Wal-Mart Stores net income down 7.2%, full year revenue up 0.8% (Updated)

Editor’s note: Story updated with additions and changes throughout.
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Fiscal year net income fell 7.2% for Wal-Mart Stores and revenue for the year rose 0.8% to $485.873 billion thanks to a more than 3% gain in Walmart U.S. sales. Despite those mixed results it was the best comp sales report for the retailer in more than four years.

Full-year net income was $13.643 billion, down from $14.694 billion in the previous fiscal year. The per share earnings for the fiscal year was $4.38, beating the consensus estimate of $4.32. However, excluding gains from the sale of Yihaodian, Wal-Mart met the estimate with per share earnings of $4.32.

Net income in the all-important fourth quarter was $3.757 billion, down almost 18% compared to  $4.574 billion in the fourth quarter of the previous fiscal year. Per share income in the quarter was $1.22. Wal-Mart reported a one-time loss of 8 cents per share in the quarter related to discontinued real estate projects. Without the loss, the Bentonville-based retailer would have beat the consensus estimate of $1.29 per share.

Fourth quarter revenue was $130.936 billion, up 1% compared with $129.667 billion in the fourth quarter of the previous fiscal year. Fourth quarter revenue was below the consensus estimate of $131.22 billion.

As has been the story in the past two years, earnings were pressured in part because of ongoing investments in e-commerce operations, broad wage increases, and increased training. Cash and cash equivalents stood at $6.867 billion at year end, down 21.1% compared with the $8.705 billion at the end of the previous fiscal year.

E-commerce growth at Walmart U.S. in the fourth quarter was up 29% and included Jet.com and online grocery sales.

“We’re moving with speed to become more of a digital enterprise and better serve customers. We had a very solid fourth quarter with U.S. comp sales growth of 1.8% and U.S. e-commerce GMV growth of 36%,” Doug McMillon, president and CEO of Wal-Mart Stores noted in the earnings statement.

Wal-Mart Stores said it spent $99 million last year on the federal corrupt practices investigation and third party compliance issues, lower than the $120 million previously estimated by the retailer. Around $80 million was spent on investigations and $19 million was spent on internal compliance changes. Wal-Mart expects to spend between $65 and $85 million in compliance-related issues this year. Since 2012 Wal-Mart has spent $837 million on FCPA-related issues.

Wall Street investors approved of the retail giant’s financial results as shares of Wal-Mart Stores (NYSE: WMT) rose nearly 3.5% in heavy volume during Tuesday’s morning session. Shares were trading at $71.75 up $2.38 as the retailer delivered improved results in its U.S. segment as well as its U.S. online sales, which were for the first time broken out from the retailer’s international e-commerce division and Sam’s Club.

Chief Financial Officer Brett Biggs told the media that U.S. online sales, which will include Jet.com and the recent acquisitions, will be reported separately from Walmart International e-commerce sales as well as SamsClub.com.

U.S. GROWTH
Ongoing investments in e-commerce and attention to detail in stores are finally starting to pay off for Walmart’s U.S. division which is the bread and butter for the retail giant. Full year revenue at Walmart U.S. was $307.833 billion, up 3.2% compared with the previous year, and in line with Walmart U.S. CEO Greg Foran’s earlier predictions. Operating income in the segment was $17.745 billion, down 7% compared with the previous year. Full year same store sales (without fuel) were up 1.4%, better than the 1.2% in the previous year.

“New technology and apps are providing real-time information to improve our in-stock levels and better manage inventory, which is down 7% this quarter versus last year on a comp-store basis,” McMillon noted in the earnings statement.

Walmart U.S. posted fourth quarter comp sales gains of 1.8% led by a 1.4% increase in customer traffic. All formats had positive comp sales and e-commerce added about 0.4% to the overall growth. Walmart U.S. CEO Greg Foran said the retailer was pleased with the comps considering the negative pull from food deflation of 0.9% in the quarter. The retailer’s gross margin also decreased 0.8% in the quarter in part because of holiday markdowns taken at the end of the quarter, a little earlier than normal.

Foran said there are many metrics that help with margin gains, from improving on fresh throwaways to unknown shrinkage. But he said Walmart U.S. continues to push for low prices and will make the best decisions possible for all the retailer’s stakeholders. When asked about the timing of the recent markdowns, Foran said the indication of an earlier spring meant the retailer would mark down winter apparel and seasonal items a few weeks ahead of normal. He said the markdown was no indication the retailer had overbought goods, citing a solid inventory position to start this new year.

“Our in stock position is better than it has been historically and inventory was adequate through the holiday despite being down from a year ago,” he said.

There was also a $249 million charge to Walmart U.S. in the fourth quarter related to discontinued real estate projects. Last year’s fourth quarter included $670 million in charges related to the impact of store closures. Excluding these adjustments, operating expenses would have increased 7.3% in the fourth quarter and 8.8% for the year.

Looking at the first two and half weeks in the company’s first quarter, executives said sales are lighter than expected given the delay in income tax refunds which should start being returned to consumers this week and next. Foran said the company is watching sales in the interim for any indication of pent up demand from consumers waiting on refunds. Foran downplayed the recent uptick in gasoline prices saying he didn’t expect any impact on Walmart sales.

WALMART US E-COMMERCE
E-Commerce CEO Marc Lore said the retailer is making “great progress and has the building blocks in place through the recent acquisitions to accelerate growth.” He said the retailer is building merchandise expertise it hasn’t had before with the recent acquisitions of ShoeBuy, Moosejaw, and Hayneedle.

