Walmart's Not So Solid Second Quarter

August 14, 2014

Walmart met low second quarter sales and profit expectations it set for itself, but significantly lowered its full year outlook due to a tepid third quarter sales forecast and increased e-commerce and health care costs.

Total company sales increased 2.8% to $119.3 billion while same store sales at U.S. stores and Sam's Clubs were flat during the period ended July 31.  The total sales figure included a $696 negative impact related to foreign currency translation, without which sales would have increased 3.4% to $120 billion.  Net income increased 0.6% to $4.093 billion from $4.069 billion, but earnings per share declined to $1.21 from $.123.  Walmart had forecast earnings in a range of $1.15 to $1.25 and analysts' consensus estimate was $1.21.

Despite the decline from the prior year, Wal-Mart Stores, Inc., president and CEO Doug McMillon said he was pleased with the earnings per share performance.

"As it relates to the positives from the quarter, I'm encouraged by the performance of our International business, our Neighborhood Market sales in the U.S. and by our e-commerce growth," McMillon said.  "As it relates to our challenges in the quarter, we wanted to see stronger comps in Walmart U.S. and Sam's Club, but both reported flat comp sales.  Stronger sales in the U.S. businesses would've also helped our profit performance."

The flat U.S. comp performance followed a 0.3% decline the prior year, as an increase in transaction size offset a decline in traffic.  Total sales for Walmart's largest division increased 2.7% to $70.6 billion due to the addition of new selling space.  However, operating profits fell 2.4% to $5.25 billion.

"We delivered net sales growth of $1.9 billion in the second quarter," said Greg Foran, Walmart U.S. president and CEO.  "Our e-commerce business, including store-fulfilled sales, delivered double-digit sales growth," added the former Walmart International executive who replace Bill Simon as head of the U.S. division last week.

Same store sales at U.S. stores are forecast to be flat in the third quarter following a 0.3% decline last year.

Sam's delivered top line growth due to the addition of new clubs, but same store sales were flat.  Total sales increased 1.7% to $13 billion, excluding fuel.  Operating profits fell 4.6% to $494 million.

"Our top priority at Sam's Club remains growth - growing our member base and growing sales," said Rosalind Brewer, Sam's Club president and CEO.  "We're taking steps to increase the value of membership through investments in Plus member cash rewards and the cash back Mastercard.  It's still early, but member response has been positive.

Sam's is expecting third quarter comps to be slightly positive.

The relative bright spot in Walmart's second quarter was the international division where sales on a constant currency basis increased 5.3% to %34.6 billion and operating profits grew 8% to nearly $1.5 billion.

"We remain focused on price investment across all our markets and expect to continue driving improved comp performance," said David Cheesewright, Walmart International president and CEO.  "I am pleased with the trends in many of our markets, which were driven by a continued focus on being the lowest cost operator."

Faced with ongoing difficulties to drive top line growth at its two U.S. divisions coupled with expense pressures, Walmart said it expects third quarter earnings per share of $1.10 to $1.20 and lowered its full year forecast to a range of $4.90 to $5.15 from an earlier forecast of $5.10 to $5.45.

"Our guidance includes incremental investments in e-commerce and headwinds from higher health-care costs in the U.S. than previously estimated," said CFO Charles Holley.

Source: Retailing Today