Quarterly income down 8.2% for Wal-Mart Stores, but retailer raises full year earnings guidance (Updated)

Wal-Mart Stores’ boss says the retailer is on a better financial and operational path heading into the all-important holiday season. Third quarter earnings of 98 cents per share hit the market estimate, but net income was down more than 8%.

The company reported Thursday (Nov. 17) that net income in the quarter ended Oct. 31 was $3.034 billion, on target with the consensus of analyst estimates, but 8.2% below the $3.304 billion in the same quarter of 2015.

For the first nine months of the fiscal year, Wal-Mart net income is $9.886 billion, down 2.3% from the $10.12 billion in the same period of 2015.

Revenue in the third quarter was $118.179 billion, better than the $117.408 billion in the third quarter of 2015. The revenue missed the consensus estimate of $118.69 billion, Revenue for the first nine months of the fiscal year $354.937 billion, up 0.7% compared with the $352.463 billion in the same period of 2015.

Net sales in the Walmart U.S. division for the quarter was $74.55 billion, up 2.5% compared to the same quarter in 2015. The closely watched U.S. comp store sales were up 1.2%, and traffic was up 0.7%. However, the comp store sales were up 1.5% and traffic was up 1.7% in the 2015 quarter. Operating income in the retailer’s largest sector was $3.999 billion, down 11.3% compared with the same quarter in 2015.

“We had a solid third quarter. Our e-commerce growth accelerated, operations in the U.S. continued to strengthen and international delivered another solid performance,” Wal-Mart Stores CEO Doug McMillon noted in the earnings statement. “We are pleased that we can see real progress stemming from our strategic choices and we appreciate the great work by our associates. Yet, we are not satisfied. We will continue to change and pick up speed to reach our longer term aspirations. We’re positioned well for this important fourth quarter and wish everyone a happy, peaceful and prosperous holiday season.”

Net sales in Walmart International totaled $28.39 billion, down 4.8% from the $29.811 billion in the same quarter of 2015. Operating income in the segment was $1.488 billion, up 11.2% from the $1.388 billion in the same quarter of 2015.

Sam’s Club net sales were $14.236 billion, up 1.1% compared to the same quarter of 2015. Operating income in the quarter was $396 million, down 26.5% compared with the $539 million in the same quarter of 2015.

Based on performance gains, the company also raised the lower end of its earnings guidance. Prior guidance was an earnings per share range of $4.15-$4.35. The new range is $4.20-$4.35.

UPDATED INFO:
DISSECTING THE NUMBERS
Walmart U.S. had a very respectable third quarter on many levels, according to Robert Drbul, an analyst with Guggenheim Securities. Overall revenue was down, but that didn’t come as surprise given price deflation in Walmart’s U.S. grocery business. Walmart U.S. CEO Greg Foran told the media during the retailer’s morning call that deflation reduced top line sales by 1.5% in the quarter.

One area of concern raised by analyst Paul Trussell of Deutsche Bank is the slight deceleration in store traffic and basket comparables (amount purchased with each transaction) from the second to third quarter. Foran addressed the basket concern by again mentioning price deflation in the grocery business. He said stores are performing better than a year ago on many levels, particularly with reducing inventory overhangs which in turn helped improve in-stocks. Walmart U.S. lowered its comp-store inventory nearly 6% in the quarter. With respect to store traffic, Walmart management said positive traffic comps continue but there is room for improvement in the overall customer experience. Walmart U.S. has not yet said what impact online grocery pickup is having on in-store traffic as that service continues to expand and is now in 600 stores and counting.

Trussell believes there is downward pressure on Walmart U.S. in that it’s having to invest heavily to compete online with Amazon and with Aldi stores He applauds the focus but said given Walmart’s huge size the law of large numbers is working against a major growth spurt.

“I just don’t see a lot of upside earnings potential for shareholders at this time,” he added, which could explain the near 4% drop in Wal-Mart shares on Thursday after the earnings release.

