Wal-Mart struggles to meet growth expectations

Sentiment out of Bentonville on Thursday (Aug. 15) was one of caution by Wal-Mart executives who slashed the company’s growth projections for this fiscal year by 50%, on the heels of two softer-than-expected quarters.

Wal-Mart is seen as a barometer for the broader economy as its sales comprise roughly 10% the nation’s retail spending, excluding automobiles. This negative sentiment sent the broader markets south with the Dow Jones Industrials and the S&P 500 sliding 1.38% and 1.33%, respectively.

The retailer continues to blame higher payroll taxes and unusual weather patterns paired with cautious spending habits for its second consecutive quarter of negative U.S. same-store sales, after five straight quarters of positive comps.

The retail giant reported fiscal second quarter net income of $4.069 billion, up 1.3% compared to the 2012 quarter, with earnings per share of $1.24 just a penny below the consensus analyst estimate of $1.25. Absent a 1-cent charge relating to a non-income tax matter, earnings would have met Wall Street expectations, the company said.


Total revenue of $116.945 billion for the quarter also missed the consensus estimate of $118.47 billion. However, the revenue in the quarter was up 2.3% compared to the 2012 quarter.

"The retail environment remains challenging in the U.S. and our international markets, as customers are cautious in their spending," Wal-Mart Chief Financial Officer Charles Holley said in pre-recorded call.

Wal-Mart's commentary is in line with what other retailers, like Macy’s, Kohl’s and American Eagle, have also said this week.

Consumers have become deep value seekers and they need a strong catalyst to prompt spending outside of consumables, said Patrick McKeever of MKM Partners. He said while Wal-Mart does offer value, it is still facing increased competition with the dollar stores who have their own value propositions in very convenient store formats.

Wal-Mart updated its full-year earnings guidance to a range of $5.10 to $5.30 from the previous range of $5.20 to $5.40. This new range includes third quarter EPS guidance of $1.11 to $1.16. Guidance was lowered on expectations of flat same-store sales in Walmart U.S. for the third quarter, and a flat to 2% comps at Sam’s Club.

This cautious growth forecast sent some investors packing as Wal-Mart’s stock price fell to $74.25 in heavy trading. Shares were trading down nearly 3% following the lackluster growth report from Wal-Mart.

Budd Bugatch, analyst with Raymond James & Associates, said the pullback in price is an opportunity for investors wanting to own Wal-Mart shares to buy in. Wal-Mart’s share price has risen 7.9% since Jan. 2. The Dow Jones Industrials, of which Wal-Mart is included, has gained 18.3% his year. He said the retailer is a good place for investors to hide amid some volatile market swings expected in this yo-yo economy.

U.S. SLUMP
Walmart U.S., which accounts for a lion’s share of company’s gross sales, posted net revenue of $68.728 billion in the quarter ending July 31. Sales grew by 2.1% from a year ago. But through the first half of this year, sales have risen a dismal 1.2%.

In the recent quarter, Wal-Mart posted a 0.3% decline in same-store sales, recording less traffic with a slightly higher average ticket.

“While I'm disappointed in our comp sales decline, I'm encouraged by the improvement in traffic and comp sales as we progressed through the quarter. The 2% payroll tax increase continues to impact our customer," said Bill Simon, Walmart U.S. president and CEO. "Furthermore, we also expected an increase in the level of grocery inflation, which did not materialize in a meaningful way. We were pleased that both home and apparel had positive comps.”

He said the company gained some market share in food and consumables during the quarter, based on Nielsen data.

For the 13-week period ending Oct. 25, Walmart U.S. expects comp store sales to be relatively flat. Last year, Walmart's comp sales rose 1.5% for the comparable period.

Meanwhile Walmart U.S. continues to roll out more stores. In the second quarter the retailer added 49 net new units, including new stores, expansions, relocations and conversions. The new units were composed of 29 supercenters and 35 small formats, most of which were Neighborhood Markets. In the third quarter, Wal-Mart plans to open approximately 90 units, more than half of those are Neighborhood Markets.


