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Wal-Mart 10-Q 2009
d10q.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 April 30, 2009.

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

Logo

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨  No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.   Check One:

Large Accelerated Filer   x                                                     Accelerated Filer  ¨                           Non-Accelerated Filer   ¨                                           Smaller Reporting Company  ¨

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 – 3,896,617,746 shares as of June 3, 2009.

 
1

 

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements


WAL-MART STORES, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
(Unaudited)
 
(Amounts in millions except per share data)
 
             
   
Three Months Ended
 
   
April 30,
 
   
2009
   
2008
 
Revenues:
           
Net sales
    $93,471       $94,042  
Membership and other income
    771       898  
      94,242       94,940  
                 
Costs and expenses:
               
Cost of sales
    70,388       71,372  
Operating, selling, general and administrative expenses
    18,637       18,251  
Operating income
    5,217       5,317  
                 
Interest:
               
Debt
    448       488  
Capital leases
    70       72  
Interest income
    (51 )     (64 )
Interest, net
    467       496  
                 
Income from continuing operations before income taxes
    4,750       4,821  
                 
Provision for income taxes
    1,603       1,670  
Income from continuing operations
    3,147       3,151  
Loss from discontinued operations, net of tax
    (8 )     (7 )
Consolidated net income
    3,139       3,144  
Less consolidated net income attributable to noncontrolling interest
    (117 )     (122 )
Consolidated net income attributable to Wal-Mart
    $3,022       $3,022  
                 
Basic net income per common share:
               
Basic income per share from continuing operations attributable to Wal-Mart
    $0.77       $0.77  
Basic loss per share from discontinued operations attributable to Wal-Mart
    -       (0.01 )
Basic net income per share attributable to Wal-Mart
    $0.77       $0.76  
                 
Diluted net income per common share
               
Diluted income per share from continuing operations attributable to Wal-Mart
    $0.77       $0.76  
Diluted income per share from discontinued operations attributable to Wal-Mart
    -       -  
Diluted net income per share attributable to Wal-Mart
    $0.77       $0.76  
                 
Weighted-average number of common shares:
               
Basic
    3,920       3,957  
Diluted
    3,930       3,967  
                 
Dividends declared per common share
    $1.09       $0.95  

 
2

 

WAL-MART STORES, INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
(Amounts in millions)
 
                   
   
April 30,
   
April 30,
   
January 31,
 
   
2009
   
2008
   
2009
 
ASSETS
                 
Current assets:
                 
Cash and cash equivalents
    $6,578       $8,042       $7,275  
Receivables
    3,356       3,249       3,905  
Inventories
    34,391       35,521       34,511  
Prepaid expenses and other
    3,266       2,990       3,063  
Current assets of discontinued operations
    155       955       195  
Total current assets
    47,746       50,757       48,949  
                         
Property and equipment, at cost:
                       
Property and equipment, at cost
    127,472       124,256       125,820  
Less accumulated depreciation
    (34,145 )     (29,926 )     (32,964 )
Property and equipment, net
    93,327       94,330       92,856  
                         
Property under capital lease:
                       
Property under capital lease
    5,394       5,808       5,341  
Less accumulated amortization
    (2,617 )     (2,680 )     (2,544 )
Property under capital lease, net
    2,777       3,128       2,797  
                         
Goodwill
    14,882       16,428       15,260  
Other assets and deferred charges
    3,358       2,840       3,567  
Total assets
    $162,090       $167,483       $163,429  
                         
LIABILITIES AND EQUITY
                       
Current liabilities:
                       
Commercial paper
    $1,457       $5,924       $1,506  
Accounts payable
    28,541       29,027       28,849  
Dividends payable
    3,234       3,322       -  
Accrued liabilities
    15,263       14,882       18,112  
Accrued income taxes
    1,810       1,699       677  
Long-term debt due within one year
    5,731       5,864       5,848  
Obligations under capital leases due within one year
    318       321       315  
Current liabilities of discontinued operations
    45       90       83  
Total current liabilities
    56,399       61,129       55,390  
                         
Long-term debt
    32,480       32,379       31,349  
Long-term obligations under capital leases
    3,185       3,584       3,200  
Deferred income taxes and other
    5,835       5,284       6,014  
Redeemable noncontrolling interest
    277       -       397  
                         
Commitments and contingencies
                       
                         
Equity:
                       
Common stock and capital in excess of par value
    4,048       3,628       4,313  
Retained earnings
    61,556       55,257       63,660  
Accumulated other comprehensive (loss) income
    (3,373 )     4,345       (2,688 )
Total Wal-Mart shareholders’ equity
    62,231       63,230       65,285  
Noncontrolling interest
    1,683       1,877       1,794  
Total equity
    63,914       65,107       67,079  
Total liabilities and equity
    $162,090       $167,483       $163,429  

3

 
WAL-MART STORES, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited)
 
(Amounts in millions)
 
   
Three Months Ended
 
   
April 30,
 
   
2009
   
2008
 
Cash flows from operating activities:
           
Consolidated net income
    $3,139       $3,144  
Loss from discontinued operations, net of tax
    8       7  
Income from continuing operations
    3,147       3,151  
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
               
Depreciation and amortization
    1,700       1,628  
Other
    (192 )     139  
Changes in certain assets and liabilities, net of effects of acquisitions:
               
Decrease in accounts receivable
    419       450  
Decrease (increase) in inventories
    153       (213 )
Decrease in accounts payable
    (315 )     (1,191 )
Decrease in accrued liabilities
    (1,341 )     (185 )
Net cash provided by operating activities
    3,571       3,779  
                 
Cash flows from investing activities:
               
Payments for property and equipment
    (2,607 )     (2,447 )
Proceeds from disposal of property and equipment
    132       126  
Other investing activities
    (208 )     88  
Net cash used in investing activities
    (2,683 )     (2,233 )
                 
Cash flows from financing activities:
               
(Decrease) increase in commercial paper, net
    (266 )     892  
Proceeds from issuance of long-term debt
    1,453       2,521  
Payment of long-term debt
    (63 )     (361 )
Dividends paid
    (1,067 )     (940 )
Purchase of Company stock
    (886 )     (1,375 )
    Purchase of redeemable noncontrolling interest
    (436 )     -  
Other financing activities
    (238 )     54  
Net cash (used in) provided by financing activities
    (1,503 )     791  
                 
Effect of exchange rates on cash
    (82 )     166  
Net (decrease) increase in cash and cash equivalents
    (697 )     2,503  
Cash and cash equivalents at beginning of year (1)
    7,275       5,569  
Cash and cash equivalents at end of period (2)
    $6,578       $8,072  
                 
(1) Includes cash and cash equivalents of discontinued operations of $77 million at January 31, 2008.
 
