Fiscal year income down 9.2% for Wal-Mart Stores, U.S. comp sales up 0.6% (Updated)

Wal-Mart Stores’ full fiscal year revenue fell 0.7% to $482.13 billion, with net income of $14.694 billion down 9.2% compared to fiscal year 2015. Although sales were up 3.6% in its U.S. stores, fourth quarter income and revenue fell below market estimates.

The company reported early Thursday (Feb. 18) fiscal year per share net income of $4.57, below the $4.58 consensus estimate of the 21 analysts who cover the company. The full year revenue also missed the consensus estimate of $483.38 billion. Wal-Mart contends that adjusted fourth quarter earnings of $1.49 and full year earnings of $4.59 beat the estimates.

For the retailer’s all important fourth quarter that ended Jan. 31, revenue was $129.887 billion, down 1.4% compared to the same quarter in the previous fiscal year, and below the estimate of $130.96 billion.

Net income in the quarter was $4.574 billion, down 7.9% from the same quarter in fiscal 2015. Per share net income of $1.43 missed the consensus estimate of $1.46. The fourth quarter income included a 20 cents per share loss to cover costs of closing 269 stores.

The Bentonville-based global retailer also saw its cash position – combination of cash and cash equivalents – fall 4.7% in the fiscal year to $8.705 billion.

(Updated story info follows.) Wal-Mart Stores CEO Doug McMillon noted in the earnings transcript that the past year focused heavily on investment and improved store execution which has resulted in some underlying strength in the U.S. business that was not present a year ago. Greg Foran, CEO of Walmart U.S., said 75% of the stores now meet or exceed their customer experience goals which were set at the beginning of last year.

“This was a significant improvement over the 16% that were meeting this mark at the beginning of last fiscal year. Additionally, our associates are more engaged and turnover is lower,” Foran said.

The retailer also reported its sixth consecutive quarter of positive same-store sales, albeit it a mere 0.6% rise in the recent quarter, what is typically the strongest period for retailers given that it includes the holiday season. Neighborhood Market comp sales were 7% in the fourth quarter, while Sam’s Club experienced a negative 0.5% decline in fourth quarter comp sales excluding fuel sales which were down 2.7% year-over-year.

One key metric that analysts should like is the positive traffic counts Walmart U.S. has reported consistently for the past five quarters. This segment’s traffic was up 0.7% in the fourth quarter with a slightly negative ticket comp. E-commerce sales contributed 0.3% to the overall U.S. store comp in the recent quarter.

“We are pleased with fundamental trends that are allowing us to improve our stores, add critical capabilities and deepen our digital relationships with customers. Our initiatives are making it simpler and more convenient for customers to shop at Walmart,” McMillon noted in the release.

The heavy cloud hanging over fourth quarter results was the recent 269 store closures. The costs related to these closures totaled $729 million in the fourth quarter. McMillon said more than half of the displaced workers in the U.S. have already found open positions within the company and they continue to work to identify other open positions for the remaining workers interested in transferring to new locations.

The International segment also continues to drag with fourth quarter net sales of $32.692 billion, sliding back from the $36.205 billion reported a year ago. Operating income fell 19% to $1.7 billion behind a hefty foreign exchange impact and weaker results in Brazil, the United Kingdom and China, according to Walmart International CEO David Cheesewright.

Lastly the company’s e-commerce business improved year-over-year with fourth quarter sales and gross merchandise value growing at 8%. For the full year, sales grew 12% and the merchandise value grew 13%. As discussed in October, growth continues to be pressured by weakness in Brazil, China and the UK because of weak economies and competitive challenges, said Neil Ashe, CEO of Walmart Global eCommerce. Ashe said the e-commerce division had strong holiday sales between Thanksgiving and Cyber Monday with nearly half of the customer ordering via a mobile device. He said in-store pickup and online grocery also grew in the recent quarter.

