Wal-Mart profits improve, shares decline

Wal-Mart is winning back customers with everyday low prices and giving savvy investors plenty to smile about with share values up almost 25% this year.

But in pre-market trading Thursday (Aug. 16), shares declined 2.5% to $72.50 on the heels of solid second quarter earnings announced this morning as investors appear to be taking some of the recent accumulated profits.

The Bentonville-based retailer pocketed $1.18 per share, up from $1.04 a year ago. Revenue for the quarter ending July 27 topped $113.5 billion, up 4.5% over a year ago. Total revenue was offset by $2.2 billion in currency exchange rate fluctuations. Without the currency impact, net sales, which include acquisitions, would have been $115.7 billion.

Wal-Mart beat analysts expectations of $1.17 per share on revenue of $114.6 billion.

Wal-Mart's topline revenue came in a little short of expectations, despite otherwise strong results.

More importantly Wal-Mart extended its positive to four consecutive quarters, after sliding backward for more than two years. U.S.same-store-sales rose by 2.2% as a result of with positive ticket and traffic.

“I’m really pleased with the continued momentum in our Walmart U.S. stores, evidenced, in part, by three consecutive quarters of positive comp traffic and four straight quarters of positive comp sales,” CEO Mike Duke noted in the release. “The team is very focused on delivering broad assortment and price leadership. Walmart’s low prices drive greater customer loyalty.

Wall Street has waited anxiously all week for Thursday’s report as the retailer is barometer of sorts for consumer sentiment and spending that has been mixed in the past two months. Wal-Mart comprises nearly 10% of all nonautomotive retail spending in the U.S.

With respect to the economic challenges facing Wal-Mart’s core customer, Duke noted, “The paycheck cycle remains pronounced in the United States and in our International markets.”

Roughly two-thirds of the back-to-school shopping fell within Wal-Mart’s second quarter and helped to support the strong domestic results.

Wal-Mart U.S. sales totaled $57.357 billion, up 3.8% from a year. Revenue at Sam’s Club rose 3.8% from a year ago to $14.161 billion, including fuel.

“Our comp sales momentum continued through the second quarter, with July being one of our strongest months. All three geographic business units and all store formats had positive comp sales. Customers are responding to our continued focus on providing the right assortment at everyday low prices and are shopping the entire store,” said Bill Simon, Walmart U.S. president and chief executive officer. “We have a powerful strategy and I’m confident in our ability to deliver sustained strong financial performance.

Ian Gordon, equity analyst for S&P Capital IQ, anticipated management would raise earnings guidance above the $4.72 to $4.92 range. And management delivered, saying it took several factors including sales trends, the global economy and currency into account in providing a 7.2% increase in third quarter guidance on the low end of the range.

Wall Street also got better clarity on the back half of this year as Wal-Mart raised and narrowed the full year guidance to a range of $4.83 to $4.93 per share, which is a 6.3% increase on the low end of the range.

According to Gordon, the retailer’s market share gains have been driven by price reductions and increased variety in merchandising, which in turn should drive sales growth during the back-to-school sale season from late summer into early fall.

Bob Summers, analyst for Susquehanna Financial Group, noted, “We expected an in-line earnings quarter characterized by sustained U.S. same-store sales strength, but acknowledge that U.S. sales expectations are heightened. We believe the combination of price investments and an economizing consumer will prove supportive to further sales gains.”

With the global economy on the decline across much of Europe and parts of Asia, analysts were somewhat concerned about Wal-Mart’s International business, which comprises more than a quarter of the company’s total revenue.

Wal-Mart International posted total revenue of $32.016 billion, up 6.4% from a year ago.

“We are also pleased with the sales and profitability of Walmart International,” Duke said. “Our goal is to achieve more balance between profitability and returns, and we will do that by improving operational and sales productivity. He added that international growth has slowed and that the company is cutting back spending on new stores in some emerging markets to focus on increasing sales at existing stores.

Doug McMillon, president of Wal-Mart International, said in June the company continues to roll-out its low pricing strategy in Brazil and is working toward that in China.

Canada is also strong, but allegations of bribery in the Mexican business unit continue to threaten what has been a great run in the international segment in the short term.

The company has launched an internal investigation into the matter and continues to work with government officials in the U.S. and Mexico. Wal-Mart has pledged to get to bottom of the allegations and has revamped its compliance procedures in the process.

In a recorded analyst call Thursday Wal-Mart said it spent about $34 million on third-party advisers reviewing Foreign Corrupt Practices Act matters during the second quarter. It expects to incur an additional $35 million to $40 million in related costs in the third and fourth quarters.

Total Sales Revenue
2Q 2013: $113.534 billion
2Q 2012: $108.6 billion

Net Income
2Q 2013: $4.016 billion
2Q 2012: $3.801 billion

Earnings Per Share
2Q 2013: $1.18
2Q 2012: $1.09