Wal-Mart profit down, U.S. sales up

Graphs showing information about Wal-Mart's First Quarter.
Graphs showing information about Wal-Mart's First Quarter.

Wal-Mart Stores Inc. reported a net-income decline of 7.8 percent during the first quarter of its fiscal year, but earnings and revenue figures beat investor expectations and boosted the company's stock during a challenging period for retailers.

Earnings per share of 98 cents, down from $1.03 a year ago, exceeded analyst estimates of 88 cents, according to Yahoo Finance. Revenue for the quarter increased by 1 percent to $115.9 billion and beat expectations of $113.2 billion.

Led by a 4.3 percent boost in net sales at U.S stores, Wal-Mart Chief Executive Officer Doug McMillon described the quarter as a "good start to the fiscal year" during a prerecorded call for investors. Shares of Wal-Mart stock rose 9 percent during pre-market trading Thursday and maintained the position throughout the day. Wal-Mart shares closed Thursday at $69.20, up $6.05.

The result was a contrast to other retailers, who have reported sluggish sales and disappointing forecasts throughout the month. Target Corp. reported Wednesday revenue of $16.2 billion, a loss of 5.4 percent, falling short of analyst expectations.

While analysts agreed Wal-Mart successfully steered clear of the retail trend with a solid quarter, some remained cautious because heavy investments in areas such as wages and e-commerce continue to affect the bottom line.

Wal-Mart reported $3.08 billion in profits for the quarter, down from $3.34 billion a year ago, and said the decline was largely related to the wage investments. Wal-Mart is in the second year of a $2.7 billion investment in its employees and also continues to spend heavily on e-commerce operations.

"Wal-Mart is really just kind of chugging along and doing the day-in, day-out things that it needs to do to execute its long-term strategy," Morningstar analyst Ken Perkins said. "But I would say longer term, the story still needs time to play out. Wal-Mart is making some pretty massive investments that I think are the right moves. But the excitement around the shares reflect more of what people are expecting. The overall long-term success is not guaranteed even though they had a good quarter."

The retailer reported net sales of $73.3 billion in its U.S stores during the quarter. Same-store sales -- a metric measuring sales from stores that have been opened for at least one year -- grew 1 percent, and traffic in stores increased by 1.5 percent. It was the seventh-consecutive quarter Wal-Mart U.S. has reported positive same-store sales and sixth-straight quarter of customer traffic increases.

Domestic stores experienced revenue growth in apparel and from increased drug prices, but deflation affected its grocery segment. Net sales at Neighborhood Markets still increased by 7 percent, while Wal-Mart also reported its internal customer experience scores continued to improve.

Executives believe the results show their plan of attracting customers with better trained and paid employees, cleaner stores, a better assortment of products and more fully stocked shelves is working.

"We're making solid progress with our urgent agenda items," Wal-Mart U.S. CEO Greg Foran said during a teleconference with reporters. "Customer-experience scores continue to rise and our investment in wages, training and store improvement are beginning to pay off. Our associates are providing better service, our customers are finding the products they want and they're getting them home in a way that meets their needs."

Edward Jones retail analyst Brian Yarbrough agreed the first quarter results showed the retailer is moving in the right direction. But Yarbrough also said it's important to keep the quarter in perspective.

"In the grand scheme of things we're talking about a 1 percent [increase in same-store sales] here in the U.S," Yarbrough said. "That's not going to cut it longer term for these guys to grow or show any kind of leverage, which is going to lead to earnings growth, because of the higher expenses."

Wal-Mart International sales decreased by 7.2 percent as the retailer reported $28.1 billion in first-quarter revenue. Same-store sales increased in 10 of its 11 international markets with Canada and Mexico remaining the top performing countries. Meanwhile, McMillon said a competitive environment and food deflation significantly affected traffic and same-store sales in the United Kingdom.

Net sales at Sam's Club increased 1 percent to $13.6 billion in the first quarter as the warehouse retail division continues to implement a new strategy. Same-store sales, excluding fuel, were in line with the company's expectations and income from memberships climbed nearly 4 percent.

Wal-Mart's e-commerce business also increased net sales during the quarter, but the 7 percent growth continued a deceleration in the segment. Online sales were better in the U.S. than in other areas around the world, but McMillon said Thursday that growth in e-commerce is "too slow."

Wal-Mart reported sales increases of 8 percent and 12 percent in e-commerce the previous two quarters. Stephens Inc. retail analyst Ben Bienvenu said Wal-Mart must do a better job of delivering more in e-commerce sales.

"If I have a gripe in the quarter, I would've liked to have seen some better e-commerce growth," Bienvenu said. "That's still a piece that's underwhelming particularly given the amount of investment they're putting in place for that business."

But Bienvenu said the quarter remained "impressive" for Wal-Mart as it continues to implement its improvement plans in stores. He said if Wal-Mart can string together similar performances in upcoming quarters "you definitely start to come to the conclusion that they're on the right path."

Wal-Mart expects U.S. same-store sales to increase about 1 percent during the second quarter, which ends July 29. The retailer also expects earnings per share to range between 95 cents and $1.08.

"As a company, we are executing against our strategic priorities, and not only delivering short- to mid-term improvements, but positioning Wal-Mart for long-term success," Chief Financial Officer Brett Biggs said in a prerecorded call for investors. "We still have work to do, however we are pleased that our first quarter results demonstrate continued progress."

Business on 05/20/2016

Upcoming Events