He also said the new restructuring of the U.S. e-commerce division is more customer focused. Lore said the scaling up of online assortment to now 35 million items has been largely possible by an expanded marketplace. Specifically he said the category expertise Walmart.com gets with the leadership from ShoeBuy, Hayneedle and Moosejaw will directly impact the U.S. business for Walmart. He said Walmart.com and Jet.com are already sharing assortments and have merged their back-end fulfillment networks.

Lore said Walmart.com will become more disciplined about its marketplace offerings in the future in terms of quality of the assortment as opposed to the number of items. For instance, the top million items sold online represent about two-thirds of all sales. Lore said Walmart.com has to get that assortment right so the retailer has the items most frequently bought online.

Lore also said Walmart.com has seen an uptick in orders since launching the two-day delivery and lower threshold for free shipping. He did not give any specifics.

“It’s going to be an exciting year … Walmart feels like a startup and we are moving as fast as possible and continue to look for additional M&A opportunities to fill in gaps in category expertise,” Lore told the media.

He gave no specifics about the targets under consideration for future acquisition, but said there are many possible categories and the retailer is actively looking.

WALL STREET ANALYSIS
Jan Rogers Kniffen, retail consultant with JRK Worldwide, said the retail giant is doing the right things and in this earnings report the results began to show. He said growing the U.S. business with better stores and increasing e-commerce is making a positive difference in the retailer’s bottom line.

After having Wal-Mart in the question column, Kniffen said he’s now positive on the shares despite icon investor Warren Buffett recently dumping more than 90% of his Wal-Mart shares, taking his 12-year investment from $3 billion down to around $100 million. Kniffen said this is one instance where he sees upside in Wal-Mart shares and he would differ with Buffett. He said the retail giant is also buffered from any detrimental impact for an adjusted border tax because much of the retailer’s sales are in grocery.

“Wal-Mart is a very big and strong company and unlike others they can also afford to buy back shares, raise their dividend, all of which benefits shareholders,” Kniffen said.

Argus analyst Chris Graja rates Wal-Mart shares a hold. He recently noted to investors the declining 12-month return on investment and lower operating income is what put him on the sidelines. Graja said he’s waiting for the retailer to “grow income faster than sales over time.” He said it’s not enough to “simply boost earnings by opening more mildly profitable stores or to boost comp sales by stuffing stores with more inventory.”

Analysts at Wells Fargo recently resumed coverage of Wal-Mart Stores giving the stock a neutral rating of “market perform.” The analysts noted Jan. 26 that while the retailer is poised to profit from improving U.S. consumer spending and increased capabilities in e-commerce they believe Wal-Mart is the in the early stages of what will be a multi-year reinvestment cycle that focuses on store upgrades, sharper pricing and improved e-commerce relevance.

Ben Bienvenue, analyst with Little Rock-based Stephens Inc., is in the midst of re-evaluating Wal-Mart share price targets and future earnings estimates following Tuesday’s results. Bienvenue is now neutral on the shares, but he was encouraged by results in the retailer’s U.S. segment. He said gross margins were slightly lower than he expected and expenses ran higher than predicted. He said he was impressed with 1.8% U.S. comp sales and 5.3% Neighborhood Market comps considering the fierce competition in the grocery space.

WALMART INTERNATIONAL
Walmart International posted full year revenue of $116.119 billion, down almost 6% compared with the previous fiscal year. Operating income for the segment was $5.758 billion, up 7.7% compared with the $5.346 billion in the previous year.

McMillon said the international segment delivered solid sales results led by Walmex. He said 10 of 11 markets posted positive comp sales for the year and seven of those grew comp sales by than 4%. Walmex comp sales grew 7% and 14% over the past two years.

China is another important market for Walmart International. McMillon said the recent launch of Walmart Global imports stores on JD.com Worldwide provides Chinese consumers access to thousands of products imported from Walmart stores around the world. He said the investments made in last-mile delivery firm New Dada has enabled two-hour delivery service from nearly 70 Walmart locations in China.

“China is a key growth market for our company, and we’re proud of how we’ve positioned the business to win,” McMillon noted in the earnings transcript.

In the fourth quarter, Walmart International grew sales grew 3% on a constant currency basis, while net sales declined 5.1%, impacted by a $2.6 billion currency headwind. China’s net sales grew 5.4% and comp sales rose 2.3%. Canada also is an improving market for the retailer. Fourth quarter sales rose by 2.7% and comp sales were flat at 0.2%, with increased market share in health and wellness and food categories, according to Nielsen data.

The Asda business in the United Kingdom continues to be a drag on the international segment. Net sales declined 0.6% and comp sales declined 2.9% in the quarter.

“We have a lot of work to do in this market, but we’re encouraged by some of the early signs of traction with improvements in the customer value proposition,” Biggs noted in the earnings transcript.

SAM’S CLUB
Sam’s Club posted full year revenue of $57.365 billion, better than the $56.828 billion in the previous fiscal year. Operating income at the club division fell from $1.82 billion in the previous year to $1.671 billion in this fiscal year. Same store sales rose 1.1% for the year, better than the 0.4% gain in the previous year.

McMillon thanked Rosalind Brewer for her five years of service as CEO of Sam’s Club and the improving results in the segment.

“We’re pleased with our progress in technology at Sam’s, including the national launch of scan-and-go. E-commerce continues to grow with direct-to-home and Club pickup. While we have more work to do to deliver the results we expect to achieve, we believe we’re on the right track to win with members and accelerate growth,” McMillon noted in the transcript.

McMillon said Sam’s Club CEO John Furner brings a unique set of experiences and a deep understanding of the company to his role.

“He’s going to be a great leader for Sam’s Club,” McMillon said.