fiscal 2008 were essentially flat compared to the corresponding period in fiscal 2007.  Operating expenses for the first nine months of fiscal 2008 were favorably impacted by the change in estimated losses associated with our general liability and workers’ compensation claims, which reduced accrued liabilities for such claims by $274 million, partially offset by pre-tax charges of $145 million for certain legal and other contingencies.  The net favorable impact of these items reduced our operating expenses as a percentage of segment net sales by 0.1 percentage point.  Otherwise, operating expenses as a percentage of segment net sales increased primarily due to lower segment net sales increases compared to the prior year.  Additionally, operating expenses for the nine months ended October 31, 2006, included the favorable impact of property insurance-related gains of $79 million.
 
    Other income in the first nine months of fiscal 2008 increased from the prior year period due to continued growth in our financial services area and increases in recycling income.  Other income, net, for the first nine months of fiscal 2008 also includes pre-tax gains of $134 million from the sale of certain real estate properties.

11

 
Sam’s Club Segment

Quarter ended October 31, 2007

 
 
 
   
Segment net
   
 
   
Segment operating
   
Segment operating
 
 
 
 
   
sales increase
   
Segment
   
income increase
   
income as a
 
 
 
Segment
   
from prior
   
operating
   
from prior fiscal
   
percentage
 
Quarter ended
 
net sales
   
fiscal year
   
income
   
year third
   
of segment
 
October 31,
 
(in millions)
   
third quarter
   
(in millions)
   
quarter
   
net sales
 
2007
  $
10,826
      6.1 %   $
362
      6.2 %     3.3 %
2006
  $
10,206
      1.9 %   $
341
      -2.0 %     3.3 %


    The Sam’s Club segment net sales increase for the third quarter of fiscal 2008 over the third quarter of fiscal 2007 resulted from growth in comparable club sales and continued expansion activities. Third quarter fiscal 2008 comparable club sales increased 3.8%, including a negative 0.1% impact from fuel sales. Comparable club sales for the third quarter of fiscal 2008 increased primarily due to an increase in both member traffic and average transaction size per member.

The increase in segment operating income for the third quarter of fiscal 2008 from the prior year resulted primarily from the leveraging of operating expenses, whereas gross margin was relatively consistent with last year as a percentage of segment net sales. Operating expenses as a percentage of segment net sales decreased primarily due to lower advertising costs and favorable trends in estimated losses associated with our general liability and workers’ compensation claims.  Additionally, operating expenses for the third quarter of fiscal 2007 included the favorable impact of property insurance-related gains of $6 million.

Nine months ended October31, 2007

 
 
 
   
Segment net
   
 
   
 
   
Segment operating
 
 
 
 
   
sales increase
   
Segment
   
Segment operating
   
income as a
 
 
 
Segment
   
from prior
   
operating
   
income increase
   
percentage
 
Nine months ended
 
net sales
   
fiscal year
   
income
   
from prior fiscal
   
of segment
 
October 31,
 
(in millions)
   
period
   
(in millions)
   
year period
   
net sales
 
2007
  $
32,526
      6.8 %   $
1,172
      12.2 %     3.6 %
2006
  $
30,453
      4.5 %   $
1,045
      2.7 %     3.4 %


The Sam’s Club segment net sales increase for the first nine months of fiscal 2008 over the first nine months of fiscal 2007 resulted from growth in comparable club sales and continued expansion activities. The comparable club sales increase for the first nine months of fiscal 2008 was 4.8%, with no impact from fuel sales. Comparable club sales for the first nine months of fiscal 2008 increased primarily due to an increase in both member traffic and average transaction size per member.

The increase in segment operating income for the first nine months of fiscal 2008 includes a net positive impact of the favorable change in estimated losses associated with our general liability and workers’ compensation claims, which reduced accrued liabilities for such claims by $21 million, and a $39 million excise tax refund, partially offset by $15 million in litigation-related charges. Furthermore, operating expenses in the first nine months of fiscal 2007 included an $11 million charge related to closing two Sam’s Clubs, partially offset by the favorable impact of property insurance-related gains of $6 million.  The remainder of the increase in segment operating income from the prior year period resulted primarily from the leveraging of operating expenses, offset by a slight decrease in gross margin as a percentage of segment net sales.  Operating expenses as a percentage of segment net sales decreased primarily due to lower wage, utility and advertising costs.


