Wal-Mart sales up for the third quarter, net income dips 0.7% (Updated)

Third quarter net income for Wal-Mart Stores Inc. dipped 0.7% and fiscal year-to-date net income is down 1.7%, although total revenue in the quarter was up 2.9% and per share net income of $1.15 beat the consensus estimate of $1.12.

Wall Street, looking for any sign of optimism about the consumer and the retail sector, rallied on the cautiously upbeat earnings announcement from Wal-Mart Stores on Thursday (Nov. 13). Wal-Mart shares led the way, rising more than 4% in active trading at $82.64, up $3.44 in the morning session.

Total revenue during the third fiscal quarter (ended Oct. 31) for Bentonville-based Wal-Mart was $119.001 billion, up over $115.688 billion during the same period in 2013 and ahead of the consensus estimate of $118.35 billion. Revenue for the first three fiscal quarters of the year is $354.086 billion, better than the $346.588 billion during the same period of 2013.

"Walmart reported solid earnings per share of $1.15 in the third quarter," Doug McMillon, Wal-Mart Stores president and CEO, said in the earnings report issued early Thursday. "The highlights for the quarter include the positive comp in Walmart U.S., including the strong performance from Neighborhood Markets, the 21% increase in e-commerce sales globally and the profit performances from Sam's Club and our International business."

Although slight, the world’s largest retailer was able to reverse its comp store sales trend with U.S. stores. It’s the first net positive increase since 2012. Same store sales in the U.S. – including Sam’s Club – were up 0.5% compared to a decline of 0.1% during the same quarter of 2013. Same stores sales with Neighborhood Markets – the company’s leading small-store format – were up 5.5%. The company also reported that e-commerce sales worldwide were up 21%.

"We're investing in key areas of our business, including wages in our U.S. stores and in e-commerce and mobile capabilities. We continue to see opportunities to improve our business," McMillon said in the report. "Being the price leader is an ongoing priority for us and a commitment to customers. As with every year, that is even more important during the holiday season. We have some things in our favor this fourth quarter, including lower fuel prices in the U.S. and other key markets, and we're set to deliver for customers during this time."

Stacy Widlitz, analyst with SW Retail Advisors, said Wal-Mart is investing in the right areas and that will likely help longer term. She said getting things right is going to be somewhat expensive in the short run.

Consolidated operating expenses increased 3.5% due to continued investments in wages and higher U.S. health care related expenses. Foreign Corrupt Practices Act and compliance-related costs were approximately $41 million, which represents about $30 million for the ongoing inquiries and investigations and $11 million for internal global compliance program and organizational enhancements. 

Wal-Mart said last year that FCPA and compliance-related costs were $69 million for the third quarter. So far this year the company has spent $137 million on FCPA and compliance-related costs, which was less than their previous guidance of between $200 million and $240 million. 

The company issued fourth quarter per share earnings guidance of between $1.46 and $1.56, and full year per share guidance of $4.90 to $5.15. Prior to the earnings report, the consensus estimate among analysts who cover the company was for fourth quarter earnings at $1.57 per share, and $4.99 per share for the full year.

U.S. OPPORTUNITY
In his first 100 days of leadership a Walmart U.S., CEO Greg Foran said he’s encouraged by the opportunities he sees among the 5,000 stores in the system.

"We had several merchandise categories driving top-line growth," he said. "I'm encouraged by our performance during key seasonal events. We had strong back-to-school results in apparel, home and school supplies, and we ended the quarter well by executing a strong Halloween event."

Walmart U.S. reported third quarter sales of $70.025 billion, up 3.4% over a year ago. Through three quarter of this year sales were $208.48 billion which was a gain of 2.7% year-over-year. The U.S. segment accounted for 59% of the retailer’s total sales in the quarter and thus far this year. 

Operating income at Walmart U.S. is down 1.2% in the quarter and down 2.6% for the year. Foran said comp sales have improved to 0.5%, but higher operating costs put downward pressure on top and bottom line performance in the quarter.

“We’ll partially offset these headwinds in the fourth quarter by making progress on the ‘urgent agenda items’ that I presented at the investor meeting last month. We have opportunities to become better shopkeepers, to execute the everyday business better,” Foran said. 

His “urgent agenda” items relate to better store management starting in the fresh departments of deli, produce and meats. He vowed to investors last month his plan to clean up the operations while also evaluating store labor counts and excess inventory in some categories while addressing lingering out-of-stocks in others.

