First quarter revenue up 1% for Walmart, same-store comps up 3.4%

Same-store sales growth of 3.4% helped Walmart score net income of $3.842 billion in the first fiscal quarter ended April 30, up 80% from the $2.134 billion in the same quarter of 2018. Per share earnings of $1.13 beat the consensus estimate of $1.02.

However, new accounting rules required the retailer in the 2018 quarter to post a $1.845 billion “unrealized” loss from the decline in value of its investment in JD.com, a retail website based in China. Without that year-ago hit, Walmart’s net income in the first quarter of 2019 would be 3.4% lower than the 2018 quarter.

Total revenue in the quarter was $123.925 billion, up 1% from the $122.69 billion in the 2018 quarter. Revenue missed the consensus estimate of $125.03 billion. But revenue was down $1.853 billion related to foreign exchange rates. On a constant-currency basis, Walmart revenue grew 2.5% to $125.8 billion.

Operating income for the quarter fell 4.1% to $4.945 billion compared to $5.154 billion a year ago. Operating profits were hindered by higher cost of sales and fractionally higher operating expenses. These results include Flipkart.

Same-store sales grown in the retailer’s U.S. segment were up 3.4%, marking the 19th consecutive quarterly gain in this key metric and the best first quarter comp in nine years. E-commerce sales rose 37% in the quarter, benefiting from improved contributions from online grocery and the home and apparel categories.

“We’re changing to enable more innovation, speed and productivity, and we’re seeing it in our results. We’re especially pleased with the combination of comparable sales growth from stores and e-commerce in the U.S,” CEO Doug McMillon stated in his prepared remarks.

MARKET REACTION
Shares of Walmart Inc. (NYSE: WMT) were trading at $103.17, up $3.29 in heavy volume in the morning session. Year-to-date, Walmart shares are up 9.6% and 14 of the 33 analysts covering the company rate the stock a “buy.”

Ben Bienvenue, an analyst with Stephens Inc., is among them. He said while the U.S. comp was slightly lighter than anticipated, he’s not surprised to see shares trade higher on the day. He credits the retailer’s impressive operating leverage in the U.S. business. He said gross margin was also better than expected behind solid comp sales and the deleveraging of expenses which bodes well for continued margin progress through the balance of this year. He remains overweight on the stock and the price target is under review.

Jefferies, also bullish on the stock, said Walmart’s early investments in tech/e-commerce and the practice of keeping prices as low as possible benefit from the company’s unmatched scale and have positioned it well for future share gains. UBS analysts said Walmart is a solid place to park money as a defensive play, but the run-up in price has likely capped out.

“Walmart is blowing it away,” CNBC Contributor Jim Cramer said on Thursday. “They are a top-tier retailer alongside Amazon and Costco. Walmart is very forward [and] no one can keep up with them, except maybe Amazon.”

SEGMENT RESULTS
Walmart U.S. is the shining star in the retail giant’s portfolio with net first-quarter sales of $80.3 billion, up 3.3% from a year ago. E-commerce contributed 1.4% of the segments 3.4% comp sales growth. Transactions grew 1.1%, and the average ticket was up 2.3%.

“We now have about 2,450 stores in the U.S. with grocery pickup, which has enabled us to provide same-day grocery delivery in nearly 1,000 locations at quarter-end,” McMillon said. “Increasingly, we’re offering customers more ways to shop with Walmart. In addition to next-day delivery on an assortment of our best sellers, they can shop in our stores, pick up their order, get groceries and an increasing number of other store items delivered same-day, or choose from the two-day free shipping assortment that we’ve been building.”

Walmart said deeper market shared penetration of 1.56% in key food categories, including private label and fresh, signals its initiatives are resonating with customers. Greg Foran, CEO of Walmart U.S., told the media the uptick in market share involving private label is a direct result of the improved quality and price focus in key categories. He said private brands are important to Walmart and he doesn’t think they threaten national brands.

“We have large stores and we don’t have to make tough choices about the inventory. We put items on the shelf and let the customers make the choices,” Foran said.

Walmart U.S. e-commerce CEO Marc Lore told the media his division is nailing the fundamentals.

“We feel good about the customer experience of our next-day shipping which was made possible because we locked down the assortment in close proximity to the customers. All the products close to the customer can ship in one box helping to keep costs lower,” Lore said during the media call.

Walmart International reported net sales of $28.8 billion, down from $30.3 billion a year ago. Currency impact was $1.853 billion. Operating income was $788 million, down 41.7%. Walmart said the decrease was primarily related to Flipkart, $52 million in currency exchange rates, and the timing of the Easter holiday.

Comp sales were up 3.6% at Walmex, 0.4% higher in China and 1.2% higher in Canada. Comp sales slid 1.1% for Asda. Walmart said it remains disappointed by the ruling that profited the merger with Sainsbury’s but will continue to look for the best viable option for the business unit, including a possible spin-off.

Sam’s Club reported net sales of $13.83 billion, up 1.5% from a year ago. Comp sales including fuel rose 1.1%, negatively impacted from loss of tobacco sales in a number of clubs. Sam’s Club reported operating income of $451 million, up 38.8% including fuel. E-commerce contributed roughly 0.5% to the company’s comp store sales.

Membership income increased 0.9% at Sam’s Club in the quarter, despite the closure of nearly 10% of its club base in January 2018. Sam’s said shipping costs related to free shipping for its Plus members drove expenses higher. Sam’s Club also increased inventory 3.7% relating to additional e-commerce fulfillment centers and promotional events. Consumables such as paper goods, baby care and pet supplies were among the strongest categories at Sam’s Club during the quarter.

TARIFFS, ACQUISITIONS, COMPETITION
Increased tariffs on goods coming from China is on the minds of retailers. Walmart said it continues to focus on mitigating the impact where it can. CFO Brett Biggs said tariffs will mean increased prices for customers, but reiterated Walmart will remain committed to its low price strategy.

Lore said Walmart will continue to look for opportunities to grow its revenue stream using digital. The recent acquisition of Silicon Valley-based startup Polymorph Labs has developed technology that will make advertising with Walmart easier for brands while delivering more relevant digital ads to customers. Lore said future acquisitions would be digitally native enterprises that can cut across all of Walmart’s channels – physical, online, mobile.

When asked about competition from deep discounters and Walmart’s strategy, Foran said the competitive environment in the U.S. is as fierce as ever. He said deep discounters like Aldi are great competitors and do a good job keeping Walmart honest about its low price strategy.

“We track them closely [Aldi, Lidl, Dollar stores] because it’s important to our DNA to have low prices,” he said.