Wal-Mart quarterly income hits $4.09 billion, earnings guidance lowered (Updated)

A largely new leadership team at Wal-Mart Stores is focused on better store execution from Bentonville to Shanghai. That was the message shared by execs with the retail giant in its second quarter earnings call  on Thursday (Aug. 14).

Wal-Mart Stores reported fiscal second quarter net income of $4.093 billion, or $1.21 per share. The earnings were deemed respectable by analysts matched the consensus estimate of $1.21 per share. The retailer’s quarterly revenue of $120.125 billion beat the consensus estimate of $119 billion.

On a cautionary note, the company also lowered its full year earnings guidance from a range of $5.10-$5.45 per share to $4.90-$5.15 per share based on higher than expected healthcare costs and “incremental investments” in its e-commerce segments.

Budd Bugatch, analyst with Raymond James & Associates, said Wall Street often frowns on guidance lowering, but in this case higher a higher expense of $500 million for healthcare costs year-over-year and continued investment in e-commerce are far more palatable than hearing consumers are staying way.

Wal-Mart also spent approximately $31 million for the ongoing Federal Corrupt Practices Act inquires and investigations, and $12 million related to Wal-Mart’s global compliance program and organizational enhancements.

Also in the quarter, Wal-Mart said consolidated inventory increased 6.2%, in part because of the new store ramp up coming in back half of the year. That said, Wal-Mart execs vowed to bring the number down to more manageable levels. The retailer showed cumulative inventory totaling $45.451 billion in the quarter, up by more $2 billion in the past year and $593 million more than reported in the first quarter.

Same-store comparable sales during the quarter were flat at Walmart U.S. and at Sam’s Club. Walmart U.S. same-store traffic was down 1.1% with the average ticket price up 1.1%. This included a .70% negative impact from lost SNAP sales in the quarter. At Sam’s Club, the traffic was up 0.3% and the average ticket was down 0.3%.

“I’m pleased with our solid earnings per share performance,” Doug McMillon, Wal-Mart Stores president and CEO, said in the earnings report. “As it relates to the positives from the quarter, I’m encouraged by the performance of our International business, our Neighborhood Market sales in the U.S. and by our e-commerce growth. As it relates to our challenges in the quarter, we wanted to see stronger comps in Walmart U.S. and Sam’s Club, but both reported flat comp sales. Stronger sales in the U.S. businesses would’ve also helped our profit performance.”

The quarterly income of $4.093 billion was just slightly better than the $4.069 billion in the same period of 2013. Total revenue of $120.125 billion was up 2.82% compared to the same quarter of 2013.

For Wal-Mart’s first six fiscal months, net income was $7.686 billion, down from the $7.853 billion in the same period of 2013. Total revenue in the six-months is $235.085 billion, up 1.8% compared to the same 2013 period.

The company said e-commerce sales helped comparable sales by 0.3%. Such sales include online purchases that are picked up by the customer at a store site.

“Our investments in e-commerce and mobile are very important, as the lines between digital and physical retail continue to blur. Our customers expect a seamless experience, and we’re working to deliver that for them around the world,” McMillon said in the statement.

U.S. GAME PLAN
Walmart U.S. reported net sales of $70.601 billion in the quarter, up 2.7% from $69.728 billion in the year-ago period.

“My initial efforts will focus on the core. We will deliver against these key customer requirements: being in stock, clean stores, the right price, the right items, improved service, better productivity,” said Greg Foran, who took over as Walmart U.S. CEO on Aug. 9. “I will be out in stores hearing directly from our customers and our associates and tracking our performance. I’m a competitive person, so I will be visiting the market place as well. We will look to build momentum.”

With Walmart U.S. representing roughly 60% of the company’s total sales, turning this segment around is a major priority to reverse six consecutive quarters of sagging results amid weaker traffic patterns as more sales shift online. Wal-Mart has been adamant that closing underperforming stores is not part of its strategy to right the ship. Chief Financial Officer Charles Holley said during the media call that supercenters still have one of the highest returns of all of the store formats and its makes no sense to shutter stores that are profitable.

Burt Flickinger, a partner with Strategic Resource Group, said Wal-Mart has suffered from not having the right leadership spread across its global enterprise.

“The U.S. segment has been struggling for sometime amid top managers with little operational expertise,” he said, adding that their logistics and financial backgrounds are  impressive but operational execution is a different matter.

McMillon is an operator and merchant at heart and has of late assembled a new cast around him with diverse operational expertise. Wall Street is watching to see what impact this new team will have on bottomline results.

SMALLER STORE PUSH
It’s apparent from Wal-Mart’s report that consumers are choosing to shop the smaller formats as Neighborhood Market reported comp sales of 5.6% in the quarter, while comp traffic rose 4.1%.

Analysts continue to ask Wal-Mart how much this smaller format expansion is hindering sales at neighboring supercenters. Wal-Mart has said it’s not concerned about cannibalization of supercenter sales, because its research shows the format is still valued for stock-up trips — a $585 billion annual market, of which it owns 60%.

The smaller format rollout is aimed to capture a larger share of the $415 billion annual quick-trip market, with 40% of that spend on grocery. Wal-Mart estimates its share of the quick-trip market at just 10%.

Wal-Mart opened 22 Neighborhood Markets during the second quarter and remains on track to open 180 to 200 new stores for the year. Additionally, The retailer said it continues to learn from its Walmart Express format test and has seen continued solid comp sales performance. 

“We’ll continue to roll out this phase of our test, with approximately 90 stores expected to open this fiscal year,” Foran noted in the call.