A internal memo linked to the media earlier this week validates Foran’s insistence on addressing the areas of fresh. The memo sent to store managers tagged as "highly sensitive,” asks Wal-Mart store managers to make sure they discount aging meat and baked goods to maximize chances of selling them before expiration dates. Wal-Mart verified the memo was sent and the areas being addressed.

Foran said the U.S. store comp of 0.5% was positively impacted by 0.2% from online orders that were fulfilled in stores. The company also estimated “fractional” losses from the normalization of food stamp benefits in the past 12 months, which Wal-Mart said might not ever be recovered. The average ticket rose 1.2% in the quarter, but there was also a small decline in traffic count. While traffic is down year-over-year, Foran said it’s improving quarter to quarter, up 0.4% from the second quarter and 0.7% better than the first quarter of this year.

Traffic is a dynamic that bears watching as more sales are being completed online across the entire retail landscape. Widlitz said retailers embracing the omni-channel approach, which includes Wal-Mart, hold the most potential for improved sales during the holidays and beyond. 

GROCERY GAINS, iNVENTORY ATTENTION
Widlitz said there is some upside in grocery because of the inflationary prices, particularly in meat and dairy. Walmart U.S. disclosed net inflation of 0.281% in the quarter over prices a year ago. The retailer said much of that is in meat and dairy and consumers continue to trade down in the categories.

“I think some of the savings people will realize from fuel purchases is likely going to go toward feeding their families,” she said.

Grocery is a huge segment for Walmart U.S. and that’s only going to increase as the retailer plans to open more than 100 Neighborhood Markets in the current quarter, in addition to 70 of smaller grocery formats.

“Given the significant number of fourth quarter openings, we expect headwinds related to pre-opening expenses, as well as higher inventory balances from these openings. We remain pleased with the 5.5% comps Neighborhood Markets are showing,” Foran said.

Foran said inventory rose 5.2% in the quarter. More than half of that increase was related to new store growth and a conscious decision to flow inventory through the diversified import network early for the upcoming holiday season. 

“This allowed us to minimize risk of delays and mitigate impact to our holiday business. We’ve taken recent actions with respect to reducing inventory, but it’s too early to see any significant impact. However, we’re reasonably confident that we’ll see an improvement in inventory levels over the next year,” Foran noted in the call.

WAL-MART INTERNATIONAL
Walmart International total sales were $33.7 billion, up 1.7%. On a same-currency comparison, sales would have been up 2.9%. Overall revenue was diminished by a $396 million hit from unfavorable currency exchange rates.

“While sales growth slowed some on a constant currency basis compared with the first half of the year, sales trends improved in the latter part of the quarter in markets such as Canada and Mexico. Customers remain challenged across much of the globe, but our teams continue to do a great job of serving these customers by helping them save time and money,” Walmart International CEO David Cheesewright noted in the earnings transcript.

He said recent steps taken to accelerate e-commerce platforms in Mexico and China are underway as are the collection points for pickup in the U.K. 

“Walmart China recently launched a ‘Worry Free Fresh’ program starting with 49 stores, providing our customers with a money-back satisfaction guarantee when buying fresh produce and meats,” he added.

Though there is always room for improvement, Cheesewright said he feels good about the third quarter results. Operating income grew faster than sales at 5.2% on a constant currency basis and 3.7% percent on a reported basis. He said the segment did not leverage expenses for the quarter, in part due to continued investments in e-commerce and other initiatives, but leveraging expenses remains a key priority.

In the five largest countries, Canada, Brazil and Mexico delivered positive comp sales, but comps declined in the U.K. and China due to retail deflationary pressures. Net sales and comp growth were strong in some of our other markets, including Africa, Argentina, Central America, Chile and Japan.

SAM’S CLUB
Sam’s Club delivered profit growth the quarter, with operating income up 5.3%, without fuel, and 12% with fuel. Segment sales were $14.39 billion in the quarter, up 2.3% from a year ago. Through three quarters of this year sales revenue registered $43.14 billion, growing 1.6% from a year ago.

"Although we lapped the fee increase from last year, our membership income growth remained strong at 10.1%" said Rosalind Brewer, Sam's Club president and CEO. "Clearly, our members responded positively to our efforts to enhance membership value."

In the quarter, comp sales increased 0.4% driven by relatively balanced growth in traffic and average tickets. Traffic remains up among the Savings members, with pressure from fewer trips within business members, Brewer noted in the release. 

Membership and other income grew 9.9%. Sam’s Plus member renewals and upgrades were strong, offsetting softness in Sam’s business member base, she added.