Wal-Mart third quarter income down 10.9%, but beats the market estimate (Updated)

Editor’s note: Story updated with changes and additions throughout.

Wal-Mart Stores posted fiscal third quarter net income of $3.304 billion, below the $3.711 billion in the same period in 2014, but better than what was expected by equity analysts who cover the retailer. And while the closely watched metric of same-store sales moved in the right direction for Wal-Mart, the company is predicting “relatively flat” sales growth for the year.

The per share earnings of $1.03 was better than the 98 cents that was the consensus analyst estimate. However, total quarterly revenue of $117.408 billion was below the consensus estimate of $117.79 billion, and below the $119.001 billion in revenue during the third fiscal quarter of 2015.

For the first three fiscal quarters of the year, Wal-Mart has posted net income of $10.12 billion, down from the $11.397 billion during the same period of 2015. Total revenue in the first three quarters is $352.463 billion, just below the $354.086 billion in the same period of 2015.

Same store sales rose 1.5% in the quarter, better than the 0.5% growth in the third quarter of 2015. Although store traffic was up 1.7%, the average ticket (purchase per customer per trip) fell 0.2%. The average ticket rose 1.2% in the 2015 quarter.

Wal-Mart Stores CEO Doug McMillon said the traffic and comp numbers indicate the work to improve the stores is working. Also, sales at Walmart U.S. during the quarter totaled $72.712 billion, up 3.8% compared to the same period in 2015.

“We are pleased with the continued sales growth in Walmart U.S. and in our international business. Strong traffic and our fifth consecutive quarter of positive comps in Walmart U.S. stores show we are taking the right steps to win with customers. Although we still have work to do, we are positioning for sustainable growth through investments in people and technology to deliver a seamless shopping experience at scale,” McMillon said in the earnings statement.

Wall Street considered the results positive as Wal-Mart shares (NYSE: WMT) rose more than 4% in early market trading to $60.17, up $2.30. During the past 52 weeks the share price has ranged from a $90.97 high to a $56.30 low.

Some analysts have said Wall Street oversold the retailer’s shares following the recent announcement that ongoing investments in wages and e-commerce capabilities would temper earnings between 6% to 12% next year. 

Wal-Mart execs again iterated that the retailer is a growth company. McMillon said in the prerecorded earnings call Tuesday (Nov. 17) that the $3.4 billion, or 2.8% growth, in third quarter earnings on a constant currency basis is proof positive the retailer is growing.

CNBC Mad Money host Jim Cramer wasn’t particularly impressed with the results saying, “Wal-Mart shows that if you cut estimates enough you can meet those estimates.”

U.S. DIVISION
The retailer said it was pleased with operational improvements seen in its U.S. division even with the higher spending on more people and higher wages, noting there is more work to be done.

Walmart U.S. operating income fell 8.6% to $4.506 billion, a reflection of increased expenses in adding employees and raising wages. The company announced earlier this year plans to invest $1 billion in new employees, higher wages and more training.

While U.S. operating income declined, Walmart U.S. CEO Greg Foran said the retailer measures success in terms of traffic, in-stock and customer experience. He told reporters in the media call that quarterly results on the top line were the best of the year so far. Foran attributed the higher top line sales to better in-stocks and the addition of some 8,000 department managers across the retailer’s U.S. store fleet. 

“Overall, we’re pleased with the momentum in the top line. Net sales increased $2.7 billion, or 3.8%. Unit sales picked up, and traffic strengthened to 1.7%,” Foran said in the prerecorded call.

Foran said the focus on in-store execution is like basic blocking and tackling, not sexy but fundamental to overall performance. He said the retailer has also reduced promotional activity and modular changes that are also helping overall performance. Specifically he said the attention to “fresh” areas in the stores and the organic produce expansion are two examples leading to higher overall sales.

Walmart U.S. had comp sales growth of 1.5% which was within guidance, despite minimal food inflation. Neighborhood Market Stores produced an 8% comp with newer stores also performing well, according to the release.

Foran would given no comments relating to holiday sales, saying only it will be a competitive season as usual and warning that food and fuel deflation are factors that were were not present last year.

SAM’S CLUB 
Sam’s Club, which has struggled in recent quarters, posted total sales of $14.075 billion, down 2.2%. However, operating income rose 9.3% to $539 million.

Comp sales excluding fuel for the third quarter were at the low end of guidance at 0.4%, flat to a year ago. Club traffic was negative 0.3% from a positive 0.2% in the year ago period. Average ticket increased 0.7% from a 0.2% rise a year ago.

“As we look back at the third quarter, we acknowledge that we need to improve our sales. Where we introduced new merchandise, we delivered strong results. We continued to make strategic investments in people and technology, as these are critical enablers of our strategy,” CEO Rosalind Brewer said in the prerecorded call.

She said in key food categories the retailer faced comparisons to last year’s steep inflationary environment. In the wireless business Sam’s and Walmart U.S. each also continued to experience increased costs and other negatives because of changing industry dynamics. Brewer said the clubs saw positive momentum in traffic from Savings members, but softness from Business members hurt the quarterly financial results.

INTERNATIONAL RESULTS
Walmart International had total sales of $29.811 billion, down 11.4%, with operating income of $1.338 billion down 6.4%.

Walmart International CEO David Cheesewright said the recent quarter was a mixed bag of sorts with comp sales trends in Mexico and Canada showing strength, which more than offset weaker sales performances in the U.K., Brazil, and China. The latter three continue to experience various competitive and economic challenges. 

Cheesewright said the retailer’s U.S. business in being overhauled as it seeks to better compete with deep discounters. He said Brazil has its problems, most of which involve economic challenges such as hyper inflation and rising unemployment on a national scale.

Canada and Mexico are good growth markets for Walmart International. Walmart Canada’s net sales grew 5.7% and comps were up 4.3%, driven by strong performance in core grocery business, as well as better performance in the general merchandise business.

Walmart Mexico reported a 7.6% increase in net sales in the quarter. Comp sales rose 6.3%, driven by comp growth in self-service and Sam’s Club.

OTHER SPENDING
Wal-Mart said it spent $30 million on Foreign Corruption Protection Act compliance in the quarter, with $22 million for ongoing inquiries and investigations, and $8 million for global compliance program and organizational enhancements. During the same quarter last year, FCPA and compliance-related costs were approximately $41 million.

So far in fiscal 2016 Wal-Mart has spent about $73 million on FCPA issues. To date the FCPA price tag is $685 million in legal fees and compliance restructuring costs over the past three years. The majority of that has funded investigation defense or lawyers representing the retailer in multiple countries on suspicions of FCPA violations.

In fiscal 2015 which ended Jan. 31, Wal-Mart said it spent $173 million on FCPA compliance-related costs. The majority of that – $121 million – was spent on legal costs associated with the investigation and additional inquiries. The remaining $52 million was spent on Wal-Mart’s internal compliance overhaul.

Wal-Mart is also using its free cash to repurchase shares at a time when profits are projected to fall. The company said it repurchased approximately 6.1 million shares for $437 million during the third quarter with plans to acquire $20 billion worth of shares over the next two years.

This is one way the retailer can help prop up share values for its investors. Analysts largely support this plan given that earnings outlooks, which typically drive stock prices, are likely to be lower thanks to the ongoing investments in wages and e-commerce through the next two years.