Wal-Mart earnings top estimates but forecast weakens

Wall Street eyes were staring at Wal-Mart Thursday morning (Feb. 21) looking for any morsel of insight into the health of the overall economy as the retailer recently leaked a memo of caution about future expectations that sent some investors packing.

At 6 a.m. Thursday, Wal-Mart Stores Inc. posted better than expected results in the last quarter of fiscal 2013, ended Jan. 31. The retail giant reported net income of $5.6 billion, or $1.67 per share, some 6.3% ahead of Wall Street expectations. Net profits improved 7.9% from the $1.57 per share earned a year ago.

Net sales in the fourth quarter totaled $74.7 billion, up 2.6% thanks to a growing market share in food, toys and entertainment sales during the holiday season.

One key metric, U.S. same-store sales, improved by 1% during the quarter, less than the 1.5% improvement a year ago.

For full fiscal 2013, the retailer boosted net earnings by 10.6%, pocketing $5.02 per share versus $4.59 in fiscal 2012. Net sales topped $466.1 billion up 5% from the prior year.

"We have high expectations for fiscal 2014, and I'm optimistic as I look ahead,” Wal-Mart CEO Mike Duke said In his prepared remarks. "Walmart is operating in markets that offer continued opportunity for growth, both in our stores and online. With our core Walmart U.S. business operating so well, our investments in e-commerce and our international markets focused on growth and improving returns, we are truly the best positioned global retailer."

But as expected, Wal-Mart’s results also came with a cautious outlook for the current quarter ending April 30.

Wal-Mart executives expect comp sales to be flat through April citing cash-strapped consumers juggling higher payroll taxes and rising fuel prices that threaten ticket sales and traffic count.

Some investors were lured back to Wal-Mart in spite of the the cautious outlook as shares rose nearly 2% in pre-market trading to $70.60. By the opening bell at 8:30 a.m. shares began trading at $70, up 69 cents from the prior day as analysts were still combing through the 40-page release and dialing in to the company’s quarterly earning call. At mid-morning shares were up $2 to $71.26 on heavy volume.

Prior to the call, Chris Horvers, analyst with J.P. Morgan, said the 18% dividend hike also announced by Wal-Mart Thursday was enough to pacify some investors. But more concerning to him is the tough comparisons he sees for Wal-Mart in the current quarter indicated by the company’s lower-end guidance.

“We expect first quarter fiscal 2014 earnings per share to range between $1.11 and $1.16," said Charles Holley, chief financial officer. "These estimates consider current economic factors that are affecting customers in many of our markets.”

Horvers says a year ago, a warm winter helped to fuel stronger consumer spending among Wal-Mart’s core customer. He said today that same customer is taking home less money from higher payroll taxes and putting more money into gas tanks – a double squeeze for Wal-Mart shoppers’ $40,000 household income.

“I believe there is risk to Wal-Mart missing its lower estimate and comps going negative given the 40 to 50 cent hike in gas prices over the past month which are clearly impacting Wal-Mart’s core customer,” Horvers said.

He said competitors Target and Costco core customers are less likely to feel the cash squeeze with households earning $60,000 and $96,000 incomes, respectively.

HOLIDAY RECAP
Wal-Mart officials said holiday sales started strong around Black Friday deals and layaway rose 10% over the previous year, though overall holiday sales did not meet expectations.

Bill Simon, CEO of Walmart US, said in his prepared remarks that seasonal assortment and price leadership resonated with the customer and the retailer served 22 million customers on Thanksgiving Day alone. He said the first three weeks of December were soft, but the retailer rebounded with double-digit positive comps the week of Christmas, and continued with strength into the first part of January.

In the last couple of weeks of the quarter, he said the stores began to see an impact from the increase in payroll taxes and the delay in the income tax refunds.

U.S. REBOUND
Simon said U.S. sales in the fourth quarter were $74.7 billion, up $1.9 billion or 2.6% versus last year, with consistent sales growth across all geographies. Gross profit increased $556 million versus last year to $20.2 billion, Simon said.

