After six weak quarters in a row, Wal-Mart Stores Inc.'s (WMT) third quarter fiscal 2015 earnings came in line with estimates, while revenues were better-than-expected. The company however narrowed its guidance for fiscal 2015.
Walmart's fiscal third quarter 2015 adjusted earnings of $1.15 per share matched the Zacks Consensus Estimate and increased 0.9% from the year-ago earnings of $1.14 per share. Positive comps at Walmart U.S., improved performances in Sam's Club and the international business and a lower-than-anticipated tax rate contributed to earnings, which remained within management's guidance range of $1.10 and $1.20 per share.
Quarter in Detail
Total revenue of the retailer increased 2.9% to $119.0 billion (including membership and other income) and beat the Zacks Consensus Estimate of $118.3 billion. The better-than-expected sales can be attributed to improvements in Sam's Club and the International business, higher Neighborhood Market sales in the U.S. and strong e-commerce growth.
Sales were encouraging as the company delivered positive comp sales of 0.4% driven by relatively balanced growth in traffic and ticket. The positive comps came after the company posted weak results in the past six quarters due to a tough economic environment.
Total revenue comprised net sales of $118.1 billion (up 2.8% year over year or 3.1% on a constant currency basis) and membership and other income of $925 million (up 13.9% on a year over year).
On a constant currency basis, operating income declined 0.4% to $6.3 billion in the third quarter, due to a decline in gross margin.
Segment Details
Walmart U.S.: The segment posted net sales growth of 3.4% to $70.0 billion in the quarter, including the impact of fuel sales. Operating income, however, declined 1.2% to $4.93 billion.
U.S. same-store sales (comps) for the 13-week period ending Oct 31, 2014 increased 0.5% versus a decline of 0.3% in the prior-year quarter. This was the first instance of positive comps since the last seven quarters, despite food stamp benefits. Comp sales also exceeded the company's expectations of flat comps. While comp traffic declined 0.7%, average ticket increased 1.2% in the quarter.
E-commerce sales positively impacted comp sales by 0.2% in the quarter. Comp sales for the Neighborhood Market format rose approximately 5.5%, which benefited U.S. comps. The increased sales in the neighborhood market signals that the company has been adding more small-format stores to increase revenue.
Walmart International: Segment net sales, including fuel sales, increased 1.7% year over year (increased 2.9% on a constant currency basis) to $33.7 billion owing to accelerated growth in e-commerce, including the launch of new expanded assortments and services in Mexico and China. Currency fluctuations impacted international sales by $396 million in the quarter. Operating income increased 3.7% to $1.43 billion.
Sam's Club: The segment, which comprises membership warehouse clubs, posted net sales growth, including fuel impact, of 2.3% to $14.39 billion. Excluding fuel impact, sales increased 2.3% to $12.7 billion. Sam's Club operating income, excluding fuel, increased 5.3% to $0.455 billion in the quarter.
Sam's Club comps, excluding the impact of fuel sales, increased 0.4% versus an increase of 1.1% in the prior-year quarter. Comp sales were in line with the company's expectations of slightly positive sales in the third quarter. Sam's Club comp traffic was up 0.2%, while average ticket increased 0.2%. E-commerce sales positively impacted comp sales by approximately 0.2% in the quarter.
Other Financial Update
During the quarter, Walmart paid $1.5 billion in dividends and repurchased approximately 1.1 million shares for $82 million.
Fourth Quarter Fiscal 2015 Outlook
For the fourth quarter of fiscal 2015, Walmart expects its adjusted earnings to range between $1.46 and $1.56 per share, which includes an estimated negative impact of approximately 3 cents per share related to the future closure of underperforming stores in Walmart Japan.
Last year, Walmart reported fourth quarter earnings of $1.34, which included approximately 26 cents in discrete items. Last year's adjusted earnings per share were $1.60.
Walmart expects U.S. comp sales to be between flat and 1% for the 13-week period ending Jan 30, as against a decline of 0.4% last year. This signals that the company may benefit from falling gas prices and a drop in U.S. unemployment.
Sam's Club comp sales, without the impact of fuel sales, are expected to be between flat and 2% compared to a decline of 0.1% last year.
Tightened Fiscal 2015 Outlook
Walmart narrowed its fiscal 2015 earnings guidance to a range of $4.92 to $5.02 per share from the previous range of $4.90 to $5.15. The new full year guidance, including charges of 3 cents per share, reflects higher investments in e-commerce, incremental investments in Sam's Club, higher U.S. health-care costs and fluctuation in tax rates.
Last year, fourth quarter earnings were $4.85 per share, which included approximately 26 cents of one-time charges. Last year's adjusted earnings were $5.11 per share.
It should be noted that Walmart had already cut its forecast during the second quarter fiscal 2015, citing higher U.S. health-care costs and increased spending in e-commerce.
Sales Outlook
Last month, the company slashed its fiscal 2015 sales outlook amid a tough economy. Walmart now expects annual sales to grow in the range of 2% to 3% for fiscal 2015, down from its earlier guidance. During the second quarter of fiscal 2015, the company had guided sales growth to be at the lower end of a 3% to 5% range. The company expects net sales to increase 2% to 4% for fiscal 2016.
Amid the weak scenario, the company is making efforts to understand the evolving needs of its customers to re-gain their confidence. The company has shifted its investment plans and will lower investment in larger stores, while investing more in e-commerce initiatives. (Read: Wal-Mart Cuts Sales View, Investing More in E-Commerce).
Walmart carries a Zacks Rank #3 (Hold).
Other Stocks to Consider
Better ranked retailers include Safeway, Inc. (SWY), Citi Trends, Inc. (CTRN), L Brands, Inc. (LB). While Safeway sports a Zacks Rank #1 (Strong Buy), Citi Trends and L Brands hold a Zacks Rank #2 (Buy).
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