Solid Q3 Results Drive Wal-Mart’s Stock to An All-Time High
Wal-Mart (NYSE:WMT) reported stronger-than-expected fiscal third quarter results on Thursday, November 16, as both its bottom line and revenue came in ahead of market expectations. The company’s stock surged to an all-time high of $95.94 after the announcement. The company also posted a full-year adjusted earnings per share guidance of $4.38 to $4.46, which is ahead of the $4.38 per share consensus estimate. Below we discuss some key takeaways from Wal-Mart’s earnings report and Q4 outlook using our interactive platform:
On a reported basis, the company’s revenue increased 4% year over year (y-o-y) to $123 billion, driven by growth in the domestic market due to its marketplace offerings. The retailer’s consolidated net income declined 42% y-o-y to $1.7 billion in the third quarter. Wal-Mart also posted diluted earnings per share of $0.58, down 41% y-o-y, and adjusted EPS of $1.00, which was at the upper end of its guidance range.
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In terms of the company’s segments, Wal-Mart U.S. delivered a strong top line performance with comparable sales of 2.7%, which was well above the consensus estimates of 1.9%. In addition, the retailer’s international sales grew 4% y-o-y to $29.5 billion during the quarter, due to positive comparable sales in ten out of eleven markets, in addition to a benefit of approximately $450 million from currency. Also, Sam’s Club comparable sales grew 2.8% y-o-y (ex. fuel) in the quarter, led by traffic and hurricanes impact.
On the cost side, Wal-Mart’s total operating expenses increased in the quarter, primarily due to ongoing investments in e-commerce and technology. For the nine months ended in October, Wal-Mart generated $17 billion in operating cash flow and $10 billion of free cash flow, which declined 18% y-o-y. This decline was primarily due to an increase in incentive payments, as well as a comparison against significant working capital changes since last year. Overall, the Q3 result suggests investments continue to favorably impact the comparable sales growth, helping the company thrive in a tough retail environment.
Wal-Mart U.S. Continues To Grow
In Wal-Mart U.S., strong comparable sales growth of 2.7% was driven by a 1.5% increase in customer traffic and a 1.2% increase in average ticket size. Overall, all store formats had positive comparable sales, and e-commerce and hurricane related impact contributed approximately 80 basis points (bps) and 30 to 50 bps to the segment in the third quarter. Additionally, the grocery business continued to improve, as food categories continued to deliver strong quarterly comparable sales performance, led by strong customer traffic. Also, the segment’s operating income grew 1% y-o-y during the quarter.
E-Commerce: Strong Growth Driver
Wal-Mart’s e-commerce division includes all web-initiated transactions, including those through Walmart.com such as ship-to-home, ship-to-store, pick up today, and online grocery, as well as transactions through Jet.com. Globally, on a constant currency basis, the company’s e-commerce sales and GMV increased 50% and 54% (including acquisitions), respectively, in this quarter. The majority of this growth was organic through Walmart.com, including online grocery, which is growing quickly. This growth was also likely boosted by the company’s recent acquisitions such as Jet.com, Moosejaw, Shoebuy and Bonobos, which have provided expertise in some high-margin categories like shoes and apparel. From a marketplace perspective, the company covers more than 70 million SKUs to date, up more than 35% from the first quarter. However, it should be noted that the e-commerce growth in Q3 has decelerated a bit from the 60%-plus levels of the past two quarters.
Future Outlook
For the upcoming quarter, Wal-Mart expects comparable sales growth for both Wal-Mart U.S. and Sam’s Club (ex. fuel) to range between 1.5% to 2.0%. For the full year fiscal 2018, the company now expects its adjusted EPS to range between $4.38 to $4.46, compared to previous guidance of $4.30 to $4.40.
Our $80 price estimate for Wal-Mart’s stock is around 15% below the current market price following the rally.
Please refer to our complete analysis for Wal-Mart
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