Wages, currency lower quarterly Wal-Mart earnings and revenue (Updated)

Improved comp store sales and a 17% increase in global e-commerce sales were just about the only highlights of the first quarter earnings report from Wal-Mart Stores. First fiscal quarter net income and total revenue were down was down 6.7% and 0.1%, respectively, from the same quarter of 2014.

Earnings per share for the fiscal first quarter ended April 30 was $1.03, down from $1.11 in the first quarter of 2014 and one cent below the consensus $1.04 per share among the 26 analysts who follow the retailer’s financial performance. The company said currency exchange rate issues reduced earnings by 3 cents per share.

Total revenue in the quarter was $114.826 billion, down from $114.96 billion in the 2014 first quarter and below the consensus estimate of $116.32 billion.

Prior to the earnings report, Wal-Mart revised downward its first quarter earnings per share forecast to between 95 cents and $1.10. The retailer noted in the previous earnings statement that its decision to invest $1 billion annually in pay raises and for its U.S. store employees and additional investments in e-commerce would trim earnings by as much 26 cents to 29 cents per share.

In the earnings report issued early Tuesday (May 19), Wal-Mart said an operating income decline of 8.3% was primarily the result of currency issues and “investments in associate wages & training and e-commerce.”

EARLY ANALYST REACTIONS
Retail analyst Stacey Widlitz, president of SW Retail Advisors, said Wal-Mart has made it pretty clear this year they don’t expect any real sales growth or earnings gains because they are “spending, spending, spending on e-commerce where they have fallen a little behind. And you can’t forget about their wage increases this year.”

She applauded their e-commerce spending saying Wal-Mart has to get out there and ramp up their penetration which is a good bit behind other retailers. But this spending comes at the cost of shorter term earnings. She cautions that if sales don’t roll in for Wal-Mart this year there will be increased pressures on the bottom line profits.

Raymond James & Associates analyst Budd Bugatch sees some upside potential in the retailer. He said without the currency fluctuations and Wal-Mart investments in e-commerce and wages the retailer would have met top line and bottom line expectations. On a positive note he said same-store sales growth of 1% and positive traffic are indications that some of the improvements underway are taking root.

He said ongoing challenges in the international business and a disappointment by Sam’s Club add to the complexity of Wal-Mart’s business going forward.

Walmart U.S. same-store, or “comp,” sales were up 1.1% in the quarter compared to a 0.1% decline in the first quarter of 2014. Wal-Mart had forecast U.S. comparable sales growth between 1% and 2% in the first quarter. The same was predicted for Sam’s Club. Comp sales for Sam’s Club in the first quarter were up 0.4% compared to a 0.5% decline in the first quarter of 2014.

WALL STREET REACTION
Wal-Mart Stores CEO Doug McMillon said the first quarter report reflects “solid” gains in improving the business.

“We had a solid first quarter. We took some important strategic steps to strengthen the foundation of our business for the future. We need to continue to get better at consistently running great stores, clubs and e-commerce everywhere we operate … and we are,” McMillon said in a statement.

Wall Street did not agree with McMillon’s “solid” statement overall as investors turned negative on the big box retailer. Shares traded down more than 4% following Tuesday’s earnings release. Wal-mart shares (NYSE: WMT) were selling at $76.39, down $3.53 in very heavy volume in the morning session. Wal-Mart shares have traded lower in recent weeks. During the past 52 weeks the share price has ranged from a $90.97 high to a $72.61 low.

Charles Holley, chief financial officer for Wal-Mart Stores Inc., estimated that currency issues and the increases in wages and training will cost the company 8 cents per share in the second quarter.

"Based on our views of the global macro-economic environment, and assuming currency exchange rates remain at current levels, we expect second quarter fiscal 2016 earnings per share to range between $1.06 and $1.18. Our second quarter guidance includes the impact of approximately $0.04 per share from our previously announced investments in both U.S. associate wages and training, as well as $0.04 per share from currency," Holley said.

The first quarter report follows a modest full-year report. Total revenue for the fiscal year ended Jan. 31 was $485.651 billion, up 2% compared to the previous year. Earnings per share for the year was $5.07, which beat the consensus estimate of $4.99 per share. Comparable store sales, a closely watched metric with Wal-Mart, also improved. Comp sales in all U.S. stores – including Sam’s Club – were up 0.5% in the fiscal year, better than the 0.4% decline in the previous fiscal year.

GROCERY GAINS
Walmart U.S. returned net sales of $70.245 billion in the quarter, up 3.5% from a year ago. While sales grew, so did expenses which negatively impacted the segment’s operating income. In the quarter, operating income fell 6.8% to $4.639 billion, which also included merchandise losses, most of which were in the fresh food business.