Wal-Mart shares (NYSE: WMT) were trading $68.58, down $2.82 in the Thursday morning session. During the past 52 weeks the share price has ranged from $58.32 and $75.19. Wall Street’s target price for the shares is $74.85. Drbul’s target is $82. He believes Walmart is poised to benefit from pent up consumer demand. Stephens Inc. analyst Ben Bienvenue said he is reviewing the recent report but has not yet changed his neutral rating on the stock. He credited Walmart’s better net profits to overall higher gross margins and lower taxes. Bienvenue’s target price is $73.

The international business was better than expected on several levels. Topline sales grew 2.4% on a constant currency basis, though down 4.8% overall. Comp sales were up 7% in Mexico, and up 8.1% in Brazil. However, comp sales were down 1.6% in China, down 1.1% in Canada, and down 5.8% in the U.K.

Walmart International CEO David Cheesewright did not take part in either call with analysts or media on Thursday. CFO Brett Biggs did address foreign exchange impact with media. He said Wal-Mart does try and mitigate currency fluctuations when it can. He said much of the profit earned abroad is reinvested in those businesses and there is not a huge amount of income being repatriated.

Sam’s Club had mixed results and CEO Rosalind Brewer did not take part in either call. With 1% revenue gains, comparable sales including fuel were 0.7%, up from a year ago. The gross profit margin decreased in the quarter which played out in a 26.5% decline in operating income including fuel. Membership income grew 2.3% from a year ago.

E-COMMERCE GAINS
McMillon was quick to call out improvements in Walmart.com, an area he had previously voiced some discontent.

“We’re excited to see Walmart.com gaining traction. From a marketplace perspective, we’re scaling fast – adding 8 million SKUs (items) over the past 3 months alone. E-commerce contributed 50 basis points to our third quarter Walmart U.S. comp, which is our largest contribution yet. It’s great to see an improving e-commerce business compliment the momentum we have in our stores,” McMillon noted on the call.

He said new CEO Marc Lore is pushing to accelerate integration efforts between Jet.com and Walmart.com. Such efforts include utilizing scale in areas like shipping, sharing assortment and leveraging the strengths of the marketing teams, he said.

McMillon said on a constant currency basis, global e-commerce sales rose 20.6% in the quarter. Gross Merchandise Value – a key metric used in retail site performance –increased 16.8%. The U.S. results were stronger than those in key international markets, driven by the retailer’s marketplace offering as well as a contribution from Jet.com. Biggs clarified for the media that Jet.com’s addition to the overall GMV was about 8.6%. Without Jet, Walmart legacy GMV grew by more than 20%. Also included in the e-commerce numbers is the unwinding of Walmart’s Yihoadian business in China which was recently sold to JD.com for a stake in that business.

“I’m also excited by how we’ve positioned our business in China to win. We continue to be pleased with how our alliance with JD.com allows us to reach even more customers with our brands. We recently announced we own roughly 10% of JD.com’s shares and during my visit a few weeks ago we jointly launched two new services. … We’re working together with them to create a seamless shopping experience. I was able to visit the JD Home Office when I was in China last month and it was clear that they work with speed and the spirit of innovation is strong. When I was in one of our Walmart hypermarkets in Beijing, JD already had a site set up for picking and delivering customer orders,” McMillon said.

OTHER SPENDING
Aside from the $6 billion Wal-Mart is spending on its e-commerce business, the retailer continues to invest in lower prices for consumers though it has not given an exact number.

Wal-Mart also doled out $29 million in the recent quarter on compliance issues related to ongoing Foreign Corrupt Practices Act investigations in multiple markets. The retailer said $24 million was directly related to the investigations and $5 million was spent on its internal compliance program. So far this year FCPA and related spending totals $82 million and for the full year ending Feb. 1 Walmart expects to have spent between $100 million and $120 million which directly offsets earnings.

The company also said it returned just under $3 billion to shareholders during the quarter through dividends of $1.5 billion and share repurchases of 1.4 billion.