                 
(2) Includes cash and cash equivalents of discontinued operations of $30 million at April 30, 2008.
 
 
 
4

 

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

1 Basis of Presentation

The Condensed Consolidated Balance Sheets of Wal-Mart Stores, Inc. and its subsidiaries (“Wal-Mart,” the “Company” or “we”) as of April 30, 2009 and 2008, the related Condensed Consolidated Statements of Income for the three months ended April 30, 2009 and 2008, and the related Condensed Consolidated Statements of Cash Flows for the three month periods ended April 30, 2009 and 2008, are unaudited. The Condensed Consolidated Balance Sheet as of January 31, 2009, is derived from the audited financial statements at that date.

The Company’s operations in Argentina, Brazil, Chile, China, Costa Rica, El Salvador, Guatemala, Honduras, India, Japan, Mexico, Nicaragua and the United Kingdom are consolidated using a December 31 fiscal year end, generally due to statutory reporting requirements. The Company’s operations in Canada and Puerto Rico are consolidated using a January 31 fiscal year end.

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 (the “SEC”) and do not contain certain information included in the Company’s Annual Report to Shareholders for the fiscal year ended January 31, 2009. Therefore, the interim Condensed Consolidated Financial Statements should be read in conjunction with that Annual Report to Shareholders.

In connection with the Company’s finance transformation project, we adjusted the classification of certain revenue and expense items within our Condensed Consolidated Statements of Income for financial reporting purposes. The reclassifications did not impact operating income or consolidated net income attributable to Wal-Mart.  The changes are effective February 1, 2009 and have been reflected in all prior periods presented.

2 Net Income Per Common Share

Basic net income per common share attributable to Wal-Mart is based on the weighted-average number of outstanding common shares. Diluted net income per common share attributable to Wal-Mart is based on the weighted-average number of outstanding shares adjusted for the dilutive effect of stock options and other share-based awards.  The dilutive effect of outstanding stock options and restricted stock was 10 million shares for the three months ended April 30, 2009 and 2008.  The Company had approximately 28 million and 25 million stock options outstanding at April 30, 2009 and 2008, respectively, which were not included in the diluted net income per share calculation because their effect would be antidilutive.

For purposes of determining net income per common share attributable to Wal-Mart, income from continuing operations attributable to Wal-Mart and the loss from discontinued operations, net of tax, are as follows:

   
Three Months Ended
 
   
April 30,
 
(Amounts in millions)
 
2009
   
2008
 
Income from continuing operations attributable to Wal-Mart
    $3,030       $3,029  
Loss from discontinued operations, net of tax
    (8 )     (7 )
Consolidated net income attributable to Wal-Mart
    $3,022       $3,022  

In June 2008, the Financial Accounting Standards Board ("FASB") issued Staff Position EITF 03-06-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities" ("FSP EITF 03-06-1"). FSP EITF 03-06-1 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method in SFAS No. 128, "Earnings per Share".  The Company adopted FSP EITF 03-06-1 on February 1, 2009. The adoption did not have, and is not expected to have, a material impact on basic or diluted earnings per share.

 
5

 

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 Walmart U.S. 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 April 30, 2009 and 2008, our inventories valued at LIFO approximate those inventories as if they were valued at FIFO.

4 Long-Term Debt
 
On March 27, 2009, the Company issued and sold £1.0 billion of 5.625% Notes Due 2034 at an issue price equal to 98.981% of the notes’ aggregate principal amount.  Interest started accruing on the notes on March 27, 2009. The Company will pay interest on the notes on March 27 and September 27 of each year, commencing on September 27, 2009. The notes will mature on March 27, 2034.  The notes are senior, unsecured obligations of Wal-Mart Stores, Inc.
 
5 Derivative Financial Instruments

The Company uses derivative financial instruments for hedging and non-trading purposes to manage its exposure to changes in interest and foreign exchange rates. Use of derivative financial instruments in hedging programs subjects the Company to certain risks, such as market and credit risks. Market risk represents the possibility that the value of the derivative instrument will change. In a hedging relationship, the change in the value of the derivative is offset to a great extent by the change in the value of the underlying hedged item. Credit risk related to derivatives represents the possibility that the counterparty will not fulfill the terms of the contract. The notional, or contractual, amount of the Company’s derivative financial instruments is used to measure interest to be paid or received and does not represent the Company’s exposure due to credit risk. Credit risk is monitored through established approval procedures, including setting concentration limits by counterparty, reviewing credit ratings and requiring collateral (generally cash) from the counterparty when appropriate. The Company’s transactions are with counterparties rated “A+” or better by nationally recognized credit rating agencies. In connection with various derivative agreements with counterparties, the Company is holding $246 million in cash collateral from these counterparties at April 30, 2009. It is our policy to record cash collateral exclusive of any derivative asset, and any collateral holdings are reflected in our accrued liabilities as amounts due to the counterparties. Furthermore, as part of the master netting arrangements with these counterparties, the Company is also required to post collateral if the derivative liability position exceeds $150 million.  The Company has no outstanding collateral postings and in the event of providing cash collateral, the Company would record the posting as a receivable exclusive of any derivative liability.