“We were pleased by the operational improvement we saw in fresh. As we mentioned in April, this is a key area of focus, and getting fresh right is critical to the customer experience. We’re taking the right steps towards reducing the time to bring fresh product to our customers, and training associates to ensure the best offering is on the shelf. We still have a lot more to do in this area, but we’re steadily improving,” Walmart U.S. CEO Greg Foran noted in the earnings call.

He said the “urgent agenda items” he laid out last year are still being addressed. Those items range from assortment discipline to pricing and in-stock goals as well as inventory controls.

Leading the way for Walmart U.S. is the Neighborhood Market grocery format which returned positive comps of 7.9% in the quarter.

While general merchandise comps were similar to last quarter, Foran said areas that performed the best were home — indoor and outdoor — led in part by lower opening price points which helped to drive momentum.

He said the health and wellness categories also performed to expectations while the media and electronics categories did not. Foran said in-stock positions for televisions suffered because of the port congestion on the west coast, which he believes is now behind them.

For the second quarter, Foran expects traffic to remain strong supported by sustained low gas prices and the retailer’s efforts to improve customer service in our stores. 

He did caution that a continued decline in food inflation will weigh a little heavier on sales in the current quarter. For the 13-week period ending July 31, the company  expects a comp sales increase of around 1%. Last year, comp sales for the period were flat.

DISAPPOINTMENT AT SAM’S
Rosalind Brewer, CEO of Sam’s Club, didn’t sugar coat her comments regarding the dismal report. 

“Our first quarter results were disappointing, as comp sales missed guidance, and we delivered softer net sales and profit than last year,” Brewer said in her opening remarks on Tuesday.

With fuel, operating income declined 10.9% to $427 million in the quarter. Brewer said the fuel business has experienced significant pricing volatility within the quarter, and as a result, Sam’s fuel business lost $9 million in the quarter.

She said net sales, without fuel, grew 1.2% to $12.4 billion. Comp sales were 0.4%, driven by slightly higher ticket increases offset by lighter traffic. The club’s Plus Cash Rewards Program nipped at the Sam’s gross profit rate which declined 0.15 % compared to last year. On a positive note, membership income rose 7.4%, but overall operating income declined 8.6% to $436 million as the retailer continues to invest in digital capabilities.

“The integration of digital and physical is a key enabler for our growth. E-commerce delivered a double-digit comp this quarter, contributing 0.40% to the segment comp. Growth in traffic, ticket, and conversion was driven by strong double-digit Club Pickup comps,” Brewer said.

CHALLENGES ABROAD
Walmart International is not without its challenges and risks. There is currency exchange volatility to deflationary pressures in the United Kingdom and Japan, and inflation runs higher in China and Brazil.

Walmart International CEO Dave Cheesewright said in the first quarter, net sales grew 3.4% on a constant currency basis, but factoring in currency exchange rates that was not the case.

“The U.S. dollar has remained at historically high levels, leading to a considerable currency impact of $3.3 billion, which led to a 6.6% sales decline on a reported basis. Net sales totaled $30.278 billion in the quarter,” Cheesewright noted in the release.

He said comp sales were favorable across four of five top markets, with the U.K., driven by continued deflation in food and aggressive competition, being the exception. 

“We also had negative comps in Japan, lapping last year’s benefit of accelerated consumer spending ahead of the April 2014 consumption tax hike. We grew comp sales in our remaining markets,” Cheesewright said.

On a positive note, Canada and Mexico performed better and Cheesewright said the new growth strategy in China is off to good start. 

“Part of this growth will come from the planned opening of 33 stores and clubs this year, with expansion focused in the southern regions where we have strong market presence. Additionally, we aim to provide better services and widen our customer reach through greater expansion of our omni-channel platforms, including online and mobile,” Cheesewright said.

Walmart China is focused on improved efficiency, cost reductions and strengthening the overall portfolio of stores. Operating income grew 23.5% in the quarter, due to expense leverage and gross margin improvement from higher sales with the Chinese New Year. 

“We leveraged expenses this quarter in our core business through ‘We Operate for Less’ and ‘We Buy for Less’ initiatives and will continue to pass those savings onto customers,” he added.

FCPA COSTS
Now its fourth year of investigation, Wal-Mart continues to spend money on the Foreign Corruption Protection Act violations the retailer has been accused of in Mexico, China and Brazil and India.

FCPA and compliance-related costs were approximately $33 million in the quarter. This is comprised of $25 million for the ongoing inquiries and investigations, and $8 million for Wal-Mart’s internal global compliance program and organizational enhancements. Last year, FCPA and compliance-related costs were $53 million in the first quarter. 

Since the retailer self-reported the alleged violations it has spent $645 million in legal fees and compliance restructuring costs. While there is no way to tell how long this investigation will continue it’s important to note that if violations are proven there could also be substantial fines to pay as well as criminal prosecution for anyone involved.