story by Kim Souza
ksouza@thecitywire.com
Wal-Mart Stores Inc. execs have decked the halls in hopes of ample holiday cheer, despite negative comp sales in the U.S. for the 13-week period ending Oct. 25.
The mass merchant discounter reported steady net income of $3.738 billion in the third quarter, up 2.8% from a year ago. On a per-share basis that’s $1.14, up 6.5% from last year and one penny better than analysts expected.
That said, Wal-Mart missed guidance for top line revenue with consolidated net sales of $114.9 billion, up 1.6%. Wall Street analysts expected $116.8 billion, but the retailer said with currency fluctuations and acquisitions aside, its total net sales were $116.2 billion in the quarter.
Wal-Mart shares slid backward in early trading on Thursday (Nov. 14) following the announcement. But by mid-morning, when analysts had digested all the numbers, the shares turned positive — trading around $79, up 10 cents at the noon hour.
Mike Duke, CEO of Wal-Mart Stores Inc., considered the quarterly performance “solid” based on operating income across all segments, as the retailer was able to curtail its expenses to help offset sluggish sales, weaker traffic and lack of grocery inflation.
"Our most important priority is growing top line sales, including comp sales," Duke noted in the statement. "The retail environment, both in stores and online, remains competitive. Wal-Mart has aggressive plans to help our customers enjoy the holiday season, and there is no doubt that we plan to win for our customers and shareholders throughout the holidays."
U.S. COMPETITION
Duke said consumers remain wary about the economic outlook and concerned about their job. Wal-Mart results are typically seen a barometer for the overall national economy given the retailer’s size and geographic reach across the U.S.
But analysts have said the caution that Wal-Mart touts quarter to quarter is not exactly what other retailers are reporting at this time.
Wal-Mart comp stores sales in the U.S. – a closely watched metric – were down 0.3% in the quarter. Neighborhood Market, Wal-Mart’s smaller grocery format, saw comp sales rise 3.4%. Sam’s Club reported comp sales of 1.1% without fuel.
CNBC contributor Jim Cramer said that perhaps Wal-Mart is getting squeezed by other discounters like Costco, who just reported same-store comps of 6% in the same economy.
“When Costco reported 6% comp store sales last week, the street paused, but you can’t tell me that Wal-Mart wouldn’t kill for 6% comps,” Cramer said.
U.S. net sales grew to $67.7 billion, up 2.4% in the quarter damped by a 0.4% decline in store traffic. Operating income increased 5.8% to over $5.1 billion as the retailer did a better job of managing expenses.
Despite negative same-store comp sales, Wal-Mart said its investment in price is helping to drive market share gain in numerous categories such as food and consumables, health & wellness, produce, home, apparel and wireless.
Walmart U.S. CEO Bill Simon said overall the quarter started slower than they would have liked.
“Sales began to pick up in September and October as we featured ‘stock up and save’ and ‘October rollbacks,’" Simon said during a media call. “We have robust plans for the holiday season, some 2 million layaway transactions have been recorded as of last week.”
The entertainment category has been challenging, but Simon said as the quarter progressed and exclusive offers for gaming devices were offered through layaway, he expects to see better results in this lackluster category during the fourth quarter.
He said inventory is up 5.1%, partly due to aggressive holiday buys. This is down from the 6.9% increase at the end of the second quarter.
Wal-Mart said it’s too early to know any impact they may feel from the SNAP reductions that took place Nov. 1 and while they can’t say for sure the 16-day government shutdown hurt their business, they can’t imagine that it helped.
Simon said traffic in stores did pick up following the resolution to the government shutdown.
FCPA COMPLIANCE
Wal-Mart said it spent $69 million in the recent quarter on compliance issues regarding the Foreign Corrupt Practice Act, which was below its $78 million estimate.
About $43 million went to expenses incurred for the ongoing inquiries and investigations in Mexico, China, Brazil and India. Roughly $26 million is related to Wal-Mart’s internal global compliance program.
Core corporate expenses rose 15.1% year over year. The company said roughly 5% of that increase is related to the FCPA matter. The rest has to do with the timing of charitable giving.
This year Wal-Mart has spent $224 million on its compliance issues, more than half of that related to FCPA investigations ongoing for the past 18 months.
SAM’S CLUB
Sam’s Club posted net sales, including fuel of $14.1 billion, up 1.1% over last year. Fuel prices decreased 7.7% and gallons sold were up 2%, creating a burden to overall sales of 1%.
Operating income increased 9.2% to $474 million in the quarter.
Sam’s Club generated a comp of 1.1%, without fuel, for the 13-week retail sales period. Comp traffic grew 2.4% and comp ticket declined by 1.3%, driven by softness in tobacco business.
Both Business and Savings members posted positive traffic this quarter, with growth primarily coming from Savings members.
Membership income grew 8.1%, up from 4% last quarter, as the benefit of the fee increase implemented earlier this year accelerates. The benefit will continue to be a tailwind in the upcoming quarter and throughout the next fiscal year.
In Q3, members received one Instant Savings book, valid from Aug. 28 through Sept. 22, that included more than $4,500 in savings. These savings are automatically loaded onto every member’s card. The books are bringing members into categories previously not shopped, and some of these members have continued shopping these categories after the event.
“Inventory, including fuel, grew 6.3% during the third quarter, significantly less than this time last year. New club growth, strategic builds for our Instant Savings events, and holiday merchandise inflated our inventory position, while sell-through of summer inventory was in line with expectations,” said Rosalind Brewer, CEO of Sam’s Club.
WALMART INTERNATIONAL
The international divisional had a 0.2% increase in net sales, achieving $33.1 billion.
On a constant currency basis, net sales were $34.4 billion, up 4.1%, according to Walmart International CEO Doug McMillion.
“Currency negatively impacted sales by approximately $1.6 billion, and our Yihaodian acquisition in China added $314 million in sales,” he added.
The international division is in the midst of major changes as the retailer recently abandoned its venture with Bharti in India, sold the VIPS restaurant chain in Mexico, plans to close 50 underperforming stores in Brazil and China and plans to increase its ownership of Walmart Chile to 97%. Outside of challenging economic metrics in Japan and Mexico, McMillion said most of the other markets are growing market share and total sales ever so slightly.
He said the fourth quarter is well under way for our markets. The slow- growth macroeconomic environment is persisting through the first month of this quarter, and the markets continue to be competitive.
“We will manage our cost dollars well and stay focused on growing sales to give ourselves the opportunity to leverage. We also remain committed to growing our e-commerce business aggressively,” McMillion said.
LOWER GUIDANCE
Even with the aggressive plans, the company is not confident that consumers will spend more during the holidays. Wal-Mart has lowered its fourth quarter earnings per share guidance to between $1.50 and $1.60. The actual earnings may be 10 cents per share higher.
The company reported a 10 cents per share cost is likely during the fourth quarter in a move to close 50 underperforming stores in Brazil and China (6 cents), and the ending of a franchise agreement in India (4 cents).
Full year guidance was lowered to range between $5.11 and $5.21. The previous guidance was a range between $5.10 and $5.30. Wal-Mart guidance earlier in the fiscal year had per share earnings in the $5.20-$5.40 range.
Wal-Mart has posted net income of $11.591 billion for the first three fiscal quarters of the year, up 1.7% compared to the same period in 2012. Total revenue for the first three fiscal quarters is $346.588 billion, also up 1.7% compared to the 2012 period.