Fair Value Instruments

The Company uses derivative financial instruments for purposes other than trading to manage its exposure to interest and foreign exchange rates, as well as to maintain an appropriate mix of fixed- and floating-rate debt. Contract terms of a hedge instrument closely mirror those of the hedged item, providing a high degree of risk reduction and correlation. Contracts that are effective at meeting the risk reduction and correlation criteria are recorded using hedge accounting. If a derivative instrument is a hedge, depending on the nature of the hedge, changes in the fair value of the instrument will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or be recognized in accumulated other comprehensive (loss) income until the hedged item is recognized in earnings. The ineffective portion of an instrument’s change in fair value will be immediately recognized in earnings. Instruments that do not meet the criteria for hedge accounting, or contracts for which the Company has not elected hedge accounting, are valued at fair value with unrealized gains or losses reported in earnings during the period of change.

Net Investment Instruments

At April 30, 2009 and 2008, the Company is party to cross-currency interest rate swaps that hedge its net investment in the United Kingdom. The agreements are contracts to exchange fixed-rate payments in one currency for fixed-rate payments in another currency.

The Company has approximately £3.0 billion of outstanding debt that is designated as a hedge of the Company’s net investment in the United Kingdom as of April 30, 2009 and 2008. The Company also has outstanding approximately ¥437.4 billion and ¥142.1 billion of debt that is designated as a hedge of the Company’s net investment in Japan at April 30, 2009 and 2008, respectively. All changes in the fair value of these instruments are recorded in accumulated other comprehensive (loss) income, offsetting the foreign currency translation adjustment that is also recorded in accumulated other comprehensive (loss) income.
 
Cash Flow Instruments

The Company is party to receive floating-rate, pay fixed-rate interest rate swaps to hedge the interest rate risk of certain foreign-denominated debt. The swaps are designated as cash flow hedges of interest expense risk. Changes in the foreign benchmark interest rate result in reclassification of amounts from accumulated other comprehensive (loss) income to earnings to offset the floating-rate interest expense. These cash flow instruments will mature on August 5, 2013.

The Company is also party to received fixed-rate, pay fixed-rate cross-currency interest rate swaps to hedge the currency exposure associated with the forecasted payments of principal and interest of foreign-denominated debt. The swaps are designated as cash flow hedges of the currency risk related to payments on the foreign-denominated debt. Changes in the currency exchange rate result in reclassification of amounts from accumulated other comprehensive (loss) income to earnings to offset the re-measurement gain (loss) on the foreign-denominated debt. These cash flow instruments will mature on March 27, 2034.

6

 
Financial Statement Presentation

As of April 30, 2009, our financial instruments were classified as follows in the Condensed Consolidated Balance Sheets:

   
April 30, 2009
 
(Amounts in millions)
 
Fair Value Instruments
   
Cash Flow Instruments
 
Balance Sheet Classification:
           
Prepaid expenses and other
    $60       $  -  
Other assets and deferred charges
    663       27  
Total assets
    $723       $27  
                 
Long-term debt due within one year
    $60       $  -  
Long-term debt
    239       -  
Deferred income taxes and other
    -       14  
Total liabilities
    $299       $14  

During the first quarter of fiscal 2010, we reclassified $34 million from accumulated other comprehensive (loss) income to earnings to offset currency translation losses on the re-measurement of foreign denominated debt.

In September 2006, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value within generally accepted accounting principles (“GAAP”) and expands required disclosures about fair value measurements. In November 2007, the FASB provided a one year deferral for the implementation of SFAS 157 for nonfinancial assets and liabilities.  The Company adopted SFAS 157 on February 1, 2008, as required. The adoption of SFAS 157 did not have a material impact on the Company’s financial condition and results of operations. Effective February 1, 2009, the Company adopted SFAS 157 for its nonfinancial assets and liabilities, and it did not have a material impact to its financial condition or results of operations.

SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. As of April 30, 2009 and 2008, the Company held certain derivative asset and liability positions that are required to be measured at fair value on a recurring basis. The majority of the Company’s derivative instruments related to interest rate swaps.  The fair values of these interest rate swaps have been measured in accordance with Level 2 inputs in the fair value hierarchy, and as of April 30, 2009 and 2008, are as follows (asset/(liability)):
 
   
April 30, 2009
   
April 30, 2008
 
   
Notional
   
Fair
   
Notional
   
Fair
 
(Amounts in millions)
 
Amount
   
Value
   
Amount
   
Value
 
 
                       
Receive fixed-rate, pay floating rate interest rate swaps designated as fair value hedges
    $5,195       $299       $5,195       $248  
Receive fixed-rate, pay fixed-rate cross-currency interest
                               
rate swaps designated as net investment hedges (Cross-currency
                               
 notional amount: GBP 795 at 4/30/2009 and 4/30/2008)
    1,250       424       1,250       (88 )
Receive floating-rate, pay fixed-rate interest rate swaps designated as cash flow hedges
    461       (14 )     -       -  
Receive fixed-rate, pay fixed-rate cross-currency interest
                               
rate swaps designated as cash flow hedges
    1,445       27       -       -  
                Total
    $8,351       $736       $6,445       $160  

7

 
6 Segments

The Company is engaged in the operations of retail stores located in all 50 states of the United States, wholly-owned subsidiaries operating in Argentina, Brazil, Canada, Japan, Puerto Rico and the United Kingdom, our majority-owned subsidiaries operating in five countries in Central America, and in Chile and Mexico, our joint ventures in India and China and our other controlled subsidiaries in China.  The Company identifies segments in accordance with the criteria set forth in Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information”.  As a result, we define our segments as those business units whose operating results our chief operating decision maker regularly reviews to analyze performance and allocate resources.

The Walmart U.S. segment includes the Company’s mass merchant concept in the United States under the “Wal-Mart” or “Walmart” brand, 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 50 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 operating income for each operating segment and excludes unallocated corporate overhead.  From time to time, we revise the measurement of each segment’s operating income as changes in business needs dictate. When we do, we restate all periods presented for comparative purposes.

