Quarterly income down almost 8% at Wal-Mart, but earnings and revenue beat estimates (Updated)

Editor’s note: Story updated with changes and additions throughout.
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Net income for Wal-Mart Stores was down almost 8% in the fiscal first quarter, but the retailer posted higher revenue and per share earnings than equity analysts expected.

Bentonville-based Wal-Mart recorded net income for the quarter of $3.079 billion, down 7.8% from the same quarter in the previous fiscal year. Per share earnings of 98 cents blew past the consensus estimate of 88 cents per share. Total revenue of $115.904 billion was up 0.9% compared to the same quarter in the previous fiscal year, and was well above the consensus estimate of $113.22 billion.

Wal-Mart’s earnings included a $3.5 billion foreign currency impact to top line revenue, on a constant currency basis the retailer said revenue would have been $119.4 billion, a gain of 4% year-over-year.

The upbeat earnings were a positive sign for Wall Street amid what has been a fairly dismal retail sector with Macy’s, Kohl’s and Target all seeing weaker-than-expected sales in their quarterly earnings. Wal-Mart shares (NYSE: WMT) rallied nearly 8% in pre-marketing trading following the earnings release early Thursday (May 19). Shares were trading up more than 8.6% at $68.53 up $5.38 in the morning session, despite a lower overall broader market. Wal-Mart stock is up 10.68% this year.

“We are proud of the overall results in the first quarter, and there is momentum in many parts of the business,” Wal-Mart Chief Financial Officer Brett Biggs noted in the earnings release. “Based on our views of the global operating environment, and assuming currency exchange rates remain at current levels, we expect second quarter fiscal 2017 earnings per share to range between $0.95 and $1.08. Additionally, we expect comp sales for Walmart U.S. to be about +1.0 percent, and Sam’s Club, without fuel, to be slightly positive for the 13-week period ending July 29, 2016.”

In what has become a more closely watched item, the company’s inventory value was $44.513 billion, down from $46.31 billion during the same quarter of 2015. A decline is the right direction, and, among other things, helps the company’s cash flow position.

“Consolidated operating income declined 7.1%, as planned investments in people and technology, as well as currency exchange rate fluctuations impacted results,” the company noted in the earnings report.

“We are pleased to see the U.S. comp result, strong performance outside the U.S., membership trends in Sam’s Club and EPS results versus guidance,” Wal-Mart Stores President and CEO Doug McMillon said in the earnings report. “Another highlight is the improved inventory position that contributed to strong cash flow performance. We’re off to a good start for the year.”

One other item still compromising profits is the ongoing Foreign Corrupt Practices Act alleged violations. Wal-Mart noted in the earnings data that FCPA and compliance related expenses were $25 million in the quarter, with $21 million going toward investigations and $4 million spent on internal compliance enhancements. Walmart expects its third party FCPA compliance expenses to range between $100 million and $120 million this fiscal year. Since 2013 Walmart has spent $763 million on legal defense and internal compliance enhancements.

Some experts close to the situation expect Walmart will likely see these investigations wrap up this year or next, noting that the government entities involved in the probe do not have any specific timetable to follow. Talk Business & Politics estimates if the FCPA ordeal is settled this year the overall cost will be $848 million, along with a hefty fine if any of the allegations are found to be true.

WALMART U.S.
Walmart U.S. is the engine that drives overall results for the retailer and the first quarter financials indicate fiscal 2017 got off to a better-than-expected start. Revenue for Walmart U.S. was $73.295 billion, up 4.3% compared the first fiscal quarter of 2015, above forecasts.

Operating income for the largest Wal-Mart Stores division $4.232 billion, down 8.8%. Same store sales for the division were up 1%, and marked the seventh consecutive quarter of same store sales growth. The shining star in the U.S. fleet is are the Neighborhood Markets posting 7% comp sales growth which has been consistent for several years.

As it has in recent quarters, the company said spending on increased wages, training and technology investments squeezed margins. Wal-Mart execs have said the company will spend $1.5 billion in the fiscal year on wages, training and technology. The $2.7 billion overall investment in people via higher wages and increased training is already paying dividends, according to Walmart U.S. CEO Greg Foran.

“We still lag many of our competitors in terms of shopping experience and we will continue to work on that,” Foran told the media.

On a positive note, he said that the higher wages being paid to employees are resulting in more spending at Walmart. He said employees are spending more at the retailer in part because they have more disposable income, but also because in-stocks are better, improvement in fresh and other store areas and there is better overall engagement among the workers.

Analysts agreed that any time retailers can reduce churn and turnover in their store operations profitability will increase and raise financial results.

