General merchandise retailer Walmart (WMT - Free Wal-Mart Stock Report) reported slightly worse-than-expected earnings for the January quarter, and the shares are down meaningfully in response. The bottom line came in at $1.33, less than our $1.35 call and Wall Street's consensus estimate of $1.37. The company expedited the start of some initiatives in order to take advantage of tax reform, which increased expenses and drove part of the miss.
The gross profit margin fell 61 basis points, two-thirds of which was caused by permanent merchandise price cuts in certain markets and a mix shift toward less profitable e-commerce sales. The remainder stemmed from inventory markdowns at 63 now-shuttered Sam's Clubs locations. Management plans to continue to make investments that will pressure margins this year, but the impact likely won't be as substantial as the one experienced in the fourth quarter.
Companywide revenue rose 3% year over year on a constant-currency basis. Same-store sales at home increased 2.6%, on a 1.6% rise in traffic. The holiday season was successful and sales were consistently strong across regions and product categories throughout the quarter. New technologies and apps that manage markdown activity and help associates improve in-stock levels contributed to the positive showing.
After posting red-hot growth for much of 2017, the e-commerce business slowed. Web-initiated sales (includes ship-to-home, ship-to-store, pick up today, online grocery, and transactions through Jet.com and smaller e-commerce brands) grew 23%, less than the 50% reported in the third quarter. The company anniversaried the acquisition of Jet.com, and also suffered from unexpected operational challenges that hindered results. Management appears confident that the growth rate will bounce back to 40% this fiscal year. Efforts to double the amount of locations offering online groceries will likely help.
Results from Sam's Club were largely in line with the core U.S. retail operation. Same-store sales there increased 2.4%. The decision to close 63 clubs and stop selling tobacco at certain locations is expected to reduce the top by $6.3 billion this year.
The International unit continues to grow at a solid pace. Sales from overseas increased 2.8% in the quarter, led by a solid showing in Mexico, which had a 6% comp in fiscal 2017. Encouragingly, nine of eleven international markets had positive comp sales.
Management expects new corporate tax laws to result in a net cash benefit of $2 billion this year. The tax rate will likely be 6.5-8.5 percentage points lower than originally anticipated. The company expects to use the cash to increase wages and benefits for more than a million hourly associates. It also plans to lower prices, improve operational technology and training, and expand same-day and next-day delivery capabilities. Walmart is currently weighing its options as far as the repatriation of overseas cash.
The Sam's Club closures, less tobacco sales, and a decision to shut down the Brazilian e-commerce business will likely create a 140-basis-point sales headwind in fiscal 2018. The sales growth forecast for the year now stands at 1.5%-2% versus prior guidance of ``at or above three percent.'' Domestic same-store sales are expected to be up 2.0% this fiscal year. International sales should grow 3%. Full-year adjusted earnings per share are forecast to land between $4.75 and $5.00, reflecting a year-over-year increase of 7%-13%. In response, we are increasing our prior $4.80 estimate by a dime to $4.90.
Excluding the operational hiccup at e-commerce, we think Walmart had a solid quarter. Underlying demand remains strong, and we think the company is being prudent by maintaining investments in the business, prices, and people. We expect Walmart to continue rewarding shareholders with dividend increases and share repurchases. All told, WMT shares are suitable for conservative long-term investors, in our view.
About The Company: Wal-Mart Stores, Inc. is the world’s largest retailer, operating 3,522 supercenters (includes sizable grocery departments), 415 discount stores, 660 Sam’s Clubs, and 735 Neighborhood Markets in the U.S., plus 6,363 foreign stores (mainly in Latin America, with the balance in Asia, Canada, and the U.K.) for total square footage of 1.164 billion (as of 1/31/17). Most stores are owned and are within 400 miles of an expanding network of distribution centers. Groceries accounted for 56% of U.S. sales, while sales per square foot were about $420.