Net sales by operating segment were as follows:

   
Three Months Ended
 
   
April 30,
 
(Amounts in millions)
 
2009
   
2008
 
Net Sales:
           
Walmart U.S.
    $61,244       $58,991  
International
    21,263       23,927  
Sam's Club
    10,964       11,124  
Total Company
    $93,471       $94,042  
 
Segment operating income was as follows:

   
Three Months Ended
 
   
April 30,
 
(Amounts in millions)
 
2009
   
2008
 
Operating Income:
           
Walmart U.S.
    $4,464       $4,320  
International
    880       1,050  
Sam's Club
    393       393  
Other
    (520 )     (446 )
Operating income
    $5,217       $5,317  
Interest expense, net
    (467 )     (496 )
Income from continuing operations before income taxes
    $4,750       $4,821  
 
8

 
Goodwill is recorded on the Condensed Consolidated Balance Sheets for the operating segments as follows:

   
April 30,
   
April 30,
   
January 31,
 
(Amounts in millions)
 
2009
   
2008
   
2009
 
International
    $14,577       $16,123       $14,955  
Sam’s Club
    305       305       305  
Total goodwill
    $14,882       $16,428       $15,260  

The decrease in the International segment's goodwill since January 31, 2009, primarily resulted from strengthening of the U.S. dollar against all major currencies except the Canadian dollar.

7 Comprehensive Income (Loss)

Comprehensive income (loss) is consolidated net income plus certain other items that are recorded directly to total equity. Amounts included in accumulated other comprehensive (loss) income for the Company’s derivative instruments and minimum pension liabilities are recorded net of the related income tax effects. Comprehensive income was $2.4 billion and $3.6 billion for the three months ended April 30, 2009 and 2008, respectively, of which approximately $100 million related to the noncontrolling interest for both periods. The following table provides further detail regarding changes in the composition of accumulated other comprehensive loss during the first quarter of fiscal 2010:


(Amounts in millions)
 
Currency Translation
   
Derivative Instruments
   
Minimum Pension Liability
   
Total
 
                         
Balance at January 31, 2009
    $(2,396 )     $(17 )     $(275 )     $(2,688 )
Foreign currency translation adjustment
    (671 )                     (671 )
Change in fair value of hedge instruments
            (14 )             (14 )
Balance at April 30, 2009
    $(3,067 )     $(31 )     $(275 )     $(3,373 )

The currency translation amount includes a net translation gain of $1.5 billion and $1.2 billion at April 30, 2009 and January 31, 2009, respectively, related to net investment hedges of our operations in the United Kingdom and Japan.

8 Common Stock Dividends

On March 5, 2009, the Company’s Board of Directors approved an increase in annual dividends for fiscal 2010 to $1.09 per share, an increase of 15% over the dividends paid in fiscal 2009. The annual dividend will be paid in four quarterly installments on April 6, 2009, June 1, 2009, September 8, 2009, and January 4, 2010 to holders of record on March 13, May 15, August 14 and December 11, 2009, respectively.

9 Income and Other Taxes

The Company's effective tax rate was 33.7% for the three months ended April 30, 2009, compared to 34.2% for fiscal 2009.  The mix of income between domestic and international operations, together with the recent changes in currency exchange rates are the main reasons for this change.  The Company expects the fiscal 2010 annual effective tax rate to be approximately 34-35%.  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 and 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.
 
9

 
In the normal course of its business the Company provides for uncertain tax positions, and the related interest, and adjusts its unrecognized tax benefits and accrued interest accordingly. During the first quarter of fiscal 2010, unrecognized tax benefits related to continuing operations decreased by $51 million and accrued interest increased by $23 million.  As of April 30, 2009, the Company’s unrecognized tax benefits related to continuing operations were $966 million, of which $551 million would, if recognized, affect the Company’s effective tax rate.

During the next twelve months, it is reasonably possible that tax audit resolutions could reduce unrecognized tax benefits by $340 million to $490 million, either because our tax positions are sustained on audit or because the Company agrees to their disallowance.  The Company does not expect any such audit resolutions to cause a significant change in its effective tax rate.

Additionally, at January 31, 2008 the Company had unrecognized tax benefits of up to $1.8 billion which, if recognized, would be recorded as discontinued operations.  Of this, $63 million was recognized in discontinued operations during the second quarter of fiscal year 2009 following the resolution of a gain determination on a discontinued operation that was sold in fiscal year 2004.  The balance of $1.7 billion at April 30, 2009 relates to a worthless stock deduction which the Company has claimed for the disposition of its German operations in fiscal year 2007. The Company believes it is reasonably possible this matter will be resolved within the next twelve months.

The Company classifies interest on uncertain tax benefits as interest expense and income tax penalties as operating, selling, general and administrative costs.  At April 30, 2009, before any tax benefits, the Company had $285 million of accrued interest and penalties on unrecognized tax benefits.

The Company is subject to income tax examinations for its U.S. federal income taxes generally for the fiscal year 2008, with fiscal years 2004 through 2008 remaining open for a limited number of U.S. income tax issues.  Non-U.S. income taxes are subject to income tax examination for the tax years 2002 through 2008, and state and local income taxes are open for the fiscal years 2004 through 2007 generally and for the fiscal years 1997 through 2003 for a limited number of issues.

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 certain 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 Condensed 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.

10 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 Condensed 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 interest 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.


On December 23, 2008, the Company and the attorneys for the plaintiffs in 63 of the wage-and-hour class actions described above announced that they had entered into a series of settlement agreements in connection with those matters. Each of the settlements is subject to approval by the court in which the matter is pending. The total amount to be paid by the Company under the settlement agreements will depend on whether such approvals are granted, as well as on the number and amount of claims that are submitted by class members in each matter. If all of the agreements are approved by the courts, the total to be paid by the Company under the settlement agreements will be at least $352 million, but no more than $640 million, depending on the number and amount of claims. The Company may also incur additional administrative expenses and other costs in the process of concluding the settlements.

One of the remaining wage-and-hour lawsuits 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. On November 19, 2008, the court of appeals issued an Order staying further proceedings in the Savaglio appeal pending the decision of the California Supreme Court in a case involving similar issues, entitled Brinker v. Superior Court.

10

 
In another of the remaining wage-and-hour lawsuits, 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 on December 7, 2007, the Company filed its Notice of Appeal.

In another wage-and-hour lawsuit, Braun v. Wal-Mart Stores, Inc., the Company agreed in October 2008 to settle the case by paying up to approximately $54 million, part of which is to be paid to the State of Minnesota and part to the class members and their counsel. On January 14, 2009, the trial court entered an Order granting preliminary approval of the settlement and directing that notices be mailed to class members. The exact amount that will be paid by the Company depends on the number and amount of claims that are submitted by class members in response to the notices.