Analysts have said Wal-Mart efforts to saturate its U.S. markets is helping to cannibalize the firm’s same-store-sales growth.

Also concerning some analysts is the 6.9% increase in inventory levels reported by Wal-Mart in the quarter. Wal-Mart said the increase is primarily driven by softer than anticipated sales trends, the delay in summer weather and timing shifts in the receipt of merchandise for back to school and the upcoming holiday season. Analysts said higher than normal inventory levels at time when consumers are spending less ultimately means deeper discounting or price rollbacks which will likely further erode margins in the back half of this year.

“While we’re not concerned about the quality of the inventory, it will continue to be an area of focus in the coming months, as we get ready for the key holiday season and continue to balance in-stock and an expanded assortment,” Simon said during the call.

On a positive note, Wal-Mart said it has seen strong back-to-school sale in ongoing quarter, which was no surprise to Citi analyst Deborah Weinswig.


Weinswig recently reiterated a "buy" recommendation for Wal-Mart noting,“We believe Wal-mart will be at the head of the class in a competitive back-to-school season as our retailers fight for share of a smaller wallet.”

GLOBAL HEADWINDS
Wal-Mart International posted $32.956 billion in sales revenue for the second quarter, up 2.9% from a year ago.

"Across our International markets, growth in consumer spending is under pressure," said Doug McMillon, Walmart International president and CEO. "Consumers in both mature and emerging markets curbed their spending during the second quarter, and this led to softer than expected sales. While this creates a challenging sales environment, we are the best equipped retailer to address the needs of our customers and help them save money.

Currency fluctuations trimmed $444 million from the firm’s International sales results. On a constant currency basis Wal-Mart said its international sales increased 4.4% from a year ago. McMillon said he expects third and fourth quarter results to be better than the first half of this year.

International operations are being negatively impacted by charges related to the ongoing Federal Corruption Practices Act investigations. With probes underway in Mexico, India, China and Brazil. Holley estimates spending related to FCPA and internal compliance efforts will top $310 million this fiscal year. Already this year he said the company has spent $155 million in FCPA and compliance matters. The company expects to dole out another $155 million in the back half of the year on these efforts.

Holley said in the third quarter roughly $75 million will be spent on FCPA matters and $80 million on internal compliance protocol. He expects the same expenditures in the fourth quarter as well.

SAM’S CLUB
Sam’s Club was a bright spot in the retailer’s otherwise challenging quarter. The warehouse club reported net sales of $14.532 billion, up 2.6% from a year ago.

Sam’s returned positive same-store sales of 1.7% in the quarter, in a challenging economic environment. A year-ago Sam’s posted comparable sales growth of 4.2%.

"Sales were up, traffic continued to improve, and comp sales were within our guidance. Response to our recent membership enhancements has been favorable, resulting in solid membership income growth and positive response to our Instant Savings Book. We were pleased with our improvement in business member traffic, reversing the decrease from the prior quarter," said CEO Rosalind Brewer.

Sam’s raised its membership fees in the recent quarter for the first time several years.

Brewer said membership and other income grew 9.2% in the quarter.

E-COMMERCE OPPORTUNITY
While Wal-Mart does not break out its e-commerce sales, the company did say it continues to invest heavily in this segment.


“During the second quarter, we had a hiring blitz which ramped up our visibility in the Bay area and added nearly 200 associates. We saw an offer acceptance rate well over 90%. People in Silicon Valley are excited to come to Wal-Mart, said Neil Ashe, CEO of Walmart Global eCommerce.


The company closed four acquisitions in the quarter — Tasty Labs, OneOps, Inkiru and Torbit. 


“E-commerce is important to our customers and our company’s future. Year to date, the incremental impact from e-commerce investments is approximately 5 cents per share. We anticipate the incremental impact to third quarter earnings will be about 2 cents per share,” Holley said.