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Dow-30 Earnings: Wal-Mart Stores - Fiscal Second Quarter 2013
The world's largest retailer Wal-Mart Stores (WMT – Free Wal-Mart Stock Report) reported somewhat disappointing results during the fiscal second quarter (ended July 31, 2013). While earnings per share of $1.24 rose 5.1% and were close to our estimate of $1.26, net sales of $116.2 billion were only up 2.4% and came in below expectations. Notably, e-commerce investment shaved $0.03 a share off the total bottom-line tally.
The company didn't leverage expenses in the second quarter due to the top-line miss. Wal-Mart thinks it can still attain full-year leverage by cutting costs internationally. Strategies include greater volumes of direct imports and working with suppliers to reduce COGS. Domestically, WMT is focused on reducing costs through enhancements to hybrid and self-checkout register technology. Route optimization should help trim transportation costs. This should help offset fees surrounding the Walmex bribery investigation and related compliance hiring.
Digging more deeply into the sales performance, Wal-Mart U.S. saw comps fall 30 basis points as traffic fell 50 basis points and average ticket rose 20 basis points. The company blamed the 2% payroll tax increase and a lack of inflation for the comp. The lack of price hikes was largely felt by the grocery segment. Produce was up in the mid-single- digit range, owing partly to an effective marketing campaign and more efficient ``farm to shelf'' logistics. Consumable sales were soft as customers traded down in categories where brand loyalty is of little importance. Health and wellness was flat year over year, but up sequentially, thanks to the prescription business. Apparel had a low single-digit positive comp due to the success of new brands.
The performance of the International segment was so-so. Net sales were only up 2.9% (4.4% on a constant currency basis). Still, Wal-Mart was not able to leverage expenses due to weak sales and wage inflation. Complex overseas labor laws and employment contracts make it more difficult to align labor costs with the consumer demand environment. It also had to pay higher indirect taxes and made investments in infrastructure and e-commerce. Workforce management tools are being put into place to help with the labor issue, and software to improve on-shelf availability is being used in Mexico. Last year's decision to scale back the rollout of new stores in China seems to be working, as net sales rose 6.3% there. A shift from daily shopping to consolidated trips is also helping.
Excluding the effect of fuel, Sam's Club comps were up 1.7% and within the guidance range. Traffic was up 2.7% but the average ticket fell 1%. The former was helped by the rollout of the Instant Savings Program, where members receive two coupon books during the quarter. Each are active for three weeks and provide savings beyond normal pricing. The promotion also explains the decline in the average transaction amount. The company expects Sam's Club comp gains to range between flat and 2% in the coming quarter.
Wal-Mart's growth initiatives appear to be progressing well. It added 29 supercenters and 35 small format stores (Neighborhood Market and Wal-Mart Express) in the U.S. during the quarter. The company plans on opening 90 new units, overall, in the current period. E-commerce is coming along, with testing under way for a Website-to-store locker program and self-scanning throughout supercenters i.e., “scan and go”. Ship from store is also being expanded, with most deliveries only taking two days or less.
Wal-Mart expects comps to be flat in the current quarter. It also revised the consolidated net sales growth outlook to 2%-3% versus the prior 5%-6%. Around a third of this is due to anticipated currency headwinds, with the rest likely the result of weaker global consumer spending expectations. The company provided a fiscal third-quarter earnings-per-share guidance range of $1.11-$1.16 and a full-year forecast between $5.10 and $5.30. In response, we have taken our full-year estimates down by a dime to $5.25 and our October period target is being trimmed by $0.03, to $1.14 a share.
Overall, the earnings report was not particularly encouraging. We think the weakness had more to do with a difficult consumer spending environment than the company's execution. Although it may prove difficult to improve investor sentiment over the near term, we still recommend the shares for conservative long-term investors based on favorable extended growth opportunities.
About The Company:Wal-Mart Stores, Inc. is the world’s largest retailer, operating 3,158 supercenters (includes sizable grocery departments), 561 discount stores, 620 Sam’s Clubs, and 286 Neighborhood Markets in the U.S., plus 6,148 foreign stores (mainly in Latin America, with the balance in Asia, Canada, and the U.K.) for total square footage of 1.072 billion (as of 1/31/13). Most stores are owned and are within 400 miles of an expanding network of distribution centers. Groceries accounted for 55% U.S. sales in 2012, while sales per square foot were about $437.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.