Wal-Mart improves comp sales, income up 2.1% to $16.36 billion (Updated)

It may have not been a stellar financial year for Wal-Mart Stores, but the global retailer ended its fiscal year with income and revenue numbers heading in the right direction for CEO Doug McMillon’s first annual report.

Total revenue for the fiscal year ended Jan. 31 was $485.651 billion, up 2% compared to the previous year, the company reported Thursday (Feb. 19) morning. The total was just below analysts’ consensus estimate of $486.62 billion. Fiscal year net income was $16.363 billion, up 2.1% compared to the previous year.

The topline earnings per share for the year was $5.07, which beat the consensus estimate of $4.99 per share. However, the per share earnings was shaved by 8 cents for wage and hour litigation expenses and the cost of closing 30 stores in Japan during the fourth quarter.

Comparable store sales, a closely watched metric with Wal-Mart, also improved. Comp sales in all U.S. stores – including Sam’s Club – were up 0.5% in the fiscal year, better than the 0.4% decline in the previous fiscal year.

"Like many other global companies, we faced significant headwinds from currency exchange rate fluctuations, so I'm pleased that we delivered fiscal year revenue of $486 billion. But, we're not satisfied,” McMillon said in the earnings report.

Currency exchange rates reduced annual revenue by $5.3 billion.

FOURTH QUARTER GAINS
For the fourth fiscal quarter, which includes the holiday shopping season, Wal-Mart posted total revenue of $131.565 billion, up 1.4% over the same quarter in the previous fiscal year. The revenue missed the consensus estimate of $132.36 billion, but the topline earnings per share of $1.61 was better than the estimate of $1.54. However, the fourth quarter per share earnings were reduced by 8 cents for the reasons noted above.

The fourth quarter also saw improvements in comp sales. Walmart U.S. reported comp sales up 1.5% in the quarter, better than the 0.4% decline in the year-ago period. Sam’s Club comp sales were up 2% compared to a decline of 0.1% in the year-ago period.

"Our fourth quarter was the first positive traffic comp we've had since the third quarter of fiscal year 2013," said Greg Foran, Walmart U.S. president and CEO, said in the statement. "Walmart U.S. had increased traffic during the six-week holiday season, with strong sales in seasonal, toys, home and apparel. We completed almost 1 billion total transactions during the holiday season, including our largest online day ever on Cyber Monday. We are also pleased to deliver positive comp sales for the full year."

E-commerce sales were $12.2 billion, up 22% in the fiscal year.

Operating income by segment shows continuing problems with Walmart U.S. – Wal-Mart’s largest division. Operating income at Walmart U.S. for the fiscal year was $21.336 billion, down 2.1% compared to the previous fiscal year. Operating income in the International segment was $6.171 billion, up 19.8% for the year. Sam’s Club operating income was $1.976 billion, up 7.2% for the year.

"We have work to do to grow the business. We know what customers want from a shopping experience, and we're investing strategically to exceed their expectations and better position Walmart for the future," said McMillon. "Our first priority is to run great stores and clubs. We will continue to integrate our physical locations with a great e-commerce and mobile commerce business.”

PAY AND BENEFIT BOOST
The company also announced a pay and training plan that will raise pay for about 500,000 full- and part-time employees in the first half of the fiscal year. The goal is to have all employees make at least $1.75 per hour above the federal minimum wage by April. By Feb. 1, 2016, the goal will be for all employees to make at least $10 per hour. The pay adjustment in this fiscal year will cost the company an estimated $1 billion.

Wal-Mart and the Walmart Foundation will also spend $100 million during the next five years to “increase the mobility for entry level workers” in the retail and service industries through training programs.

“We're strengthening investments in our people to engage and inspire them to deliver superior customer experiences. We will earn the trust of all Walmart stakeholders by operating great retail businesses, ensuring world-class compliance, and doing good in the world through social and environmental programs in our communities,” McMillon said in the statement.

But the company used the earnings report to lower financial expectations for the new fiscal year. First, currency exchange issues could shave $10 billion from the topline in the fiscal year. The company also lowered its fiscal year earnings forecast to between $4.70 and $5.05 per share.

“Given the potential impact of currency headwinds, we expect that our fiscal year 2016 sales growth will be between 1 and 2 percent, versus the 2 to 4 percent we provided at our October investor conference," Charles Holley, Wal-Mart Stores chief financial officer said in the report.

Wal-Mart shares (NYSE: WMT) were trading lower in pre-market action. The share price closed at $86.29 on Wednesday. During the past 52 weeks the share price has ranged from a $90.97 high to a $72.61 low.

OTHER EARNINGS REPORT DETAILS
Following are other details from the earnings report and related conference call.
• Wal-Mart said Federal Corruption Practices Act compliance-related costs totaled $173 million for the year. These costs were comprised of $121 million for the ongoing inquiries and investigations, and $52 million for our global compliance program and organizational enhancements. Last year, total FCPA and compliance-related costs were $282 million. This investigation into alleged FCPA violations is now its third year. 

• Wal-Mart increased its dividend for 2016 from $1.92 to 1.96 which is paid quarterly. This marks the 42nd year the company has increased its shareholder dividend. For the full year, the company returned $7.2 billion to shareholders through dividends and share repurchases. Wal-Mart ended the year with free cash flow of $16.4 billion, compared to $10.1 billion last year.

• Fuel sales had no impact on Walmart U.S. same-store sales in the quarter. However, executives said overall lower fuel prices were responsible for more trips and a slight average uptick per ticket.

• Foran said the retailer had a good holiday season.

“Walmart U.S. had increased traffic during the six-week holiday season, with strong sales in seasonal, toys, home and apparel. We completed almost 1 billion total transactions during the holiday season, including our largest online day ever on Cyber Monday,” Foran said.

• Foran said Neighborhood Market stores delivered a 7.7% same-store comp during the quarter. This smaller format is resonating with customers prompting Walmart to open 233 of them last year, with many of those in the recent quarter.

• Wal-Mart ranked at the bottom of list for customer satisfaction according to recent survey by the American Customer Service Satisfaction Index. McMillon said Thursday that such news “breaks my heart” as he doesn’t want anyone to have a bad customer experience at Wal-Mart. He acknowledged there are lots of stores and more work required to improve customer service. To that point, Foran said adding staff back to stores in the Checkout Promise program during the holidays did increase costs, but it was the right decision for the customer.

• Inventory management is another area Foran wants to improve. He said inventory grew by 3.9% in the quarter. He attributed much of that to the 178 new store openings in the recent quarter. Foran said comp store inventory improved in the quarter because of the strong holiday sell-through and better aligned seasonal markdown in apparel.

“Inventory management is a key element to customer experience, and while we have room for improvement, we’re also making progress to better manage working capital,” Foran said.

• Wal-Mart’s fiscal 2016 year began on Feb. 1 and the retailer said it plans to add between 15 million and 16 million more retail square feet across the U.S. this year.

• Foran said there is some concern over the imported merchandise flows related to the
upcoming spring and Easter seasons, due to ongoing port congestion. 

“We’ll continue to take the appropriate steps, using our diversified supply chain network, to reduce the impact for our customers,” he said.