Walmart share price tumbles more than 10% after ‘squishy’ earnings report

Tuesday’s fourth quarter and full year earnings report was a rare black eye for Bentonville-based Walmart, with earnings misses, declining operating income, and relative slowdown in online sales sending shares of the world’s largest retailer falling more than 10% in Tuesday trading.

Walmart on Tuesday (Feb. 20) reported fiscal 2018 – for the 12-month period ended Jan. 31 – net income of $9.862 billion, down 27.7% compared with $13.643 billion in fiscal 2017. Full year revenue, which includes sales and memberships, totaled $500.343 billion, up 3% compared with the $485.873 billion in fiscal 2017. The full year revenue was better than the consensus estimate of $498.78 billion. Adjusted earnings per share for the full year reached $4.42, just below the consensus estimate of $4.44.

Operating income for the fiscal year was $20.437 billion, down 10.2% compared to the previous fiscal year.

Shares (NYSE: WMT) closed Tuesday at $94.11, down $10.67, or 10.18%. During the past 52 weeks, the share price has ranged between $109.98 and $69.33. The Walmart share price is up 16% over the past year.

Aside from missing guidance, Walmart told Wall Street the slowdown in e-commerce was not entirely unexpected as online sales grew 23% in the fourth quarter on the heels of a one-year lap of the Jet.com acquisition. But Walmart President and CEO Doug McMillon expects online sales in 2018 will gradually increase 40% for the full fiscal period as Walmart U.S. will double the number of locations for grocery pickup over the next 12 months and continue to expand its online assortment, which is now about 75 million items.

McMillon also said Jet.com will grow slower at the expense of more investments and focus on Walmart’s core online business at Walmart.com. He said in much of the U.S. the Walmart.com brand has the opportunity to grow, whereas the Jet.com business is mostly focused on urban areas.

Marrying online and in-store is a major focus for Walmart as omnichannel shoppers spend nearly twice as much as consumers shopping either physical stores or online, McMillon said. He said the U.S. store business is in good shape in terms of fleet size and recent in-store management changes which McMillon said allows for more nimbleness.

He said the recent closure of 63 Sam’s Clubs was a move that mirrored the store closure spree at Walmart two years ago when the company abandoned the Express format and shuttered more than 150 U.S. stores. McMillon said the company looked at Sam’s Club properties this past year and decided to close underperforming stores. He said using existing facilities for online fulfillment centers is a new strategy beginning with the Memphis Sam’s Club project.

“We hope to learn a great deal from this project and feel using our existing facilities for fulfillment gives us a competitive advantage. It’s never a good time to close a store or club if you are an associate impacted, but we are working to get as many of our people transferred as possible,” McMillon said.

The company expects Sam’s Club will see diminished sales revenue of about $6.3 million this year resulting from the 63 closures and the decision to abandon tobacco sales at some clubs. The retailer expects Sam’s Club comp sales to be flat or possibly negative when factoring in the loss of tobacco sales this next year. Excluding fuel and tobacco, comp sales are expected to range from 3% to 4% for the full year. Walmart U.S. expects comp sales growth of 2% for the full year.

‘SQUISHY’ METRICS
Karen Short, an analyst with Barclays, said Walmart’s financial metrics looked a “little squishy” especially with Walmart outlining a bullish game plan in October at its annual meeting with the investment community. She said Walmart missed on several metrics and given so much has been spent on e-commerce, that miss drew some concern for Wall Street.

“I am not concerned. I think Walmart is working through a bottleneck of excess demand and feel like they won’t have any trouble reaching a 40% sales growth (Gross Market Value) for the full year as they have forecast. It won’t happen in one quarter or two,” Short noted. “Walmart has $1.6 billion to play with in terms of free cash not yet allocated from the lower tax rate and I expect Walmart to make a smooth landing with the plane despite some intermittent turbulence.”

Paul Trussell of Deutsche Bank said he’s neutral on Walmart and the slowdown in online sales is a valid concern for Wall Street given much of the stock appreciation was on the back of growing online sales against Amazon. He said investors have reason to wait and see if this is just a speed bump or something more problematic as Walmart tries to go head-to-head with the 800-pound gorilla known as Amazon.

Walmart expects margins to be relatively steady this year with earnings growth of about 5%. That said, the retailer continues to face margin pressures which amounted to about 0.6% in fiscal 2018, CFO Brett Biggs said. About a third of that related to one-time charges and the rest involving lowering prices to remain competitive and higher transportation costs related to capacity constraints in the transportation industry.

BUYING OPPORTUNITY
Cowen analyst Oliver Chen looked at the Walmart sell-off as a buying opportunity. He said part of the margin compression experienced by Walmart in the recent quarter dealt with discounting online items.

Chen said there is an 85% overlap between Walmart shoppers and Amazon shoppers and Walmart’s future is the stores and leveraging them for pickup and fulfillment options in a period of rising transportation costs.

Ben Bienvenue, an analyst with Stephens Inc., said the earnings miss was primarily driven by lower gross margin, which he estimated to hurt earnings by 17 cents per share. He said the company’s leverage of expenses and sales increases were not enough to offset the margin compression. Stephens remains overweight on Walmart, but is reviewing the price target and earnings estimates following the miss.