Wal-Mart Stores (WMT - Free Wal-Mart Stock Report), the world's largest retailer and a Dow-30 component, has reported fiscal third-quarter results (year ends January 31, 2014). Adjusted revenues (on a constant-currency basis) advanced 2.7%, to $116.2 billion. (Our estimate called for $116.7 billion.) However, revenues were only up 1.6% when unfavorable currency translations are factored in. The company remains focused on lowering costs, which explains why earnings per share expanded at a much faster rate than revenues. (Share net increased 6.5% year over year.) The company remains on track to accomplish its 5-year goal of cutting 100 basis points from its expense-to-sales ratio by 2017. Wal-Mart shares were little changed on the news.
Comparable-store sales in the U.S. dropped 30 basis points, the same result that was experienced in the prior quarter. While traffic declined 40 basis points, this was somewhat offset by the average ticket rising 10 basis points. It appears that Wal-Mart's core customer group (middle- and lower-income consumers) remains cautious in its spending, largely due to a lack of quality employment opportunities.
Furthermore, it is becoming increasingly apparent that Wal-Mart may have cut back too much on shelf stocking staff. Management touched on that topic during its earnings call, but only to say the matter is in good shape. Nonetheless, we don't doubt WMT is closely monitoring the costs and benefits of paying its associates for more hours. The company did hire 55,000 seasonal workers and added another 70,000 part-time and full-time workers for the season. Some 35,000 are being elevated from temporary to part-time, while another 35,000 will move from part-time to full-time. These upgrades will continue after the holiday season, and it remains to be seen if complaints of sparsely filled shelves for certain items will decline. Overall, we think this issue is probably less severe than some analysts and journalists are reporting.
Certain product categories are performing better than others. The grocery business, which includes food and consumables, experienced a 70 basis-point comp decline. Produce and adult beverages provided a bit of an offset. Health and Wellness reported a low-single-digit positive comp, showing improvement over the prior period. Prescriptions had a low-single-digit positive comp, and now that a number of less-lucrative generic drug introductions have been anniversaried, growth rates ought to improve.
At the same time, hardlines continue to register decent gains, while toys are suffering, since children are spending more time with electronics at younger ages. Apparel is sticking with its strategy of offering low-fashion, brand name “basics”, and we doubt Wal-Mart will stray from this approach after learning its lesson in the mid-2000s when it unsuccessfully switched to more fashion focused goods. Overall, inflation was not much of an issue. Lastly, Sam's Club comp sales sans the impact of fuel rose 1.1% in the quarter on higher traffic.
The company expects to launch an extensive holiday marketing campaign. The blitz is expected to make 25 billion “impressions” via conventional TV, radio, and direct means, but also newer social and e-commerce focused methods. The retailer is looking to take the lead on toy assortment, pricing, and availability this season. Nonetheless, fiscal fourth-quarter comps are expected to be flat, compared with a 30-basis-point rise in the prior year.
Too, Wal-Mart remains focused on expanding its small format Neighborhood Market locations (which compete with grocery stores) and Wal-Mart Express units (which target convenience stores) over the next several years. At present, WMT is on pace to increase the former's store count 50% this year. At the recent annual analyst meeting, management announced that the pace of this expansion has increased significantly, with the number of new locations expected to be added by 2016 doubling to 400. That would bring the total to well over 700 stores. Further, small-format comp store sales have been trending well above those of conventional super centers for several years.
Elsewhere, the company announced plans to close approximately 50 underperforming stores in Brazil and China, which should lower share earnings by $0.06. This move was not unexpected, as performance has been lagging in these areas of late. We chalk this up to an overly aggressive international expansion strategy and difficulty infiltrating less-populated cities in China. Too, implementing an everyday low price strategy has proven difficult when compared to other parts of the world. Total international sales increased only 20 basis points in the quarter.
Wal-Mart's fourth-quarter guidance range (excluding some nonrecurring items) is pegged at share net of $1.60-$1.70. In response, we are shaving a nickel from our estimate, bringing it to $1.65 per share. Although the company seems well prepared to deliver decent domestic holiday sales, recent traffic trends, a difficult consumer spending environment, and troubles abroad make us concerned that overall results this quarter won't be overly impressive.
About The Company: Wal-Mart Stores, Inc. is the world’s largest retailer, operating 3,158 supercenters (includes sizable grocery departments), 561 discount stores, 620 Sam’s Clubs, and 286 Neighborhood Markets in the U.S., plus 6,148 foreign stores (mainly in Latin America, with the balance in Asia, Canada, and the U.K.) for total square footage of 1.072 billion (as of 1/31/13). Most stores are owned and are within 400 miles of an expanding network of distribution centers. Groceries accounted for 55% U.S. sales in 2012, while sales per square foot were about $437.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.