SEGMENT SALES, HIGHLIGHTS
Fiscal year sales were up in one of the retailer’s three segments.
Walmart U.S.
FY 2016: $298.378 billion
FY 2015: $288.049 billion
up 3.6%

Walmart International
FY 2016: $123.408 billion
FY 2015: $136.16 billion
down 9.4%

Sam’s Club
FY 2016: $56.828 billion
FY 2015: $58.02 billion
down 2.1%

FCPA EXPENSES CONTINUE
The expense of a now a four-year investigation into violations of the Foreign Corrupt Practices Act (FCPA) continues to dig overall financial results. FCPA and compliance related costs totaled $33 million in the fourth quarter bringing the annual cost to $126 million. Of that, 95 million went toward legal expenses related to ongoing inquiries and investigations.The remaining $31 million was spent on internal compliance, the company noted in a supplemental release on Thursday.

In fiscal year 2017, Walmart expects its FCPA-related expenses to range between $100 million and $120 million.

EARNINGS GUIDANCE
Company officials also used Thursday’s earnings report to downplay expectations for the new fiscal year. Continued costs related to wages and training are estimated to lower full year net income by 30 cents per share. Currency exchange rate changes may reduce total sales by $12 billion during the fiscal year.

More important, the company lowered its net sales growth estimate to “relatively flat” compared to previous guidance of a 3%-4% gain.

“This change reflects the impact from recently announced store closures globally, as well as the continued strengthening of the U.S. dollar. Excluding the impact of currency and store closures, our net sales growth guidance would have remained in the 3 to 4 percent growth range,” the company noted.

Investors reversed their positions in Wal-Mart shares early Thursday following the lower than expected earnings outlook of the coming year on the heels of a lackluster holiday performance. In pre-market trading Wal-Mart shares fell 4.5% to $63.18, largely erasing the gain shares had accrued since the start of the year.

Wal-Mart also plans on share repurchases during this period of reduced earnings. The company paid out $10.4 billion to shareholders through dividends and share repurchases last year.

“I also want to call out our continued commitment to our shareholders. In the fourth quarter, we were able to return $4.0 billion to our shareholders through dividends and share repurchases. In fact, today we announced a dividend increase. Our annual dividend was $1.96 and we’ve increased it to $2.00 per share. This is the 43rd consecutive year of dividend increases for Walmart,” McMillon said.

Shares of Wal-Mart (NYSE: WMT) opened Thursday at $63.67 and was trading around $62.50 in early morning trading, down more than 5%. During the previous 52 weeks the share price has ranged from an $84.86 high to a $56.30 low.

ANALYSTS SAY …
Such numbers are not a complete surprise. Wal-Mart officials have said the next several years will be a challenge as the company boosts spending on wages, training and e-commerce initiatives. As expected the company reported an 11.2% decrease in operating income during the full fiscal year, with much of the decline coming from the wage and technology costs. Several Wall Street analysts weighed in on Wal-Mart shares just ahead of Thursday’s report.
• Cowen reiterated a “Market Perform” rating with a $66 price target.
• Goldman Sachs has a “Neutral” rating with a $58 price target.
• Deutsche Bank reiterated a “Hold” rating with a $62 price target.
• Jefferies reiterated a “Hold” rating with a $60 price target.
• Morgan Stanley reiterated an “Equal Weight” rating with a $65 price target.

Patrick McKeever, a retail analyst with MKM Partners, is on the sidelines with Wal-Mart and he expects soft fourth quarter results in the retail sector. He said deep discounters and dollar store chains were likely the exception. He had estimated Wal-mart same-store comps to be 1% in the fourth quarter, they were shy of that number at 0.6%.

McKeever said unfortunately there is not a big catalyst on the horizon to hoist retail sales higher for Wal-Mart. He said spring sales could boost traffic, but e-commerce continues to be a thorn in the side for many retailers. Wal-Mart, he said, is better positioned to benefit from e-commerce if it can woo shoppers away from Amazon.