Exempt Status Cases:> The Company is currently a defendant in four cases in which the plaintiffs seek class certification of various groups of salaried managers and challenge their exempt status under state and federal laws. In one of those cases (Sepulveda v. Wal-Mart Stores, Inc.), class certification was denied by the trial court on May 5, 2006. On April 25, 2008, a three-judge panel of the United States Court of Appeals for the Ninth Circuit affirmed the trial court’s ruling in part and reversed it in part, and remanded the case for further proceedings. On May 16, 2008, the Company filed a petition seeking review of that ruling by a larger panel of the court. On October 10, 2008, the court entered an Order staying all proceedings in the Sepulveda appeal pending the final disposition of the appeal in Dukes v. Wal-Mart Stores, Inc., discussed below. Class certification has not been addressed in the other cases. 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 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 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. On December 11, 2007, the three-judge panel withdrew its opinion of February 6, 2007, and issued a revised opinion. As a result, the Company’s Petition for Rehearing En Banc was denied as moot. The Company filed a new Petition for Rehearing En Banc on January 8, 2008. On February 13, 2009, the court of appeals issued an Order granting the Petition. The court heard oral argument on the Petition on March 24, 2009. 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’s financial condition or results of operations. The plaintiffs also seek punitive damages which, if awarded, could result in the payment of additional amounts material to the Company’s financial condition or results of operations. 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 by the Equal Employment Opportunity Commission (“EEOC”) on August 24, 2001, in the United States District Court for the Eastern District of Kentucky on behalf of Janice Smith and all other females who made application or transfer requests at the London, Kentucky, distribution center from 1998 to the present, and who were not hired or transferred into the warehouse positions for which they applied. 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 EEOC seeks back pay and front pay for those females not selected for hire or transfer during the relevant time period, plus compensatory and punitive damages and injunctive relief. The EEOC has asserted that the hiring practices in question resulted in a shortfall of 245 positions. The claims for compensatory and punitive damages are capped by statute at $300,000 per shortfall position. The amounts of back pay and front pay that are being sought have not been specified. The case has been set for trial on March 1, 2010.

11

 
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.

11 Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" ("SFAS 141(R)"). SFAS 141(R) replaces SFAS 141, "Business Combinations," but retains the requirement that the purchase method of accounting for acquisitions be used for all business combinations. SFAS 141(R) expands on the disclosures previously required by SFAS 141, better defines the acquirer and the acquisition date in a business combination and establishes principles for recognizing and measuring the assets acquired (including goodwill), the liabilities assumed and any noncontrolling interests in the acquired business. SFAS 141(R) also requires an acquirer to record an adjustment to income tax expense for changes in valuation allowances or uncertain tax positions related to acquired businesses. SFAS 141(R) is effective for all business combinations with an acquisition date in the first annual period following December 1, 2008; early adoption is not permitted. The Company adopted this statement as of February 1, 2009 and it did not have a material impact on its financial statements.

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51" ("SFAS 160"). SFAS 160 requires that noncontrolling (i.e., minority) interests in subsidiaries be reported in the equity section of the Company's balance sheet, rather than in a mezzanine section of the balance sheet between liabilities and equity. SFAS 160 also changes the manner in which the net income of the subsidiary is reported and disclosed in the controlling company's income statement and establishes guidelines for accounting for changes in ownership percentages and for de-consolidation. SFAS 160 is effective for financial statements for fiscal years beginning on or after December 1, 2008 and interim periods within those years. The Company adopted the presentation and disclosure requirements of SFAS 160 retrospectively and adopted all other provisions of SFAS 160 prospectively on February 1, 2009. Accordingly, “attributable to Wal-Mart” refers to operating results exclusive of any noncontrolling interest.

The Company also adopted Emerging Issues Task Force Topic No. D-98, “Classification and Measurement of Redeemable Securities (“EITF D-98”), in conjunction with its adoption of FAS 160.  This standard is applicable for all noncontrolling interests where the Company is or may be required to repurchase an interest in a consolidated subsidiary from the noncontrolling interest holder under a put option or other contractual redemption requirement.  Because the Company has certain redeemable noncontrolling interests, noncontrolling interests are presented in both the equity section and the mezzanine section of the balance sheet between liabilities and equity.

In March 2009, the Company paid $436 million to acquire a portion of the redeemable noncontrolling interest in Distribución y Servicio D&S S.A. (“D&S”) through a second tender offer as required by the Chilean securities laws.  This transaction resulted in a $148 million acquisition of the redeemable noncontrolling interest and the remaining $288 million is reflected as a reduction of Wal-Mart shareholders’ equity. Additionally, the former D&S controlling shareholders still hold a put option that is exercisable beginning in January 2011 through January 2016. During the exercise period, the put option allows each former controlling shareholder the right to require the Company to purchase up to all of their shares of D&S (approximately 25.1%) owned at fair market value at the time of an exercise, if any.
 
12

 
12 Discontinued Operations
 
During fiscal 2009, the Company disposed of Gazeley Limited (“Gazeley”), an ASDA commercial property development subsidiary in the United Kingdom.  Consequently, the results of operations associated with Gazeley are presented as discontinued operations in our Condensed Consolidated Statements of Income and Condensed Consolidated Balance Sheets for all periods presented.  The cash flows related to this operation were insignificant for all periods presented.  In the third quarter of fiscal 2009, the Company recognized approximately $212 million, after tax, in operating profits and gains from the sale of Gazeley.  The transaction continues to remain subject to certain indemnification obligations. The Company’s operations in the United Kingdom are consolidated using a December 31 fiscal year-end.  Since the sale of Gazeley closed in July 2008, the Company recorded the gain to discontinued operations in the third quarter of fiscal 2009.

