Wal-Mart says U.S. store turnaround on track, Wall Street not impressed

The turnaround mission for Walmart U.S. is in its second year of leadership behind Walmart U.S. CEO Greg Foran, but estimates that better revenue and operating profits are another year away – news that brought out the bears on Wall Street.

The retail giant announced Thursday, (Feb. 18) it will not generate the 3% to 4% sales growth this year the company predicted in its October analyst conference. Instead, Walmart U.S. expects flat overall results for the full year which began Feb. 1. Company executives cited expenses related recent store closures and expected currency exchange losses ($12 billion for fiscal 2017) for the reduced sales guidance this year.

“Over the last 12 months, we’ve laid out our plan to win in the U.S. now and in the future. … We track to measure our progress, we’re right where we expected to be. We’ve still got a lot of work to do, but I’m pleased that our fourth quarter results demonstrated solid progress against this plan,” Foran said during Thursday’s earnings call.

In the fourth quarter Walmart U.S. reported top line revenue of $81.5 billion, up 2.4% from a year ago. Operating income declined 17.1% to $5.1 billion for the quarter.

Wall Street wasn’t impressed with that news as Wal-Mart shares sold off heavily in the morning session. Shares had experienced a 7% run up in price this year until Thursday’s gloomier than expected outlook. Wal-Mart shares (NYSE: WMT) were trading below $63 in the morning session, off nearly 5% from the prior day’s close of$66.11.

PLAN EXECUTION
On his goal of “Fast, Clean and Friendly,” Foran said more than three-quarters of the 4.600 stores have now met or exceeded expectations, up from must 16% a year ago. He said adding back the department managers and the new training programs announced in June helped make the difference. He also reported progress in his efforts to ensure more products are in-stock and excess inventory and overall store shrink is down. Foran said further investments in technology will be required in these areas.

“We continued to make progress in managing inventory. Overall inventory grew 0.9%, or approximately 25% the rate of total sales growth. Comp store inventory declined 2.9% as we remained focused on cleaning up our backrooms and using processes such as better re-stocking procedures and top-stock initiative to ensure better in-stocks for our customers. Inventory will remain a key focus area for us in this new fiscal year,” Foran said.

He also discussed the reasons behind closures of Express stores and a few underperforming Neighborhood Markets. He said the decision was not taken lightly, but after careful consideration, he thought it better to focus on improving overall supercenter performance and continuing to grow Neighborhood Market sales. The smaller store experiment was a distraction from his main game plan – the supercenter turnaround.

The cost of the 269 store closures dinged fourth quarter earnings to the tune of $729 million, or 20 cents a share, the bulk of which fell to the U.S. division. Foran said his focus will continue to be on the best long-term possibilities which also includes the e-commerce piece of the puzzle as it continues to help in-store traffic growth.

In the fourth quarter Walmart U.S. reported a 0.7% improvement in customer traffic, nearly half of that was related to in-store pickup option for online orders of groceries and general merchandise. Comparable sales were slightly higher at 0.6% for the quarter, while net sales grew 2.4% or $1.9 billion from the same period last year.

“While customers benefited from lower gas prices, we experienced significant headwinds from deflation in meat and dairy products. Additional sales pressure came from warmer-than-normal temperatures early in the quarter, and delays in IRS tax refund checks impacted the very end of the quarter,” Foran said.

Looking specifically at the six week holiday season, Foran said the company performed as expected given that management opted to pullback on short-term, deep price discounts. He said throughout the quarter the retailer had lackluster results in the entertainment category.

“We continued to experience soft wireless sales and a slower adoption of new technology in televisions. We’re continuing to make progress in this space by focusing on our operating model, including service to our customers, assortment and department layout, but it will take time to get it right,” Foran said. “Given we pulled back on deep discounts we did see an increase in our gross margins in this category.”

Other areas of concern include seasonal apparel sales as well as over-the-counter cough and cold medicine which is lower this year because of a warmer winter. Foran said margins were up slightly over last year thanks to overall inflation in food, general merchandise and consumable pricing.

WIN IN FRESH
Another key component in Foran’s turnaround plan involves fresh foods. The retailer confirmed this week it has already hired 30 field managers and plans to hire hundreds more over the next three years to improve the fresh food offerings in its 4,600 stores. The new position has been created to help help ensure quality and consistency in the fresh operations. A field manager will oversee operations in about 10 stores.

“Our grocery business delivered positive comp traffic growth, even while lapping positive comp traffic from last year. We continued to push forward with our ‘Win in Fresh’ initiatives, including 11 testing new layouts, reducing inventory while improving in-stocks in both food and consumables, and exceeding expectations in our urgent agenda items such as reducing waste and throwaways,” Foran said.

“We still have work to do in our Fresh area, and many things we want to accomplish in the upcoming year, but we remain on track,” he added.

Foran said Walmart U.S. expects to open 50 to 60 supercenters in the year, including relocations and conversions. It will also open 85 to 95 Neighborhood Markets. The retailer also expects to further expand its online grocery program to more markets.

“We know the decisions we’ve made this year to improve our business pressured the bottom line, but we’re confident they were in the best interests of our customers, our associates, and our shareholders. We believe in our long-term plan, and we remain on track to achieve these goals. In the new fiscal year, we’re continuing to march down the path we’ve laid out,” Foran said.

Looking ahead to the May earnings, Foran said he expects a comp sales increase of 0.5% which will be under the 1.1% gain experienced during the same 13-week period last year.

WALMART PAY
Walmart Pay was also briefly discussed during Thursday’s earnings call. The mobile pay option was introduced in December in a few test markets including its home base in Northwest Arkansas.

While there is shopper apprehension to using mobile pay options the industry is convinced the payment mode will accelerate this year.

With major smartphone brands Apple and Samsung making a big entrance into the mobile payment business, the total revenue of the worldwide mobile payment market in 2015 reached $450 billion, according to the global market research firm TrendForce. By the end of 2016, the total revenue is estimated to reach $620 billion, representing growth of 37.8% year-on-year.

Wal-Mart obviously wants to be a leader in this area following on the footsteps of Starbucks who now says about 20% of its total U.S. sales are derived from mobile app payments.

“I’m excited about the introduction of Walmart Pay, and I was very proud of how different parts of our company worked together on it with a relentless focus on the customer experience. I look forward to us rolling it out this coming year,” said Doug McMillon, CEO of Wal-Mart Stores. “We recently aligned our technology teams because we want more speed and more customer-centric and cost-efficient innovations like this one. We will deliver one Walmart experience to our customers.”

Analysts have applauded Walmart for moving toward mobile pay options. Retail expert Carol Spieckerman, CEO of Spieckerman Retail, has characterized mobile pay in the U.S. like days in the Wild West with various payment platforms jockeying for position amid skittish consumer sentiment from recent data breaches.

“Doing so affords Walmart the opportunity to get customers acquainted with, and possibly addicted to, its solution initially. If the solution is easy to use and as shopper trust is developed, Walmart will have the opportunity to serve up personalized promotions and suggestions that will keep customers in its ecosystem and potentially drive incremental sales,” she added.

Spieckerman said Walmart implementing its own solution for mobile pay is a smart move, even if they decide to integrate additional payment solutions (like Apple Pay) at a later time.