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Wal-Mart (WMT) Q2 Earnings and Sales Beat on Comps Gain

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Wal-Mart Stores Inc. (WMT - Free Report) reported upbeat second-quarter fiscal 2017 results, wherein both earnings and revenues exceeded the Zacks Consensus Estimate. Revenues also increased owing to an improvement in comps but earnings declined year over year. Unfavorable currency and higher investments in wages and e-commerce activities took a toll on the company’s results. Shares gained more than 3% in pre-market trading.

Wal-Mart’s second-quarter fiscal 2017 adjusted earnings (excluding non-cash gain from the sale of Yihaodian in China) of $1.07 per share beat the Zacks Consensus Estimate of $1.02 by 4.9%. Earnings were within management’s guided range of 95 cents to $1.08 per share. However, the figure declined 0.9% from the year-ago earnings from continuing operations of $1.08 per share. Though the company reported higher sales at Wal-Mart U.S., a decline in sales at the international business and Sam’s Club resulted in the year-over-year fall in earnings. Currency headwinds also resulted in the decline.

Quarter in Detail

Total revenue of the retailer was $120.9 billion (including membership and other income). Revenues beat the Zacks Consensus Estimate of $120.1 billion by 0.7% and increased 0.5% year over year. Currency depleted sales by approximately $2.7 billion. The decline in the International business and Sam’s Club divisions were more than offset by growth in sales at Wal-Mart U.S.

On a constant currency basis, revenues rose 2.8% to $123.6 billion. E-commerce sales increased approximately 11.8% globally on a constant currency basis. However, e-commerce growth was higher than the preceding quarter’s growth of 7%.

Total revenue comprised net sales of $119.4 billion (up 0.1% from the year-ago quarter) and membership and other income of $1.4 billion (up 61.2% year over year).

Operating income grew 1.6% to $6.17 billion in the second quarter. This includes a gain of $535 million from the sale of Yihaodian. Excluding this gain, consolidated operating income declined 7.2% as the company continued to invest in people and technology. Higher investment in e-commerce initiatives in order to compete with online retailer Amazon.com, Inc. (AMZN - Free Report) and in associates through higher wages and training seem to have dampened operating income, along with negative currency. On a constant currency basis, operating income increased 4.2%.

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Segment Details

Wal-Mart U.S.: The segment posted net sales growth of 3.1% to $76.2 billion in the quarter, including the impact of fuel sales. Operating income, however, declined 6.2% to $4.5 billion, as the company incurred huge expenses as a result of e-commerce initiatives and higher wages and training.

U.S.same-store sales (comps) for the 13-week period ended Jul 29 increased 1.6% compared with 1.5% growth in comps in the prior-year quarter. This was the eighth consecutive quarter of positive comps. Comp sales growth was ahead of the company’s expectations of around 1% increase. While comp traffic rose 1.2%, average ticket increased 0.4% in the quarter. Lower fuel prices benefited consumers and the impact was seen in improved traffic during the quarter.

Neighborhood Market comps also increased approximately 6.5%, with strong customer growth. E-commerce sales positively impacted comp sales at Wal-Mart U.S. by 0.40% in the quarter.

Wal-Mart International: Segment net sales, including fuel sales, declined 6.6% year over year to $28.6 billion. The same, however, increased 2.2% on a constant currency basis to $31.3 billion, led by strong performance in Mexico and Canada. Operating income, on the other hand, surged 35.2% to $1.7 billion. On a constant currency basis, it soared 47.5%.

Sam’s Club: The segment, which comprises membership warehouse clubs, posted net sales decline, including fuel impact, of 1.3% to $14.5 billion. Sam’s Club operating income, however, increased 10.3% to $472 million in the quarter.

Sam’s Club comps, excluding the impact of fuel sales, inched up 0.6% compared with 1.3% growth in the prior-year quarter. Comp sales growth was in line with the company’s expectations of slightly positive comps. While comp traffic decreased 0.4%, average ticket increased 1.0%. E-commerce sales positively impacted comps by approximately 0.6% in the quarter.

Other Update

Wal-Mart paid $1.56 billion in dividends during the quarter. The company repurchased about 30 million shares worth $2.12 billion in the quarter, with shares worth $12.7 billion remaining out of $20 billion authorized in Oct 2015.

Guidance

Third-Quarter Fiscal 2017

In the third quarter of fiscal 2017, earnings are expected in a range of 90 cents to $1.00 per share, compared with the prior-year quarter’s earnings of $1.03 per share.

Wal-Mart expects U.S. comp sales growth of around 1% to 5% for the 13-week period ending Oct 28 compared with 1.5% comps growth last year.

Sam’s Club comp sales, without the impact of fuel sales, are expected to be slightly positive.

Fiscal 2017

The company has updated its fiscal 2017 guidance to reflect the sale of Yihaodian. Wal-Mart now expects its earnings in the range of $4.15−$4.35 per share, up from $4.00−$4.30 per share expected previously. It includes an estimated dilutive impact to EPS of approximately 5 cents, primarily in the fourth quarter, as a result of expected operating losses and one-time transaction expenses related to the planned acquisition of Jet.com.

Earnings are, however, anticipated to be lower from $4.57 per share posted in fiscal 2016. The decline in year-over-year growth is due to higher wages and increased spending on e-commerce activities. Higher wages and training costs are expected to negatively hurt earnings by 30 cents per share, while currency is expected to hurt earnings by 10 cents.

The company expects full-year effective tax rate at the low end of the previously stated range of 31.5% to 33.5%.

Our Take

Though the company is making efforts to boost its sales and regain investors’ confidence, it still faces many headwinds, which will reduce earnings in the near term. Higher expenses, lower margins at Wal-Mart U.S. and currency headwinds are also expected to negatively impact results.

Wal-Mart currently carries a Zacks Rank #2 (Buy).

Stocks to Consider

Other well positioned retailers include Boot Barn Holdings, Inc. (BOOT - Free Report) and The Children's Place, Inc. (PLCE - Free Report) . Both hold the same Zacks Rank as Wal-Mart.

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