During the third quarter of fiscal 2009, the Company initiated a restructuring program under which the Company’s Japanese subsidiary, The Seiyu Ltd., has closed or will close approximately 23 stores and dispose of certain excess properties.  This restructuring will involve incurring costs associated with lease termination obligations, asset impairment charges and employee separation benefits.  The costs associated with this restructuring are presented as discontinued operations in our Condensed Consolidated Statements of Income and Condensed Consolidated Balance Sheets for all periods presented.  The cash flows and accrued liabilities related to this restructuring were insignificant for all periods presented.  The Company recognized approximately $8 million, after tax, in operating losses as discontinued operations during the first quarter of fiscal 2010.  Additional costs will be recorded in future periods for lease termination obligations and employee separation benefits and are not expected to be material.

13 Subsequent Event
 
           On May 21, 2009, the Company issued and sold $1.0 billion of 3.20% Notes Due 2014 at an issue price equal to 99.987% of the notes’ aggregate principal amount.  Interest started accruing on the notes on May 21, 2009. The Company will pay interest on the notes on May 15 and November 15 of each year, commencing on November 15, 2009. The notes will mature on May 15, 2014.  The notes are senior, unsecured obligations of Wal-Mart Stores, Inc.
 
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 and should be read in conjunction with our Condensed Consolidated Financial Statements as of April 30, 2009, and the period then ended and the accompanying notes included under Part I, Item 1, of this Quarterly Report on Form 10-Q, as well as our Consolidated Financial Statements as of January 31, 2009, and for the year then ended and the accompanying notes, 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, 2009, and incorporated by reference in and included as an exhibit to our Annual Report on Form 10-K for the year ended January 31, 2009.

We intend for this discussion to provide the reader with information that will assist 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 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 is defined as operating income for each operating segment and excludes unallocated corporate overhead.   From time to time, we revise the measurement of each segment’s operating income as changes in business needs dictate. When we do, we restate all periods presented for comparative purposes.

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.  Our comparable store sales are measured in this report on a calendar basis in relation with our fiscal calendar.  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.

In connection with the Company’s finance transformation project, we adjusted the classification of certain revenue and expense items within our income statement for financial reporting purposes. The changes, which are effective February 1, 2009, did not impact operating income or consolidated net income attributable to Wal-Mart and had a minimal impact on our comparable store sales.
 
13


Company Performance Metrics
 
Management uses a number of metrics to assess the Company’s performance including:
 
·  
Total sales;
 
·  
Comparable store sales;
 
·  
Operating income;
 
·  
Diluted net income per common share from continuing operations attributable to Wal-Mart;
 
·  
Return on investment; and
 
· 
Free cash flow.

Total Sales

   
Three Months Ended April 30,
 
         
Percent
   
Percent
         
Percent
   
Percent
 
(Amounts in millions)
 
2009
   
of Total
   
Change
   
2008
   
of Total
   
Change
 
Net Sales:
                                   
Walmart U.S.
    $61,244       65.6 %     3.8 %     $58,991       62.8 %     6.7 %
International
    21,263       22.7 %     -11.1 %     23,927       25.4 %     22.0 %
Sam's Club
    10,964       11.7 %     -1.4 %     11,124       11.8 %     7.9 %
Total Net Sales
    $93,471       100.0 %     -0.6 %     $94,042       100.0 %     10.4 %

Our total net sales decreased by 0.6% for the first quarter of fiscal 2010 and increased by 10.4% for the first quarter of fiscal 2009. The first quarter of fiscal 2010 decrease primarily resulted from changes in currency exchange rates and one extra selling day in the first quarter of fiscal 2009 due to leap year.  For the three months ended April 30, 2009, changes in currency exchange rates had an unfavorable impact of $4.8 billion on the International segment’s net sales, causing a decrease in the International segment’s net sales as a percentage of total Company net sales.  For the three months ended April 30, 2008, changes in currency exchange rates had a favorable impact of $1.3 billion on the International segment’s net sales. Although movements in currency exchange rates cannot reasonably be predicted, volatility in currency exchange rates, when compared to prior periods, may continue to impact the International segment’s reported net sales in the foreseeable future.

Comparable Store Sales

   
Three Months Ended April 30,
 
   
2009
   
2008
 
             
Walmart U.S.
    1.6 %     2.8 %
Sam's Club (1)
    -2.2 %     6.7 %
Total U.S. (2)
    0.9 %     3.4 %
                 
(1) Sam's Club comparable club sales include fuel. Fuel sales had a negative impact of 4.5 percentage points for the three months ending April 30, 2009 and a positive impact of 2.8 percentage points for the three months ended April 30, 2008.
 
(2) Fuel sales had a negative impact of 0.7 percentage points for the three months ended April 30, 2009 and a positive impact of 0.5 percentage points for the three months ended April 30, 2008.
 

Comparable store sales in the United States, including fuel sales, increased 0.9% for the first quarter of fiscal 2010 compared to 3.4% for the first quarter of fiscal 2009. Comparable store sales in fiscal 2010 were lower than fiscal 2009 primarily due to one extra selling day in the first quarter of fiscal 2009 due to leap year.
 
14

 
Operating Income
 
   
Three Months Ended April 30,
 
         
Percent
   
Percent
         
Percent
   
Percent
 
(Amounts in millions)
 
2009
   
of Total
   
Change
   
2008
   
of Total
   
Change
 
Operating Income:
                                   
Walmart U.S.
    $4,464       85.6 %     3.3 %     $4,320       81.3 %     9.3 %
International
    880       16.9 %     -16.2 %     1,050       19.7 %     19.2 %
Sam's Club
    393       7.5 %     0.0 %     393       7.4 %     4.8 %
Other
    (520 )     -10.0 %     16.6 %     (446 )     -8.4 %     -16.8 %
      $5,217       100.0 %     -1.9 %     $5,317       100.0 %     10.1 %

Operating income growth compared to net sales growth is a meaningful metric to share with investors because it indicates how effectively we manage costs and leverage expenses. Our objective is to grow operating income faster than net sales. Our operating income decreased 1.9% for the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009, and net sales decreased by 0.6% over the same period. While the Sam’s Club segment met this objective due to deflation in fuel prices, the Walmart U.S. and International segments did not.  The Walmart U.S. segment did not meet this objective due to increased expenses relating to health benefit costs. The International segment fell short of this objective primarily due to increased operating expenses associated with the recent acquisition in Chile and closing our Sam’s Club operations in Canada.