Another trend Walmart U.S. continues to confront is more consumers shopping online. 

Jan Kniffen of Kniffen Worldwide said as more people buy more products online physical stores and shopping malls will be hurt. He applauds Wal-Mart, the second largest e-commerce retailer next to Amazon, for continued investments it’s making in e-commerce in using stores as delivery options.

“Those brick and mortar stores that figure out how to leverage their physical assets to meet digital demand will be the winners,” Kniffen said.

Wal-Mart is doing just that. The retailer said 20 more supercenters became online fulfillment options in the quarter, and 20% of Wal-Mart’s online orders are now filled by supercenters.

“Our algorithms are helping to determine the optimal shipping point, whether from an online fulfillment center, a store distribution center or a store,” said Neil Ashe, CEO of Walmart Global E-Commerce.

Stacy Widlitz, a CNBC retail contributor, said it will take more time for Wal-Mart’s small store rollout to have a meaningful impact on overall results when so many of the retailer’s stores are supercenters. She said Wal-Mart is moving in the right direction, and the comps at the small store level are good, as are the online sales. She said they’re just not enough to combat the lukewarm results of the massive supercenter fleet.

SAM’S CLUB
Sam’s Club reported total net sales of $14.863 billion in the quarter, up 2.3% from a year ago. Gross profit rate was dinged .50% in the quarter nearly half of which related to investments in the new cash rewards program

“Our top priority at Sam’s Club remains growth – growing our member base and growing sales,” said Rosalind Brewer, Sam’s Club president and CEO. “We’re taking steps to increase the value of membership through investments in Plus member cash rewards and the cash back Mastercard. It’s still early, but member response has been positive.”

Membership and other income grew 10.5%, driven by upgrades and Plus renewals. Brewer said Sam’s launched late in the quarter a social media initiative to drive new membership growth. 

“We had almost 130,000 people respond to the offer, which ran from July 21 to August 1. While the majority of the offer redemptions will cross into the third quarter, we have been pleased by the number of new members who have already come into the club to officially activate their memberships,” Brewer said.

Like Wal-Mart, inventory management is a concern at Sam’s Club with inventory rising 4.7% in the quarter. Brewer said new clubs and an earlier set for fall seasonal merchandise contributed to the inventory uptick.

Brewer said the pets and laundry categories struggled in the quarter, which prompted some transitioning toward better pack-size values. The challenging electronics category is starting to improve despite comp sales weakness in wireless.

INTERNATIONAL GROWTH
The Walmart International division lead the company in sales growth percentage in the quarter, despite a challenging global economy. International sales totaled $33.872 billion, up 3.1% from the year-ago period. Excluding the impact of currency exchange rate fluctuations, Walmart International’s net sales for the quarter would have been $34.6 billion, an increase of 5.3% over last year. Currency exchange rate fluctuations negatively impacted net sales by $696 million during the quarter.

Operating income for the segment rose 8% to 1.489 billion.

“We remain focused on price investment across all our markets and expect to continue driving improved comp performance,” said David Cheesewright, Walmart International president and CEO. “I am pleased with the trends in many of our markets, which were driven by a continued focus on being the lowest cost operator.”

He said the global economy remains challenged, which means the customer is also stretched. Price remains a critical factor in our customer’s buying decisions. 

“During a recent visit to Chile, I saw first-hand how important price is to our customers. Just a year ago, Walmart Chile rolled out a mobile app, which allows customers to compare prices between Walmart and competitors. We had almost 200,000 item scans in this quarter alone. We believe innovations like this and price position will continue to set us apart in the market place,” Cheesewright said.

The United Kingdom posted comp sales of 2%, while traffic increased 1.7% and average ticket sales rose 0.3%. While net sales rose 2.2%, gross profit declined as Cheesewright said it faced aggressive price pressure from competitors.

Walmex reported comp sales growth of 1.9% on declining traffic but a 2.1% higher ticket spend. Overall net sales rose 5% in this large segment.

Mexico grew sales by 5.4% with comp sales improving 1.2%, related to Easter sales and strong growth in the self-serve formats. Sam’s has struggled in Mexico so much that the retailer recently announced management changes. Todd Harbaugh, who has more than 20 years of experience with Walmart, including 11 years in the Sam’s Club U.S. business, took over leadership of the club business. The merchandising division for Sam’s Club in Mexico was restructured into two areas, grocery and general merchandise, both with new leadership. 

“Our team is laying the groundwork for a more aggressive strategy to win back members and acquire new ones. We expect continued near-term challenges, but improvement in the longer term,” Cheesewright said.

Canada remains weak for retailers in general. Walmart Canada reported total sales decline 0.2% with 1.1% decline in traffic offset by a 1.3% higher average ticket.

In Brazil, Walmart posted a stellar 9.7% comp sales gain, but traffic was flat and the entire increase was in average ticket spend. Walmart said much of the gain was linked to food, general merchandise and consumable sales driven by the World Cup.

In China, Walmart saw comp sales slide 1.6%, while traffic fell 7.9%, offset by a 6.3% in average ticket spend. Net sales were up 1.1% in China in the quarter.

“We continue to face significant headwinds from government austerity programs, as well as price deflation in some key categories,” Cheesewright said.

The steep traffic decline was impacted by a new home delivery service in 383 stores. Cheesewright said the average ticket for delivery was significantly higher than the average store visit for the quarter.

Wal-Mart shares (NYSE: WMT) held their own following the earnings announcement with trading at $74.15, up 12 cents in Thursday’s morning session. During the past 52 weeks the share price has ranged from an $81.37 high to a $71.51 low.