“Jim Sinegal, co-founder of Costco, modeled this for years in his business with one of the lowest turnover rates among retailers. Turnover means more money and time must be spent retraining which is a drain on productivity and operational budgets. McMillon seems to understand that as well and the short term cost to raising pay and enhancing training will payoff over the long-term. In Walmart’s case it’s paying off sooner than many expected,” said CNBC Mad Money Host Jim Cramer.

Daniel Binder, an analyst with Jefferies, said the investments and changes made in store operations and personnel are having visible results in the stores he routinely visits in New Jersey. He said two years ago some of the stores were often out-of-stock and service lagged. Binder now reports improved service, cleaner and better stocked stores. Binder said while the store turnaround efforts are bearing fruit, not all of the stars are yet aligned for the retailer.

One area of high spending that did not meet expectations was the e-commerce division despite the 7% increase in overall sales in the quarter. The gross market value of the goods sold in the quarter was up 7.5%, but that level of growth was too slow, according to Biggs. Walmart said the U.S. e-commerce sales were better than than global sales but still lacking expectations overall. Biggs told the media that over the past few years Walmart has made investments in foundation systems and fulfillment have been substantial. These investments include several different initiatives from online grocery pickup to Walmart Pay which continue to slowly be rolled out across the massive store network.

“We do expect to see more growth in the business. If you think about how we are approaching the customer, we want people shopping at Walmart and we will continue investing to allow the customer to do that in many different ways,” Biggs told the media in the call.

Michael Lasser, an analyst with UBS, said Walmart has to show it can fully participate in the growth of the e-commerce channel and it’s not doing that given that Amazon reported e-commerce sales growth of 28% from a year ago, the best growth number reported in four years.

Foran said the grocery pickup service in the U.S. will be in nearly 40 markets by the end of May, which is up from 22 markets at the start of they year. He said customers using the service report high satisfaction levels overall.

Walmart execs are pleased with how the company is using technology to deepen customer relationships. Walmart Pay was rolled out to more than 1,000 stores the week and is expected to be available across the nation this summer. The company also recently tweaked its free shipping subscription for online orders – Shipping Pass, available by invitation only in key test markets now costs $49, half of Amazon Prime’s rate of $99. The delivery time of Shipping Pass was also reduced to 2 days from 3 days previously.

“Although we are making progress on several of our key priorities, we have more work to do, particularly in some of our largest international markets” Biggs said.

WALMART INTERNATIONAL
Quarterly revenue at Walmart International was $28.083 billion, down 7.2%. However, the strength of the U.S. dollar continues to result in a negative exchange rate for the retailer. On a constant currency basis, revenue for the division was $31.6 billion, up 4.3%.

Operating income for Walmart International was $1.164 billion, up 8.8% compared to the same quarter in 2015. The company said ten of 11 markets had positive comp sales in the quarter. Nine of them posted comp sales greater than 4% led by Walmart and Canada.

Walmart ASDA, a grocer in the United Kingdom, continues to be hammered by intense competition in that market from German grocer’s Lidl and Aldi. Comp sales for ASDA were down 5.7% while traffic was down 5% from a year ago. Walmart said there are significant, structural shifts in the market driven by growth in hard discounters and intense price competition which has led to continued deflation in food that has now lasted for 20 consecutive months. Walmart has responded with Project Renewal an initiative aimed to simplify and strengthen the customer offer, reduce costs and drive sales.

The cost analytics program, which is part of Project Renewal, made good progress and delivered savings in line with expectations, and is helping to deliver an improvement in the price position against key competitors, the retailer noted in the earnings report. ASDA’s efforts to reduce prices and product availability throughout the quarter were not enough to overcome traffic and food volume declines in the large store format.

SAM’S CLUB
Revenue at Sam’s Club was $13.608 billion, up 1%. Operating income $413 million, down 3.3% from the $427 million in the same quarter of 2015. Same store sales at Sam’s Club fell to 0.1% compared to 0.4% for the same quarter in 2015. The flat comp sales were in line with guidance.
E-commerce contributed approximately .60%  to comp sales as Club Pickup sales grew more than 30% representing the fastest growing piece of the business.

Membership income grew 3.9% over last year led by more Plus Memberships being sold. The Club division also managed to grow inventory lower than sales by as much as .05% in some key categories.

“The team at Sam’s is in the early stages of executing against the strategy that was outlined at the end of last year. We know we have work to do, and we are on the right path. For the 13-week period ending July 29, 2016, we expect comp sales to be slightly positive,” the company noted in the transcript.