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Dow-30 Earnings: Wal-Mart Stores - Fiscal Fourth Quarter 2012
The world's largest retailer, Wal-Mart (WMT - Free Wal-Mart Stock Report), reported decent results to finish fiscal 2012 (ended January 31, 2013). Fourth-quarter earnings per share of $1.67 far exceeded our $1.58 estimate, the $1.51 earned last year, and the company's $1.53-$1.58 guidance. The primary reason for the outperformance was a 10% decline in the tax rate due largely to the American Taxpayer Relief Act of 2012. Revenue of $127.1 billion was 2.6% shy of our estimate, but still grew 3.9% year over year (3.7% excluding favorable currency translation).
U.S. same-store sales improved 1% (1.2% without considering fuel), coming in at the low end of management's 1% to 3% guidance. A 1.1% rise in the average transaction amount was offset by a 10-basis point decline in traffic. Although holiday sales were solid, business slowed in January. It appears that Wal-Mart customers are feeling the effects of lighter paychecks caused by the expiration of the Social Security payroll tax cut, as well as relatively high gas prices and delays in tax refunds. These trends prompted the company to issue flat comp guidance for the April quarter. Notably, tax refund check activity picked up toward the middle of February.
Nonetheless, the core domestic business managed to improve its share of food, consumables, health, and over-the-counter spending by 40 basis points, according to Nielsen research. Key drivers of a low single-digit positive comp in Grocery were adult beverages, dry and fresh goods, like produce and USDA meat. In consumables, a broader assortment, value pack sizing, and lower opening price points resonated with cash-strapped customers. In health and wellness, brand-to-generic conversions hurt the average transaction amount but helped prescription volume. Meanwhile a busy flu season benefited over-the-counter volume.
Other areas of strength were sporting goods, mobile phones (iPhone 5, Samsung devices), jewelry, and home decor. Importantly, a focus on basic and essential apparel drove a low-single-digit positive comp for the category. This clinched the first full year of positive comp sales in apparel in the last seven. Although the entertainment category continued to decline owing to the current lull in the technology cycle, Wal-Mart's portion of the entertainment and toy categories increased according to The NPD Group.
The U.S. gross margin was up seven basis points in the quarter, but fell 16 basis points in 2012 as the company continues to keep prices low in order to drive customer loyalty. Companywide operating expenses as a percentage of sales fell 14 basis points in 2012, owing to changes in worker's schedules, inventory stocking, and merchandise sourcing. Wal-Mart's goal is to reduce this rate an additional 86 basis points by the end of fiscal 2016, bringing the five-year total to 100 basis points of operating leverage or $6 billion.
The company plans on growing domestic retail space by 15 million-17 million square feet, which would reflect 7% to 21% year-over-year growth. The increase will likely stem from approximately 100 small format Neighborhood Market and Wal-Mart Express locations. Initial results from the small stores have been encouraging, with comps outpacing the domestic average. The company plans on opening, expanding, and relocating around 130 supercenters this year, similar to 2012.
Last year the company opened fewer stores in Mexico, China, and Brazil than it wanted to, and those it did open were not ideally located. This, along with a weak holiday selling period in developed markets like the United Kingdom and Japan drove poor comps and weaker-than-expected international total revenue growth of 6.9% in the fourth quarter. The company is conducting research on its international customers to get a better sense of their buying patterns, continuing to reinforce everyday low prices, and trying to make merchandise more locally relevant. Although we are optimistic that results will eventually improve, we doubt it will be a quick fix. Meantime…
Sam's club performed better than Wal-Mart U.S. during the quarter with comp sales rising 2.3% on top of a 5.4% advance in the prior year. Traffic grew 1.6% while the average transaction amount was up 70 basis points driven by a strong holiday season. Still, traffic from small business members slowed toward the end of the quarter, which we attribute to concerns over the economy. And, operating margins may come under pressure as the company continues to lower prices in an effort to garner customer loyalty.
The company's guidance is in line with our expectations. Revenue growth is expected to be between 5% and 6%, comparable to last year. Earnings per share for the April quarter ought to come in at $1.11-$1.16, reflecting 2% to 6% growth year over year. For the full year, earnings are expected to range between $5.20 and $5.40. In response, we have shaved a nickel off our 2013 share-net estimate bringing it to $5.35.
Overall, Wal-Mart put forth a solid showing in the fourth quarter despite facing some consumer spending headwinds. We think the company is well positioned in the retail space for the year ahead. The shares offer solid risk-adjusted long-term price appreciation potential at current levels, in our view.
Also, we are encouraged that the company is raising the quarterly dividend by 18% or $0.29, to $1.88.
About The Company: Wal-Mart Stores, Inc. is the world’s largest retailer, operating 3,029 supercenters (includes sizable grocery departments), 629 discount stores, 611 Sam’s Clubs, and 210 Neighborhood Markets in the U.S., plus 5,651 foreign stores, mainly in Latin America, with the balance in Asia, Canada, and the U.K as of 1/31/12. The company operates 1.037 billion square feet of total store space. Most stores are owned and are within 400 miles of an expanding network of distribution centers. Groceries accounted for 54% U.S. sales in 2011, while sales per square foot were about $430.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.