Wal-Mart Reports Growth Across Segments, But Falls On Bleak Guidance

The world’s largest retailer, Wal-Mart (NYSE:WMT), reported its Q4 and full year fiscal 2015 earnings on Thursday. The retailer’s net revenues for the fourth quarter increased by 1.4%, driven by growth in comparable sales at Wal-Mart U.S. and Sam’s Club, partially offset by negative currency headwinds that severely impacted its international results. The company’s earnings per share for the quarter totaled at $1.61, which was well above the consensus estimate of $1.54. However, its net revenues missed the consensus by $600 million.

For the full year, Wal-Mart reported earnings per share of $5.07, which was marginally better than the street estimate of $4.99. Although the company was surprisingly able to deliver better-than-expected bottomline results amid an edgy retail environment (despite healthcare cost pressures), its shares fell by close to 5% after the earnings release. This can be attributed to the fact that Wal-Mart guided its fiscal 2016 EPS below fiscal 2015’s levels on account of higher expenses related to a new plan to boos minimum pay and additional e-commerce investments. The retailer expects its fiscal 2016 earnings per share to be in the $4.70-$5.05 range. ^[1]

Our price estimate for Wal-Mart stands at $81, which is about 5% below the current market price. However, we are in the process of updating our model in the light of the recent earnings release.

See our complete analysis for Wal-Mart

Sales Improve In The U.S.

Wal-Mart reported 1.5% rise in its comparable store sales in the U.S., marking its first quarter of positive growth after six consecutive quarters of comparable store sales decline. The company managed this growth on top of 0.4% comparable store sales decline witnessed in the same quarter last year. Interestingly, Wal-Mart’s comparable store sales growth exceeded its initial guidance of +1%. Surprisingly, despite the ongoing customer shift from stores to online channel, traffic at Wal-Mart’s stores improved 1.4% year over year. However, we believe that this can be attributed to the fact that during the same period last year, there was an extreme lull in store traffic due to unfavorable weather conditions.

Wal-Mart’s comparable store sales growth in the U.S. was bolstered by sturdy performance of its neighborhood format and robust growth in e-commerce sales. Comparable store sales for neighborhood stores increased 7.7%, indicating that the company is headed in the right direction with its strategy of expanding in the U.S. with small stores. Wal-Mart’s global e-commerce revenues increased 22% during the quarter and positively impacted its U.S. comparable store sales by 0.3%.

Overall, revenues for Wal-Mart U.S. increased by 4.1% to $79.6 billion, but its operating income fell o.6% to $6.18 billion weighed down by higher healthcare costs arising from increased enrollment and medical costs inflation. Regarding West Coast ports congestion, the company mentioned in its earnings call that although it puts its spring and Easter inventory inflow at risk, it can be diluted by leveraging the diverse supply chain network. ^[2]

International Sales Pummeled By Currency Headwinds

While Wal-Mart’s international revenues increased by 3% in constant currency, they fell 3.9% after factoring in currency effects. Negative currency headwinds impacted the company’s international sales by a total of almost $2.6 billion, making it the second retailer after Costco (NASDAQ:COST) to report significant decline in international sales solely on the account of currency fluctuations. Wal-Mart reported positive comparable store sales growth in Brazil, Canada, and Mexico, but underperformed in the U.K. and China due to food deflation and fierce competition. The company’s fourth quarter results were also negatively impacted by a cost of $148 million related to store closures in Japan. Despite this, Wal-Mart reported a staggering 79.6% growth in operating income on a constant currency basis. The growth remained strong at 66.4% even after factoring in the exchange rate fluctuations, that has troubled a number of companies in the recently concluded quarter.

We believe that Wal-Mart international’s biggest concern right now is negative currency headwinds that can continue to impact its growth in fiscal 2016. However, it is well positioned in markets such as Brazil, Mexico and even Canada (following Target’s exit) to propel its long term growth. China on the other hand, still needs some work. Government austerity measures, reduction in gift card sales and deflation in several categories continue to trouble it. ^[2]

Falling Gasoline Prices Subdue Sam’s Club’s Results

Wal-Mart’s warehouse format, Sam’ Club, posted sales growth of just 1.3% to $14.87 billion for the fourth quarter of fiscal 2015. The company said that the segment’s growth was constrained by the almost 25% fall in gasoline prices, while volume sales went up by 8%. Excluding the impact of gasoline deflation, Sam’s Club’s revenues for the fourth quarter increased about 3.7%, which looks impressive considering the current retail scenario in the U.S. While gasoline prices negatively impacted Sam’s Club’s growth, it boosted the segment’s gross margins. Sam’s Club’s gross margins improved 23 basis points due to higher margin on fuel. Sam’s Club managed to reduce its operating expense rate by 50 basis points and its overall operating income for the quarter improved 29.1% to $510 million.

Higher Expenses And Currency Headwinds Hamper Fiscal 2016 Guidance

For fiscal 2016, Wal-Mart expects additional pressure on its bottomline growth, as it is preparing to ramp up investments in e-commerce arena and is planning to increase wages for over half a million employees. These factors together are expected to have a negative impact of about $0.26-$0.29 to the company’s fiscal 2016 EPS. Wal-Mart said that the heaviest portion of its investments in the online channel will come over the next 18-24 months, during which its bottomline will remain under pressure. The company plans to invest around $1.2 billion-$1.5 billion in e-commerce and digital initiatives during fiscal 2016. It made a separate announcement during the earnings release that it will increase minimum wages to $9 and subsequently $10 per hour, that would impact a good protion of its 500,000 employees. Although this was a much needed move, given not only pressure from labor groups but strong demand for  low wage workers, it will cost the company an additional $1 billion in compensation.

Wal-Mart has guided its sales growth for fiscal 2015 at 1%-2%, significantly below its earlier outlook of 2%-4%. The main reason behind the revised guidance appears to be the foreign exchange impact, that is likely to have a negative impact of $10 billion on sales in fiscal 2016.

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1. Walmart announces Q4 underlying EPS of $1.61 and additional strategic investments in people & e-commerce; Walmart US comp sales increased 1.5 percent, Walmart, Feb 19 2015 [↩]
2. Wal-Mart’s Q4 fiscal 2015 earnings transcript, Feb 19 2015 [↩] [↩]