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Dow 30 Earnings: Wal-Mart Stores - Fiscal Fourth Quarter 2011
The world's largest retailer, Wal-Mart (WMT –Free Wal-Mart Stock Report), has posted in-line results for the fiscal fourth quarter (ended January 27, 2012). Companywide net sales advanced 4.5%, year over year, or 5.8%, including acquisitions (Massmart in South Africa and Netto in the U.K.) but there was a $1 billion negative impact from currency exchange. Earnings per share of $1.44 (excluding a favorable tax benefit) rose 7%, year over year, and were within the company's guidance range of $1.42-$1.48.
Domestic same-store sales rose 1.5% in the term (2.1% excluding fuel sales), marking the second consecutive period of positive comps. Prior to the October, 2011 interim, that fundamental had been negative for nine quarters. Not only did the average transaction amount increase, but traffic turned positive after several years of declines. We credit lower prices, the merchandise add-back program, improved on-shelf availability, and effective marketing and promotions.
Grocery price inflation was 4%, but around half of this increase was offset by trade downs to less-costly brands or smaller package sizes. The holiday season was strong, with the price match guarantee initiative boosting sales of electronics. Improved TV volumes once again offset industrywide price deflation. Apparel was the one negative category, as unseasonably warm weather reduced demand for winter clothing. The company is shifting its focus away from fashionable items toward day-to-day clothing necessities, which is boosting sales at its Basics unit.
Evidence of the company's “investment in price” can be found in the 30 basis-point-gross margin decline. However, operating expenses as a percentage of sales fell by 20 basis points. Elsewhere, Sam's Club continued to deliver impressive results, recording a 5.4% comp gain in the quarter.
Management revealed that Wal-Mart is gaining market share in each of its international markets, primarily through the rollout of its everyday low price initiative. Still, this caused the company to recorded losses in China and India, a trend that may not reverse until traffic improves. Aggressive warehouse expansion in Mexico, Brazil, and China ought to continue for the foreseeable future, in an attempt to take advantage of their ballooning middles classes. Further, we expect integration of new technologies, optimization of the supply chain, and the teaching of “best-practices” for sales associates to help WMT reach its goal of reducing operating expenses by 100 basis points over the coming five years.
Management exhibited some caution in its expectations for near-term spending from its core customer base (households with under $50,000 in annual income), due largely to the still-challenging employment environment and potentially higher gas prices. This is likely contributing to weakness in the share price this morning.
In all, comps are expected to be flat to up 2% in the April period. For full-year 2012, sales are expected to increase between 5% and 7%. We are lowering our 2012 earnings estimate by a dime, to $4.90 a share, in response to management's guidance of $4.72-$4.92.
Nonetheless, we are encouraged by Wal-Mart's progress in its turnaround efforts. Refocused merchandising initiatives appear to be gaining steam, and we view WMTs competitive positioning in the retail landscape favorably. Although still-challenging economic conditions will probably continue to restrict low-income consumer spending, we think WMT's pricing power and improved merchandise assortment make it capable of winning business back from competing dollar stores. International operations remain a promising growth engine that ought to lead to solid risk-adjusted returns out to mid decade.
About The Company: Wal-Mart Stores, Inc. is the world’s largest retailer, operating 2,907 supercenters (includes sizable grocery departments), 708 discount stores, 596 Sam’s Clubs, and 189 Neighborhood Markets in the U.S., plus 4,557 foreign stores, mainly in Latin America, with the balance in Asia, Canada, and the U.K. The company operated 985 million square feet of total store space at the end of its 2010 fiscal year. Most stores are owned and are within 400 miles of an expanding network of distribution centers. Groceries accounted for 54% U.S. sales in 2010, while sales per square foot were about $430.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.