12


International Segment

Quarter ended October 31, 2007

 
 
 
   
Segment net
   
 
   
Segment operating
   
Segment operating
 
 
 
 
   
sales increase
   
Segment
   
income increase
   
income as a
 
 
 
Segment
   
from prior
   
operating
   
from prior fiscal
   
percentage
 
Quarter ended
 
net sales
   
fiscal year
   
income
   
year third
   
of segment
 
October 31,
 
(in millions)
   
third quarter
   
(in millions)
   
quarter
   
net sales
 
2007
  $
22,403
      16.9 %   $
1,081
      8.6 %     4.8 %
2006
  $
19,158
      33.7 %   $
995
      19.2 %     5.2 %

 
International segment net sales for the third quarter of fiscal 2008, when compared to the same period in fiscal 2007, increased as a result of increased sales at existing units, continued expansion activities within the segment and the acquisition of the controlling interest in Bounteous Company Ltd. (“BCL”). BCL operates 101 hypermarkets in 34 cities in China under the Trust-Mart banner.   Net sales increases in the United Kingdom, Brazil, and China contributed to the majority of the increase in segment net sales for the third quarter of fiscal 2008 when compared to the prior year quarter. Exchange rate movements (primarily in the strengthening of the British pound, Canadian dollar and Brazilian real versus the U.S. dollar) had a favorable impact of $1.1 billion on segment net sales during the quarter.

International segment operating income as a percentage of segment net sales declined from the third quarter of fiscal 2007 to the third quarter of fiscal 2008.  This decline was driven primarily by an increase in operating expenses as a percentage of segment net sales, which includes a charge of $35 million for certain legal matters.  The International segment’s gross margin increased primarily due to a favorable shift in the mix of products sold toward higher margin goods in Brazil. Exchange rate movements had a favorable impact of $55 million on operating income in the third quarter of fiscal 2008.

Nine months ended October 31, 2007

 
 
 
   
Segment net
   
 
   
 
   
Segment operating
 
 
 
 
   
sales increase
   
Segment
   
Segment operating
   
income as a
 
 
 
Segment
   
from prior
   
operating
   
income increase
   
percentage
 
 Nine months ended
 
net sales
   
fiscal year
   
income
   
from prior fiscal
   
of segment
 
October 31,
 
(in millions)
   
period
   
(in millions)
   
year period
   
net sales
 
2007
  $
63,630
      17.0 %   $
3,026
      10.3 %     4.8 %
2006
  $
54,382
      30.4 %   $
2,743
      17.5 %     5.0 %


    International segment net sales for the first nine months of fiscal 2008, when compared to same period in fiscal 2007, increased as a result of increased sales at existing units, continued expansion activities within the segment and the acquisition of the controlling interest in BCL. Net sales increases in the United Kingdom, Brazil, Canada, and China and the consolidation of BCL contributed to the majority of the increase in segment net sales for the first nine months of fiscal 2008 when compared to the same prior year period. Exchange rate movements (primarily in strengthening of the British pound, Canadian dollar and Brazilian real versus the U.S. dollar, partially offset by a decline in the Japanese yen and Mexican peso versus the U.S. dollar) had a favorable impact of $2.7 billion on segment net sales during the first nine months of fiscal 2008.

The International segment’s operating income as a percentage of segment net sales declined from the first nine months of fiscal 2007 to the first nine months of fiscal 2008 due to an increase in operating expenses as a percentage of segment net sales, partially offset by an improvement in gross margin across most countries. The increase in expenses as a percentage of segment net sales was largely due to the impact of BCL, sales pressures combined with the startup of banking operations in Mexico, development activities in India and a charge of $35 million for certain legal matters. The net impact of changes in foreign currency rates favorably impacted the segment’s operating income by $119 million in the nine months ended October 31, 2007.


13


Unit Data By Segment
Square Footage in Thousands

 
 
October 31, 2007
   
October 31, 2006
   
January 31, 2007
 
 
 
 
   
Square
   
 
   
Square
   
 
   
Square
 
 
 
Units
   
Footage
   
Units
   
Footage
   
Units
   
Footage
 
Wal-Mart Stores Segment
 
 
   
 
   
 
   
 
   
 
   
 
 
Discount Stores
   
988
     
106,388
     
1,100
     
114,261
     
1,075
     
114,507
 
Supercenters
   
2,419
     
451,258
     
2,176
     
407,230
     
2,256
     
421,211
 
Neighborhood Markets
   
128
     
5,419
     
110
     
4,629
     
112
     
4,672
 
Total Wal-Mart Stores Segment
   
3,535
     
563,065
     
3,386
     
526,120
     
3,443
     
540,390
 
 
                                               
Sam's Club Segment
   
586
     
77,525
     
574
     
74,788
     
579
     
76,270
 
United States Total
   
4,121
     
640,590
     
3,960
     
600,908
     
4,022
     
616,660