Walmart third-quarter net income beats estimate, revenue was up 2.5%

Walmart came through big in the third quarter with $3.288 billion in net income, or $1.15 per share. That was above the $1.09 equity analysts expected from the retail giant in the quarter ending Oct. 31. Net income was also better than the prior year, which totaled 58 cents per share after adjustments.

Revenue in the quarter totaled $127.99 billion, below the $128.8 billion equity analysts expected. Revenue was up 2.5% from the prior-year period. Walmart said on a constant currency basis, revenue was $129 billion, up $4.31 billion from the prior-year period.

Through three quarters, Walmart reports total net income of $10.74 billion, on revenue of $382.293 billion. Revenue was 1.8% higher than last year and net income was up more than 260% after charges.

“We’re pleased with our performance for the quarter. Our associates are responding to change in an inspiring way, and we’re proud of them. The Walmart U.S. business saw strong comp sales and expense leverage, and operating income grew for the sixth consecutive quarter. We also celebrated the first anniversary of Flipkart and PhonePe as part of the Walmart family. It was great to see record sales in India during The Big Billion Days event,” the company noted in the earnings report posted Thursday (Nov. 14) before the markets opened.

SEGMENT RESULTS
Walmart U.S fueled the higher profits behind 3.2% comp sales growth, better than the consensus estimate of 3.1%. The retailer said transactions rose 1.3% in the quarter and the average ticket increased by 1.9%. Walmart U.S. comp sales increased on a two-year stacked basis by 6.6%. Market share gains in the business were led by food and consumables, including fresh food, said John Furner, CEO of Walmart U.S.

E-commerce sales rose 41% in the quarter, driven higher by the company’s online grocery business which is now available for pickup in 3,700 stores and delivery is offered in 1,400 stores. Walmart U.S. CEO Marc Lore said the business segment continues to be focused on improving customer experiences and growing general merchandise sales online. He said the division is also focused on reeling in expenses in its efforts to eventually become profitable. Walmart’s U.S. eCommerce sales were $83.2 billion, up over the $83 billion consensus.

Sam’s Club had comp sales growth of 0.6%, below the 1.6% analysts had expected. Sam’s said e-commerce sales rose 32% in the quarter. The segment said reduced tobacco sales negatively impacted comp sales by 3.5%.

Walmart said it had positive comps in 7 of the 11 international markets in which it operates. Net sales at Walmart International were $29.2 billion, an increase of 1.3%. Excluding currency exchange rates, net sales were $30.2 billion, an increase of 4.8%. The inclusion of Flipkart and strength in Walmex and China were partially offset by softness in the U.K., the company said.

Walmart reported operating income at $4.7 billion in the quarter, short of the $5 billion consensus mark. Operating income fell to 5.4% in the quarter related to a non-cash impairment charge for the inclusion of Flipkart in the results.

EXECUTIVE COMMENTARY
Furner said during the media call on Thursday that Walmart is in strong shape heading into the holiday season. He said his focus for the first 100 days will be on delivering the goals through holidays behind the momentum put in place by Greg Foran, who stepped down from his CEO role earlier this month.

Furner said his top priority is to continue to make Walmart a great place to work and to shop. He said merchandising plans already in place will be carried out with a continued focus on “fresh” food, and he’s excited to learn more about the innovations being tested in stores to make the shopping experience easier for busy families.

He said Walmart is not concerned about the compressed holiday season between Black Friday and Christmas as the retail giant has already begun to roll out savings promotions and will continue to do so through the peak season.

Furner and McMillon were in El Paso, Texas, early Thursday morning ahead of the reopening of the El Cielo Supercenter following the mass shooting that took place there in August. Furner said the decision to reopen the store was made after talking with city officials and store employees who are eager to get back to some type of normalcy in their lives. Furner said Walmart has not seen any pushback from customers on the decision to enforce no-carry rules in store and stop certain types of ammunition sales following the shooting.

Much of the equity market remains bullish on Walmart despite the solid price appreciation this year. Shares of Walmart Inc., (NYSE: WMT) initially trading higher following the earnings release only to reverse course by mid-morning with shares trading down slightly to $120.06 in very heavy volume. So far this year shares are up 30%.

ANALYSTS WEIGH-IN
Ben Bienvenue of Stephens Inc. said Thursday the firm is reiterating its “buy” rating based on the strength of the U.S. business. He said while earnings will continue to be compromised by the Flipkart investment, earnings should increase in the high single digits this year excluding the Flipkart impact. Stephens has a target price of $125 per share but said it was under review. (Stephens conducts investment banking services for Walmart and is compensated accordingly.)

Budd Bugatch, an analyst with Raymond James & Associates, is also bullish on Walmart following the results. He said Walmart should outperform the industry in the next 12 months.

“We were most encouraged by the 6.1% annual growth in Walmart U.S. operating income (6th consecutive quarter of growth), which came in at $4.176 billion, slightly above our $4.110 billion estimate,” Bugatch noted.

Moody’s recently said intense competition and digital investments are putting pressure on retailer profits. The industry is seen as stable, recently downgraded from positive.

“Large retail contributors such as drug stores and home improvement stores have been negatively impacted this year by reimbursement pressures and softer housing markets,” said Mickey Chadha, vice president-senior credit officer at Moody’s. “Meanwhile, retailers are facing intense pricing pressures in the fight for market share, as well as rising costs due to continued investments in e-commerce capabilities and rising labor costs, putting pressure on margins and weighing on overall profitability.”

Despite progress in 2018 with operating profit growing to 4.9%, pricing wars and intense competition have taken a toll on U.S. retail performance this year, Moody’s noted. The firm expects operating income to grow a slower 2% to 3% in 2019, with sales forecasted to grow 3.5% – 4.5%. Moody’s previous forecast called for 2019 operating income and sales to grow 5%-6% and 4.5% – 5.5%, respectively.

Moody’s forecasts 2020 U.S. retail industry operating income growing 3% – 4% and sales growth steady, at 3.5% – 4.5%. Discounters and warehouse clubs, off-price, online retailers and dollar stores will continue to grow, and improvement in specialty retailers, home improvement, supermarkets and drug stores will also help.