Wal-Mart income up, U.S. comp store sales fall

Softer consumer sales hindered by higher taxes and larger heating bills this winter led to missed analysts’ expectations by Wal-Mart Stores – but the company still pocketed $3.78 billion in its fiscal first quarter ending April 27.

Early Thursday (May 16) Wal-Mart reported its net income of $1.14 per share rose 4.6%, despite sluggish overall economic growth in the U.S., with the GDP estimated between 1% to 2% in the corresponding months, according the economists at Wells Fargo Securities.

The retail powerhouse predicted in February net profits ranging from $1.11 to $1.15 per share its first quarter. While hitting the mark it set for itself, the results were just shy of Wall Street’s consensus $1.15 estimate.
 
Total revenue for the quarter rose 1% to $113.4 billion, compared to $113 billion last year – and that was up against a negative foreign currency exchange rate that reduced the top line by more than $1 billion.

The quarter marked was by “considerable headwinds” to top line sales, said CEO Mike Duke.

"I'm confident about our long-term strategy and the direction Walmart is headed," Duke said in the earnings statement. "Our expectations about our U.S. businesses' performance, coupled with more discipline in International, will allow us to improve our performance throughout the year."

He said e-commerce sales grew more than 30% in the first quarter versus last year.
 
"There is no doubt that our company is making the right investments in e-commerce to differentiate ourselves and become a better Wal-Mart," said Duke. "And with our sales growth in the first quarter, we believe our investments are paying off.”

The company expects to deliver EPS for Q2 between $1.22 and $1.27, compared to $1.18 last year.

U.S. RESULTS
Operating income in the Walmart U.S. division was $5.329 billion, up 5.9% compared to the same quarter a year ago. Total sales for the division were $66.333 billion, up 0.3%.

Wal-Mart’s commitment to lower prices failed to deliver improvement in same-store sales which fell 1.4%, the first negative comps in nearly two years. One year ago, same-store sales rose 2.6%, followed by 2.2%, 1.5% and 1% increases throughout fiscal year 2013.

Leon Nicholas, senior analyst with Kantar Retail, said Wal-Mart is likely to struggle with low same-store comps (well below 2%) in coming quarters as it continues to cannabilize sales with store saturation amid an ongoing shift to more online sales.

"Despite comps being lower than expected, we continued to generate market share gains," said Bill Simon, Walmart U.S. president and CEO. "According to The Nielsen Company, we gained 20 basis points of market share3 in the measured category of 'food, consumables and health & wellness/OTC' during the 13-weeks ended April 27, 2013."

Simon said during the 13-week period, the Walmart U.S. comp was negatively impacted by a delay in tax refund checks, challenging weather conditions, less grocery inflation than expected and the payroll tax increase. Comp traffic was down 1.8%, while average ticket increased 0.4%.

Wal-Mart continues to focus on lowering prices in hopes of attracting shoppers away from Dollar Stores, but analysts say this consistent drive for the “every day low price” has also taken a toll on gross margins, particularly in consumable food products that traditionally have little room for mark downs.

However, Wal-Mart continues to invest in prime-time media with its “price-comparison” television ads which it produces itself to save on the total cash outlays.

Raymond James & Associates analyst Budd Bugatch said Wal-Mart is a master at leveraging its weight while also controlling overhead costs, which helped to soften the blow from tepid overall consumer demand.

Walmart U.S. expects to increase comps for the second quarter to range between 0% and 2%.

INTERNATIONAL RESULTS
Operating income in the company’s international division totaled $1.256 billion, down 4.7% Total revenue in the division was $32.055 billion, up 2.9%.

Wal-Mart’s international segment, once seen as the main growth engine for the retail juggernaut, has slowed somewhat in developing countries like China, India and Brazil.
 
These countries in addition to Mexico remain under scrutiny by ongoing investigations into business practices and possible violations of the Foreign Corrupt Practices Act.
 
The retailer said it spent $157 million last year relating to these investigations. The retailer spent $73 million on FCPA activities in the quarter, more than the $45 million expected.

"Our stores in the U.K., Africa, Mexico, Central America, Brazil, Chile, Argentina, China and India delivered positive comp sales," said Doug McMillon, Walmart International president and CEO. "Comps in Canada and Japan declined. We grew our share in seven of our eleven markets."

Wal-Mart expanded its footprint in Canada last year bracing for Target’s grand entry which began in March. A price study conducted by Kantar Retail between these two retailers showed a 25-cent difference in an assorted basket of 29 national brands across grocery and health and beauty aids.

The analysts said the competitors were discounting certain items to leverage the retailers’ pricing image.

“Such tight price comparisons so soon after Target’s initial opening signals that the retailer intends to contest its rival’s price position in this market,” notes Robin Sherk, with Kantar Retail.

SAM’S CLUB
Sam’s Club celebrated it’s 30th birthday in the quarter, marking another milestone for the wholesale club. The wholesale club continues to face heightened competition from Wal-Mart supercenters that are cannibalizing some sales.

The division reported operating income of $525 million, up 7.4%. Total revenue at Sam’s Club for the quarter was $13.429 billion, up 0.1%. In the first quarter, Sam's Club comp traffic was up 1.3%, while ticket was down 1.1% for the 13-week period.

"Comp sales for the first quarter were impacted by unfavorable weather and less than expected inflation," said Rosalind Brewer, Sam's Club president and CEO. "Our business member is an integral part of our business, and comp sales and traffic patterns indicated that they remained pressured in the first quarter. Small business optimism remains at historically low levels, as businesses adapt to higher payroll taxes and cautious consumers."

Sam's Club expects to increase comps for the second quarter period to between 1% and 3%.

STOCK GAINS
Wal-Mart is said to be good for consumers seeking low prices, but it’s also been an investment boon for shareholders. The stock price set a new 52-week high – $76.96 – on May 15. Ahead of today’s earnings call, shares traded at $79.99 with a total market capitalization in excess of $262 billion.

The stock price has risen 15.5% this year.

The oracle of Omaha, Warren Buffett is a buyer of Wal-Mart Stores Inc. recently picking up 1.7 million shares giving his firm Berkshire Hathaway 49.2 million shares in the Bentonville-based retailer. Buffett’s stake in Wal-Mart has a street value of $3.9 billion, according a March 15 filing with Securities and Exchange Commission.

Wal-Mart shareholders will convene in Fayetteville on June 7 for the company’s annual shareholder meeting. Roughly 15,000 are expected to attend the “big show” that is a blend of an international pep rally and sales meeting with star-studded entertainment.
 
THE NUMBERS
Wal-Mart Stores Inc.
 
Net Sales Revenue
1Q Fiscal 2014: $113.429 billion
1Q Fiscal 2013: $112.264 billion
up 1%
 
Net Income
1Q Fiscal 2014: $3.784 billion
1Q Fiscal 2013: $3.742 billion
up 1.1%
 
Earnings per share
1Q Fiscal 2014: $1.14
1Q Fiscal 2013: $1.09
up 4.6%