Wal-Mart profits improve, but Wall Street heeds caution

Wal-Mart investors saw recent profits crash Thursday (Nov. 15) as the retailer narrowly missed revenue estimates and alerted of more investigations into foreign corruption in China, India and Brazil – and possibly other countries.

The Bentonville-behemoth reported $1.08 per share in net earnings, on total revenue of $113.9 billion in its third quarter of fiscal 2013. The report was released before the Thursday markets opened.

This compared to 97 cents per share and total revenue of $110.22 billion in the year-ago period.

By company standards it was a strong quarter, but one that did not impress Wall Street analysts who expected to see $1.07 per share in net profits on revenue of $114.95 billion in the recent quarter.

Shares tumbled more than 4.5% in heavy trading at the opening bell. The stock price fell into $68 range in first few minutes of trading, down more than $3 from yesterday’s close.

CNBC analyst Jim Cramer said the sell off of Wal-Mart shares is likely based on the fact the price was over-hyped in recent months,  a mistake now being corrected.

“We’re very pleased with our financial performance for the third quarter and the dedication and hard work of our associates serving Walmart customers and communities around the world,” Mike Duke, Wal-Mart Stores Inc. president and CEO, said in a his prepared remarks.

PRICE COMMITMENT
Wal-Mart remains focused on low prices, despite compressed margins which led to the lower revenue reported Thursday.

Duke says, “Price will continue to be a major factor for U.S. customers over the holidays. Our strong price position and broad assortment are clear competitive advantages.”

“Across all of our markets, we are seeing the same price consciousness as we do in the United States. More customers are part of a growing global middle class, looking for quality, value and a better life, and our EDLP (always low price) model matters to these customers,” Duke noted in the earnings call.

Analysts say the price game makes for tenuous competition across the retail spectrum, but Wal-Mart remains undaunted by its always low price commitment even as margins compress among fast moving consumables.

HEEDING CAUTION
With a hint of tentativeness, the retailer tightened its earnings guidance for the rest of fiscal 2013 and next year.

“Current macroeconomic conditions continue to pressure our customers,” said chief financial officer Charles Holley. “The holiday season is predicted to be very competitive, but we are well prepared to deliver on the value and low prices our customers expect.

Wal-Mart expects fourth quarter fiscal 2013 diluted earnings per share from continuing operations to range between $1.53 and $1.58. This compares to last year’s fourth quarter reported earnings per share of $1.51,” said Holley.

”For the full year, we are tightening and reaffirming the top end of our earnings per share guidance to a range of $4.88 to $4.93,” Holley said.

CORRUPTION INVESTIGATION
Also making headlines Thursday, is a item tucked inside Wal-Mart’s routine quarterly filing that notes “Inquiries or investigations regarding allegations of potential Foreign Corrupt Practices Act violations have been commenced in a number of foreign markets where we operate, including but not limited to Brazil, China and India.”

Wal-Mart said it has incurred expenses of approximately $48 million in the recent quarter and $99 million during the past nine months relating to investigating and litigating the alleged bribery charges in its Mexican business unit.

Wal-Mart released the following statement regarding the broader investigation.

“Since the implementation of the global review and the enhanced anti-corruption compliance programs, the company has identified or been made aware of additional allegations regarding potential violations of the FCPA. When allegations are reported or identified, we, together with our third party advisors, conduct inquiries and when warranted, we open investigations
 
“We have inquiries or investigations regarding allegations of potential FCPA violations in a number of foreign markets where we operate regarding FCPA allegations, including but not limited to Brazil, China and India. This is in addition to the ongoing investigation in Mexico.

“As these matters are currently under review, it would be inappropriate for us to comment further on the specific allegations until we have concluded the investigations.

“We take compliance with the FCPA very seriously and are committed to having a strong and effective global compliance program in every country in which we operate. We will not tolerate noncompliance anywhere or at any level of the company. We are working diligently to strengthen our compliance programs and dedicating considerable resources to this effort. In fact, the company has spent more than $35 million on its global FCPA compliance review efforts over the past 18 months.” 

COMP-SALES
Como-sales are where the rubber meets the road for retailers and Wal-Mart’s getting some traction in its U.S. store comps with its low price/ back to basic approach.

Wal-Mart extended its positive comp sales to five consecutive quarters, after sliding backward for more than two years. U.S.same-store-sales rose by 1.5% as a result of with positive ticket and traffic.

“We again delivered strong sales across the business, adding $2.3 billion in revenue. Comp sales increased 1.5% this quarter, as we lapped a 1.3% comp last year,” said Bill Simon, CEO and president of Walmart U.S.

“We’re excited about the fourth quarter. November sales started ahead of plan. Our Black Friday plans are innovative and designed to drive additional traffic in our stores. We expect strong performance through Thanksgiving weekend,” he added.

Economist closely watch Wal-Mart sales as they represent 10% of the all gross retail revenue, excluding autos.

Walmart U.S. saw total revenue of $66.127 billion in the quarter, up 3.6% from the prior year.

Sam’s Club posted a 4.7% gain in revenue with $13.918 billion in the quarter, and International revenue grew by 2.4% to $33.159 billion.

“We gained market share in almost all of our markets, indicating that our underlying business is performing well. We are working hard to improve execution where it’s needed, and we’re ready with great merchandise and price investments for the fourth quarter,” said Doug McMillon, president and CEO of Walmart International.

ANALYSTS SAY
Hitha Prabhakar, retail analyst and author likes Wal-Mart’s focus on grocery.

“The thinking is to bring the customers in for the staples and you can sell them almost anything else. It's working well enough . . that they are taking shelf space from less productive items and putting it into food, despite the generally lower margins on groceries,” she notes.

Not everyone agrees that groceries will be the winning ticket for Wal-Mart in the coming decade.

Wal-Mart continues to advertise its low grocery price campaign, but recent reports from Kantar Retail and Raymond James & Assoc. find the retailer struggling to maintain its status as the lowest cost retailer as Dollar General, Target and Publix continue to nip away at margins on consumables both branded and private label.

Leon Nicholas, senior vice president of Kantar Retail, said in private interview Wednesday evening that Wal-Mart’s supercenter focus is of concern going forward given that more people across the country don’t shop that way anymore.

He said the time-intensive, fill up the shopping cart with two weeks worth of groceries isn’t the way that the growing Generations X & Y generally shop.

He and other analysts see the supercenters as a dying breed, but Wal-Mart is committed to spend $4.5 billion this year and next building more.

Nicholas said Wal-Mart’s moves continue to be cautious with it’s U.S. business, meanwhile Dollar General and Amazon are taking bold steps forward.

He said the retailer is dabbling in a few areas that customers are responding favorably to such as extended layaway.

Wal-Mart said in the earnings call it had taken in $300 million more in layaway than last year at the end of the quarter. The recent results include an added month that shoppers didn’t have last year.

David Schick, analyst with Stifel Nicolaus notes there is some softness on the revenue side, but says Wal-Mart is headed in the right direction with its merchandising and pricing efforts.

Total Revenue
3Q 2013: $113.92 billion
3Q 2012: $110.22 billion

Consolidated Net Income
3Q 2013: $3.635 billion
3Q 2012: $3.336 billion

Earnings Per Share
3Q 2013: $1.08
3Q 2012: $0.97