Wal-Mart Stores managed to over-deliver on second quarter earnings growth and top line revenue, despite falling short of the profits pocketed a year ago. Analysts covering Wal-Mart liked the second quarter results reported early Thursday.
Wal-Mart shares (NYSE: WMT) in the morning session were down around 2% on heavy volume trading just below the $80 level. Wal-Mart shares have rallied more than 17% since the first of the year. Analysts suspect Thursday’s decline was a profit-taking action given the cautious outlook for the third quarter. However, the majority of analysts polled remain bullish on Wal-Mart over the next 12 to 18 months as some of the earlier investments in e-commerce and stores began to pay off.
Robert Drbul, analyst with Guggenheim Securities, said expectations for Wal-Mart were likely too high given its solid run this year. That said, Drbul maintains his overweight recommendation for Wal-Mart citing management’s ability to better manage expenses which he said will grow the bottom line through next year.
Solid same-store sales growth of 1.8% in the U.S. segment, which was led by 1.3% uptick in traffic and fractionally higher average basket sales, look good against a backdrop of dismal retail results reported earlier by competitors, according to Michael Lasser, a retail analyst with UBS Securities. Lasser is also bullish on Wal-Mart.
Target on Wednesday reported same-store sales growth of 1.3%, but grocery was the only area where sales were flat, according to Target CEO Brian Cornell. Compare that to a strong 5.6% same-store growth in Wal-Mart’s grocery units – Neighborhood Markets – and Lasser said it’s clear the strategies underway at Wal-Mart are working.
CNBC Mad Money host Jim Cramer said there was a lot in the Wal-Mart numbers he liked, namely the strongest grocery comp in five years at a time when grocery has been hammered by deflation. Cramer said Wal-Mart’s growth of online sales (60%) which did not come at the expense of its in-store sales (1.8%) and improved traffic (1.3%) have to be catching Amazon’s eye.
“In many ways Wal-Mart has more to leverage than the U.S. government. You have Marc Lore, Walmart U.S. e-commerce CEO, saying consumers love the free 2-day delivery and pickup discounts that don’t require a membership fee. I think Amazon has to know Wal-Mart is not falling over playing dead here. Wal-Mart has game and CEO Doug McMillon is chronically under-estimated. He comes out as a David, he’s not a Goliath,” Cramer said.
ONLINE GROCERY GROWING ‘RAPIDLY’
In a call with the media, Wal-Mart CFO Brett Biggs said the retailer is pleased it’s food business results and added that “online grocery continues to grow rapidly.” Wal-Mart said it has expanded its online grocery service to include more than 900 locations in the U.S., 230 additional stores over the first quarter report. Wal-Mart said it will expand the online grocery pickup to 1,100 locations by the end of this year.
Online grocery pickup results are part of the Walmart U.S. e-commerce sales which added 0.70% to the overall same-store sales growth. Wal-Mart said the majority of the its 60% gain in e-commerce sales was organic coming from Walmart.com and Jet.com which includes Walmart online grocery pickup.
“We’re delivering growth through an improved customer value proposition that includes free two-day shipping on millions of items and Easy Reorder, as well as an expanded assortment, now with more than 67 million SKUs (items) – an increase of more than 30% from the first quarter. With Easy Reorder, we’re integrating both in-store and online purchases to provide customers with a single spot to view and repurchase the items they buy most frequently. Initiatives like these, along with everyday low prices, are the reasons why customers are choosing Walmart in greater numbers. As a reminder, we’ll begin to lap the Jet.com acquisition in the third quarter,” said Biggs.
MARGIN, COMPETITION CONCERNS
One area of concern was the slight decrease in Wal-Mart’s gross margin as the retailer continues to make downward price adjustments. Lasser said the heat Wal-Mart is facing on all sides of its business from deep discounters in grocery to Amazon online will continue to squeeze margins. But, he said, the investments Wal-Mart has made in its e-commerce business will pay off in the long-run, which makes the Bentonville-based retailer a better bet than some of its competitors.
During the media call Wal-Mart was asked about the heightened competition from the Amazon-Whole Foods deal and the impact that could have on its own grocery business. Walmart U.S. CEO Greg Foran said the retailer will watch the competition to see if Amazon expands its online grocery. He said Wal-Mart welcomes the competition from Amazon and the German discounters Aldi and Lidl.
“In order to do well in a market that’s improving you have to perform better than yourself,” Foran said.
One of Wal-Mart’s biggest cheerleaders has been Raymond James & Associate analyst Budd Bugatch who was bullish on Wal-Mart shares long before this year’s 17% price increase.
“Overall Wal-Mart delivered a solid fiscal second quarter, but more importantly the beat versus our model was driven by Wal-Mart’s U.S. segment,” he said.
He wasn’t that bothered by the slightly lower margins reported by Wal-Mart given the company did a better-than-expected job of managing expenses and the U.S. segment has increased operating income of 2.2% in the quarter building on positive improvement last quarter.
Biggs said managing inventory has been a key focus for the U.S. business, and during the quarter, inventory at comp stores fell 3.8% while in-stock levels remained high.
Charlie O’Shea, retail analyst with Moody’s Investor Services, said Wal-Mart’s strategy to tactically invest in pricing and investments in online did hurt earnings, but he believes the payoff on the $6 billion Wal-Mart has spent on e-commerce and supply chain enhancements over the past two years is materializing.
“Explosive online growth is continuing its post-Jet.com trend,” O’Shea said. “We expect this level of performance to continue, along with Wal-Mart’s ongoing efforts to leverage Jet by making tactical pure-play online acquisitions similar to the recent Bonobos deal, and therefore put itself in the solid number two position behind Amazon in most online categories.
“As Wal-Mart is a key player across most back-to-school/back-to-college product categories, and we are in the heart of those seasons, we would expect further promotional activity in Q3, with smaller retailers to feel increased levels of stress as Wal-Mart and Amazon continue their battle over market share,” he said.
Retail consultant Anne Howe also gives Wal-Mart good marks, not because they are “unstoppable” but because they are never afraid to keep charging forward. She said Wal-Mart’s focus on the shopper and the investments made to enhance shopper convenience and experience should keep shoppers loyal and perhaps woo more consumers into Wal-Mart’s fold.