Wal-Mart continues to invest in price and says comps grew by low-single digits for grocery, heath & wellness, home and apparel. Hard line comps such as sporting goods grew by mid-single digits and entertainment sales relating to mobile phone plans achieved double-digit gains in comp sales as the company expanded offerings to include iPhone and Samsung 2.

Simon said following the shooting in Newtown, Conn., there has been a strong push for gun and ammunition sales as the renewed interest from lawmakers in limiting firearms.

Another interesting note was the financial services category and an update since the launch of Bluebird accounts this past Fall. To date Wal-Mart says it has 570,000 active Bluebird accounts and volume is growing daily.

For the full year, Wal-Mart posted U.S. sales of $274.49 billion, up 3.9% from the prior year. Comparable sales excluding fuel rose 1.8% during fiscal 2013.

INTERNATIONAL HICCUP
Wal-Mart’s international unit has previously been a growth engine for the retailer but did not hit the mark in the fourth quarter, according to Duke, who said sales in international stores grew 6.9% to $37.9 billion in the quarter.

For the full year, international sales rose 3.9% to $274.4 billion.

Doug McMillon, CEO of Wal-Mart International, said the holiday season was tough on the global stage. And a Wal-Mart decision to slow store openings in Mexico, China and Brazil negatively impacted overall sales results.

Sales in mature markets like Japan, Britain and Canada and also did not go as planned, according to McMillon.

Wal-Mart also coughed up $153 million in expenses related to the ongoing investigations into the Foreign Corrupt Practices Act during the past year. Investigations are under way in Mexico, Brazil, China and India, according to a previous note in a regulatory filing with the Securities and Exchange Commission.

SAM’S SLUMP
Sam’s Club in previous years has been a shining star in the Wal-Mart portfolio, but that has not been the case lately.

In a lackluster fourth quarter Sam’s Club grew net sales by 3.4% to $14.49 billion. WIthout fuel, sales totaled $13 billion.

Operating income slid 3.5% in the quarter but comparable sales (without fuel) rose 3.6%. This comp benefited from a 1.6% increase in traffic and a 0.7% increase in average ticket. While the comps are positive they are considerably lower than the 5.1% sales growth from the previous year period.

For fiscal 2013 Sam’s Club posted net sales of $56.42 billion, up 4.9% from 2012. Net operating income for the warehouse club totaled $1.96 billion, up 6.2%.

"Overall, we are proud of the accomplishments this year at Sam's Club, but also recognize the mounting economic concern from both small businesses and consumers," said Rosalind Brewer, Sam's Club CEO. "The business member at Sam's Club is an integral part of our comp sales. Recent traffic patterns of our business members indicate that they are more deliberate in their spending due to macro-economic factors.”

She cautioned that comps through April 30 would be flat.

BULLS SAY
“For the first time, Wal-Mart disclosed its investments in e-commerce – $450 million, equal to roughly 9 cents a share. This commitment into omnichannel retail should help drive sales growth in the future and I see as a silver lining in today’s announcement,” said Matt Nemar, analyst with Wells Fargo Securities.

“I give Wal-Mart a target price of $80. The comps are fairly weak but the company is managing through it,” noted Dana Telsey, CEO of Telsey Advisors.

“The dividend increase signals strong cash flow … and management’s willingness to enhance shareholder value,” said Brian Yarbrough, with Edward D. Jones.

“Wal-Mart’s customers are just who we thought they were, people who need those tax refunds. As the refunds trickle in sales should be boosted in the coming months," said Stephen Guilfoyle, Street.com.

BEARS SAY
“Fiscal 4Q makes nine out of 11 quarters Wal-Mart has seen soft inventory growth outpace sales. Why is management so quiet about its online business and is the big spend on marketing paying off in traffic and profits?” asked Rob Wilson, Seeking Alpha retail analyst.

“Wal-Mart is a proxy for the broader U.S. consumer and the slow start to February is a concern,” said Joseph Feldman, Telsey Advisors

“The delay in income tax refunds has really affected Wal-Mart’s business and they have been seeing lower volumes by the increase in payroll taxes, things businesses can’t escape from as more money is going to government and less is coming from the government,” said Kim Forrest, Fort Pitt Capital Group.