Diluted Net Income per Share from Continuing Operations Attributable to Wal-Mart

   
Three Months Ended
 
   
April 30,
 
   
2009
   
2008
 
Diluted net income per share from continuing operations attributable to Wal-Mart
    $0.77       $0.76  


Diluted net income per share from continuing operations attributable to Wal-Mart increased 1.3% for the first quarter of fiscal year 2010 compared to the first quarter of fiscal year 2009.

Return on Investment

 Management believes return on investment (“ROI”) is a meaningful metric to share with investors because it helps investors assess how effectively Wal-Mart is employing its assets. ROI was 18.7% and 19.1% for the trailing twelve months ended April 30, 2009 and 2008, respectively. The decrease in ROI resulted from our investment in Chile and the accrual for our settlement of 63 wage and hour class action lawsuits in January 2009.

We define ROI as adjusted operating income (operating income plus interest income, depreciation and amortization and rent expense) for the fiscal year or trailing twelve months divided by average invested capital during that period. We consider average invested capital to be the average of our beginning and ending total assets of continuing operations plus accumulated depreciation and amortization less accounts payable and accrued liabilities for that period, plus a rent factor equal to the rent for the fiscal year or trailing twelve months multiplied by a factor of eight.

ROI is considered a non-GAAP financial measure under the SEC’s rules. We consider return on assets (“ROA”) to be the financial measure computed in accordance with generally accepted accounting principles (“GAAP”) that is the most directly comparable financial measure to ROI as we calculate that financial measure. ROI differs from ROA (which is income from continuing operations attributable to Wal-Mart for the fiscal year or the trailing twelve months divided by average of total assets of continuing operations for the period) because ROI: adjusts operating income to exclude certain expense items and add interest income; adjusts total assets from continuing operations for the impact of accumulated depreciation and amortization, accounts payable and accrued liabilities; and incorporates a factor of rent to arrive at total invested capital.

Although ROI is a standard financial metric, numerous methods exist for calculating a company’s ROI. As a result, the method used by management to calculate ROI may differ from the methods other companies use to calculate their ROI. We urge you to understand the methods used by another company to calculate its ROI before comparing our ROI to that of such other company.
 
15


The calculation of ROI along with a reconciliation to the calculation of ROA, the most comparable GAAP financial measurement, is as follows: 

   
For the Twelve Months Ended
April 30,
   
(Amounts in millions)
 
2009
   
2008
   
               
CALCULATION OF RETURN ON INVESTMENT
   
               
Numerator
             
Operating income (1)
    $22,698       $22,441    
+ Interest income (1)
    271       290    
+ Depreciation and amortization (1)
    6,811       6,463    
+ Rent (1)
    1,749       1,667    
= Adjusted operating income
    $31,529       $30,861    
                   
Denominator
                 
                   
Average total assets of continuing operations (2)
    $164,232       $160,535    
+ Average accumulated depreciation and amortization (2)
    34,684       30,258    
- Average accounts payable (2)
    28,784       28,284    
- Average accrued liabilities (2)
    15,073       14,118    
+ Rent * 8
    13,992       13,336    
= Invested capital
    $169,051       $161,727    
                   
Return on investment (ROI)
    18.7 %     19.1 %  
                   
CALCULATION OF RETURN ON ASSETS
   
Numerator
                 
Income from continuing operations attributable to Wal-Mart(1)
    $13,749       $13,514    
                   
Denominator
                 
                   
Average total assets of continuing operations (2)
    $164,232       $160,535    
                   
Return on assets (ROA)
    8.4 %     8.4 %  
                   
Certain Balance Sheet Data  
As of April 30,
 
 
2009
   
2008
 
2007
                   
Total assets of continuing operations (1)
    $161,935       $166,528  
 $154,542
Accumulated depreciation and amortization
    36,762       32,606  
27,910
Accounts payable
    28,541       29,027  
27,541
Accrued liabilities
    15,263       14,882  
13,353
 
(1)  
Based on continuing operations only and therefore excludes the impact of Gazeley Limited, a United Kingdom property development subsidiary, which was sold in the second quarter of fiscal 2009, and the closure of 23 stores and divesture of other properties of The Seiyu, Ltd. in Japan pursuant to restructuring program adopted during the third quarter of fiscal 2009.  All of these activities have been disclosed as discontinued operations.  Total assets as of April 30, 2009, 2008 and 2007 in the table above exclude assets of discontinued operations that are reflected in the Condensed Consolidated Balance Sheets of $155, $955 and $880, respectively.

(2)  
The average is based on the addition of the account balance at the end of the current period to the account balance at the end of the prior period and dividing by 2.
 
 
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Free Cash Flow

 We define free cash flow as net cash provided by operating activities in a period minus payments for property and equipment made in that period. We generated positive free cash flow of $964 million for the three months ended April 30, 2009, compared to $1.3 billion for the comparative period in the prior year. The decline in our free cash flow is the result of increased capital spending coupled with the timing effect of the payments in our U.S. associate payroll cycle.

Free cash flow is considered a non-GAAP financial measure under the SEC’s rules. Management believes, however, that free cash flow is an important financial measure for use in evaluating the Company’s financial performance, which measures our ability to generate additional cash from our business operations. Free cash flow should be considered in addition to, rather than as a substitute for, income from continuing operations as a measure of our performance and net cash provided by operating activities as a measure of our liquidity.

Additionally, our definition of free cash flow is limited, in that it does not represent residual cash flows available for discretionary expenditures due to the fact that the measure does not deduct the payments required for debt service and other contractual obligations or payments made for business acquisitions. Therefore, we believe it is important to view free cash flow as a measure that provides supplemental information to our entire statement of cash flows.

Although other companies report their free cash flow, numerous methods may exist for calculating a company’s free cash flow. As a result, the method used by our management to calculate free cash flow may differ from the methods other companies use to calculate their free cash flow. We urge you to understand the methods used by another company to calculate its free cash flow before comparing our free cash flow to that of such other company.

The following table reconciles net cash provided by operating activities, a GAAP measure, to free cash flow, a non-GAAP measure.

