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Dow-30 Earnings: Wal-Mart Stores - Fiscal Third Quarter 2012
The world's largest retailer, Wal-Mart (WMT - Free Wal-Mart Stock Report), reported solid results for the fiscal third-quarter (ended October 31, 2012). Earnings per share of $1.08 rose 11.3% year over year, matching our estimate and coming in toward the high end of management's guidance range of $1.04 to $1.09. Sales of $113.2 billion were up 3.4% and would have nearly equaled our $115.0 billion estimate (a 5% advance) were it not for unfavorable currency translation. Operating income increased 4%, once again growing faster than sales.
Same-store sales at the domestic unit were up 1.5% (1.7% excluding fuel). That was toward the low end of the 1% to 3% guidance range, however. Although this was likely due to still-challenging economic conditions for Wal-Mart's core customers and not the company's execution, we believe this disappointed investors somewhat, and likely contributed to the stock price dropping more than 4% following the release. Strong back-to-school, Halloween, and Labor Day sales contributed to the respectable performance. ''Value pack'' sizing, the USDA steak program, consumables, health and wellness, basic apparel, and hunting items helped also. Not surprisingly, entertainment items had a low-single-digit comp due to price deflation on TVs and such. Still, an expanded layaway program should aid results for the upcoming holiday selling season. Overall, the number of transactions only rose 10 basis points, but their value advanced 140 basis points on average, despite deflation in certain foods and electronics. According to Nielsen, Wal-Mart gained 50 basis points of share in the food, consumables, and over-the-counter medicines markets.
The third quarter marked the eighth straight one in which companywide expenses were leveraged. While price cuts lowered gross profit 13 basis points, operating expenses fell 17 basis points. Cost savings stemmed from more direct imports, standardizing the global replenishment system, and improving inventory flow. Overall, the cost per case shipped fell 4.2%.
The company seems well prepared for the unfolding holiday shopping season. It plans on opening its doors for Black Friday on Thanksgiving night at 8:00 PM, the earliest in its history. There will be a big increase in TV and radio advertising, and over two billion online ad displays across social media and the Web, three times last year's total. ''Bake centers'' and ''meal trains'' should make it easy for customers to find holiday essentials. Inventory is up 4.3% and the company has taken measures to ensure it doesn't sell out of popular toys and electronics. Lastly, the layaway program has been expanded and contributions are already trending favorably compared to last year.
Meanwhile, results at Sam's Club were mildly disappointing as the 2.7% comp (excluding fuel) fell below the guidance range of 3% to 5%. Inflation caused some customers to trade down while there was also some deflation in certain categories. Business members spent less due to uncertainty in the U.S. economy, a trend which may persist in the current quarter. Still, inflation is moderating and membership income should rise in the coming quarters due to fee hikes (which are currently being tested).
Despite a challenging global economy and currency headwinds, Wal-Mart International increased sales by 2.4% (7.6% sans currency headwinds). Latin America was the standout with all countries and regions delivering positive results. Global comps were positive in four of WMT's six largest markets. In general, average ticket is up but traffic has been weak, which Wal-Mart hopes to remedy with improved marketing and by continuing its rollout of the everyday low price strategy. Market share was maintained or increased in all markets except for China, where comps were flat and traffic was down 7.6%. Wal-Mart is trying to rightsize its store base in that country following some admittedly unwise new location decisions. It is also focused on making its merchandise selection more locally relevant.
The company's new checking and debit alternative card developed with American Express, dubbed Bluebird, has met a warm reception, and adoption is surpassing initial expectations. We view this as a viable traffic driver and customer loyalty enhancer.
The new store pipeline is encouraging. Wal-Mart U.S opened 59 supercenters during the quarter. Growth in small formats continues to accelerate as 33 Neighborhood markets were opened and 80 are expected for the full year. These stores are averaging a mid-single-digit comp thanks partly to prescriptions, over the counter medicines, and adult beverages. Elsewhere, the giant retailer continues to test its Wal-Mart Express store format.
Finally, the company increased the low end of its full-year earnings guidance range by a nickel, and it now stands at $4.88 to $4.93. We have lowered our $4.95 estimate to $4.93 to be more in line with guidance. Same-store sales are once again expected to come in with a rise of 1% to 3%.
We are pleased with Wal-Mart's overall performance during the fiscal third quarter. We think the holiday season will prove successful, and the uncertain economy should keep value-minded shoppers frequenting Wal-Mart for the foreseeable future. Further, we like the footprint growth prospects and focus on small format stores. Although the share price has had a nice run-up year to date, the long-term risk-and-reward scenario remains favorable, in our view.
About The Company: Wal-Mart Stores, Inc. is the world’s largest retailer, operating 3,029 supercenters (includes sizable grocery departments), 629 discount stores, 611 Sam’s Clubs, and 210 Neighborhood Markets in the U.S., plus 5,651 foreign stores, mainly in Latin America, with the balance in Asia, Canada, and the U.K as of 1/31/12. The company operates 1.037 billion square feet of total store space. Most stores are owned and are within 400 miles of an expanding network of distribution centers. Groceries accounted for 54% U.S. sales in 2011, 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.