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General merchandise retailer Walmart (WMT Free Walmart Stock Report) recorded solid results for the October quarter, but shares dipped lower on the news. 

Companywide constant-currency net sales increased 3.3% year over year, matching our estimate. Adjusted earnings per share were up 7.4% to $1.16, above our $1.09 forecast. A lower tax rate helped drive the outperformance. 

Walmart U.S. had another strong quarter, with same-store sales growth of 3.2%. Traffic increased 1.3%, while the average transaction amount grew 1.9%. The latter was hurt by modest food deflation. The grocery category continued to perform well, with a mid-single-digit comp sales gain. Fresh food was particularly strong, as improvements in areas like bakery and meats helped drive a mid-single-digit comp gain. Health and wellness comp sales increased by a mid-single-digit percentage, as branded drug inflation and prescription volume growth benefited results. General merchandise comp sales were up a low single-digit percentage, with strength in home and hardlines. Finally, there was some softness in apparel due to unseasonably warm weather. The company feels good about its positioning for the holiday season despite there being six fewer shopping days between Thanksgiving and Christmas this year. It reported that its customers’ economic health appears solid. 

The e-commerce business grew an impressive 41%, the best result of the year thus far. This contributed 170 basis points of the Walmart U.S. comp gain. Grocery pickup is resonating with customers, and is now available at 3,000 locations nationwide. The InHome delivery program launched in Kansas City, Pittsburgh, and Vero Beach Florida. Although we like the innovative strategy, it remains to be seen whether this service will catch on. Elsewhere, since the launch of NextDay delivery in May, more than 75% of the U.S. population has access to this expedited shipping.

Sam's Club recorded strong comp sales of 4.1% (excluding fuel and tobacco). This result was helped by merchandise improvements and efforts to run a simpler, more focused club model. Still, operating income was pressured by lower prices and technology investment.

The International division did well overall, but there continues to be some pockets of weakness. Seven of the 10 markets had positive same-store sales, helping the top line rise 4.8% in constant-currency terms. Mexican e-commerce sales rose 65%, and there was triple digit online growth in China. However, in the U.K., concerns over Brexit continue to negatively affect customer spending patterns, and business in Chile was hurt by civil unrest.

While third-quarter sales and operating income were in line with expectations, the better-than-expected earnings prompted management to increase its full-year fiscal 2019 earnings guidance. It now expects the bottom line to be up slightly year over year, compared to the prior outlook of down slightly to up slightly. In response, we are raising our fiscal 2019 earnings estimate from $4.90 to $4.95.

Overall this was another solid showing from the world's largest retailer. Although we continue to recommend these relatively safe shares to conservative investors, those hunting for a bargain will likely want to look elsewhere.

About The Company:Walmart, 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.

 

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.