   
Three Months Ended April 30,
 
   
2009
   
2008
 
(Amounts in millions)
           
Net cash provided by operating activities
    $3,571       $3,779  
Payments for property and equipment
    (2,607 )     (2,447 )
Free cash flow
    $964       $1,332  
                 
Net cash used in investing activities
    $(2,683 )     $(2,233 )
                 
Net cash (used in) provided by financing activities
    $(1,503 )     $791  

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.

Consolidated

Three Months Ended April 30, 2009

Our total net sales decreased by 0.6% for the first quarter of fiscal 2010 and increased by 10.4% for the first quarter of fiscal 2009.  The decrease in fiscal 2010 resulted from changes in currency exchange rates and one extra selling day in the first quarter in fiscal 2009 due to leap year.  Currency exchange rates had a $4.8 billion unfavorable impact on the International segment’s net sales for the first quarter of fiscal 2010 which contributed to the decrease in the International segment’s net sales as a percentage of total Company net sales. Currency exchange rates had a $1.3 billion favorable impact on the International segment’s net sales for the first quarter of fiscal 2009.

Our gross profit margin increased from 24.1% for the first quarter of fiscal 2009 to 24.7% in the first quarter of fiscal 2010.  This increase is primarily due to more effective merchandising and strong inventory management in the Walmart U.S. segment.  Gross profit margin was also positively impacted by a change in sales mix in the Sam’s Club segment driven by strong sales in higher margin categories and a decrease in lower margin fuel sales.
 
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Operating, selling, general and administrative expenses (“operating expenses”), as a percentage of net sales, increased 0.5 percentage points for the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009.  Operating expenses as a percentage of net sales increased in the first quarter of fiscal 2010 primarily due to higher health benefit costs in the U.S. businesses, as well as changes in currency exchange rates.

Corporate expenses have increased primarily due to our long-term transformation projects to enhance our information systems for merchandising, finance and human resources. We expect these increased expenses from the transformation projects to continue for the foreseeable future.

Membership and other income, as a percentage of net sales, which includes a variety of income categories such as Sam’s Club membership income and tenant lease income, decreased 0.2 percentage points due to a decline in several miscellaneous income categories compared to the first quarter of fiscal 2009.

Interest, net, for the first quarter of fiscal 2010 decreased by 5.8% compared to the first quarter of fiscal 2009 due to lower short-term borrowing levels.

Our effective income tax rate from continuing operations decreased from 34.6% for the first quarter of fiscal 2009 to 33.7% for the first quarter of fiscal 2010 due to the mix of income between domestic and international operations, as well as the recent fluctuations in currency exchange rates.

Walmart U.S. Segment

Three Months Ended April 30, 2009
(Amounts in millions)

         
Segment net
         
Segment operating
   
Segment
operating
 
         
sales increase
         
income increase
   
income as a
 
         
from prior
   
Segment
   
from prior fiscal
   
percentage
 
Three months ended
 
Segment
   
fiscal year
   
operating
   
year first
   
of segment
 
April 30,
 
net sales
   
first quarter
   
income
   
quarter
   
net sales
 
2009
    $61,244       3.8 %     $4,464       3.3 %     7.3 %
2008
    58,991       6.7 %     4,320       9.3 %     7.3 %

Net sales for the Walmart U.S. segment increased 3.8% for the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009. The increase resulted from our continued expansion activities, strength in the grocery and health and wellness categories and a comparable store sales increase of 1.6%. Comparable store sales for the first quarter of fiscal 2010 increased primarily due to an increase in customer traffic in our comparable stores.

Gross profit margin increased 0.5 percentage points for the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009 due to higher initial margins and lower inventory shrinkage.

Operating expenses as a percentage of segment net sales increased 0.4 percentage points for the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009 primarily due to higher health benefit costs.

         Other income as a percentage of segment net sales for the first quarter of fiscal 2010 decreased 0.1 percentage points due to a decline in several miscellaneous income categories compared to the first quarter of fiscal 2009.
 
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International Segment
 
At April 30, 2009, our International segment was comprised of wholly-owned subsidiaries in Argentina, Brazil, Canada, Japan, Puerto Rico and the United Kingdom, our majority-owned subsidiaries in Central America, Chile and Mexico and our joint ventures in China and India and our other controlled subsidiaries in China.

Three Months Ended April 30, 2009
(Amounts in millions)

         
Segment net sales
         
Segment operating
   
Segment
operating
 
         
decrease/increase
         
income
   
income as a
 
         
from prior
   
Segment
   
decrease/increase
   
percentage
 
Three months ended
 
Segment
   
fiscal year
   
operating
   
from prior fiscal
   
of segment
 
April 30,
 
net sales
   
first quarter
   
income
   
year first quarter
   
net sales
 
2009
    $21,263       -11.1 %     $880       -16.2 %     4.1 %
2008
    23,927       22.0 %     1,050       19.2 %     4.4 %

Net sales for the International segment decreased 11.1% for the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009. The decrease resulted from the negative $4.8 billion impact of the strengthening of the U.S. dollar. This negative impact was offset by increased sales from comparable units as well as acquisitions and new store growth.
 
Gross profit margin for the first quarter of fiscal 2010 was consistent with the first quarter of 2009.
 
Operating expenses as a percentage of segment net sales increased 0.4 percentage points for the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009 due to expenses from the closure of Sam’s Clubs in Canada and the impact of the acquisition of Distribución y Servicio D&S S.A. (“D&S”) in Chile, partially offset by expense improvements in the United Kingdom, China and Japan.
 
Other income as a percentage of segment net sales increased 0.1 percentage points for the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009 primarily as a result of the consolidation of D&S.

Operating income as a percentage of segment net sales decreased 0.3 percentage points for the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009 primarily due to the increase in operating expenses.

Sam’s Club Segment

Three Months Ended April 30, 2009
(Amounts in millions)

         
Segment net sales
         
Segment operating
   
Segment
operating
 
         
decrease/increase
         
income increase
   
income as a
 
         
from prior
   
Segment
   
from prior fiscal
   
percentage
 
Three months ended
 
Segment
   
fiscal year
   
operating
   
year first