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Weak Q3 Earnings for Walmart, Narrows View

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Wal-Mart Stores, Inc.’s (WMT - Free Report) poor run in the first half of fiscal 2014 continued well into the third quarter as well. The retail giant beat the Zacks Consensus Estimate for earnings in the third quarter of fiscal 2014 but missed the same for revenues due to a gloomy consumer spending environment globally. Moreover, the company narrowed its earnings expectations for the fiscal year.

Walmart’s fiscal third quarter 2014 adjusted earnings (excluding discontinuing operations related to Vips restaurants in Mexico) of $1.14 per sharebeat the Zacks Consensus Estimate by a penny. Earnings were up 5.6% year over year and were within the company’s guidance range of $1.11 and $1.16 per share.

Total revenue of the world’s largest retailer climbed 1.7% to $115.7 billion (including membership and other income) but missed the Zacks Consensus Estimate of $116.5 billion. Currency fluctuations reduced sales by $1.6 billion in the quarter. A challenging retail environment in the U.S. as well as in most international markets due to cautious consumer spending also hurt the top line in the quarter.

Total revenue comprised net sales of 114.9 billion (up 1.6% year over year or 2.7% on a constant currency basis) and membership and other income of 0.8 billion (up 12.3% on a year-over-year).

On a constant currency basis, operating income increased 5.0% to $6.4 billion, driven by productivity improvements.

Segment Details

Walmart U.S.: The segment posted net sales growth of 2.4% to $67.7 billion in the quarter, including the impact of fuel sales. Operating income increased 5.8% to $5.1 billion.

U.S. same-store sales (comps) for the 13-week period ending Oct 25 declined 0.3%; much lower than 1.5% growth in the prior-year quarter. Weak consumer spending environment hurt comps in the quarter. However, it was marginally better than the company’s guidance of flat comps. Comp traffic declined while average ticket increased in the quarter.E-commerce sales also positively impacted comp sales in the quarter.

Walmart International: Segment net sales, including fuel sales, increased 0.2% (4.1% on a constant currency basis) to $33.1 billion. Segment sales were softer than management expectations due to sluggish consumer spending environment in both mature and emerging markets.

Currency fluctuations also negatively impacted the sales. Operating income increased 1.7% to $1.46 billion owing to improved operating expense leverage.

Sam’s Club: The segment, which comprises membership warehouse clubs, posted net sales growth, including fuel impact, of 1.1% to $14.1 billion. Net sales, excluding fuel impact, increased 2.1% to $12.4 billion. Sam’s Club operating income grew 9.2% to $0.47 billion in the quarter.

Sam’s Club's comps, excluding the impact of fuel sales, grew 1.1% in the quarter as positive traffic increase was offset by decline in average ticket. Same-store sales growth was within the guidance range of flat to 2.0%but lower than comps growth of 2.7% in the prior-year quarter.

FY14 Outlook Lowered

The company expects a challenging sales environment and currency headwinds to continue to hurt fiscal year results. Walmart has revised its adjusted earnings expectations from a range of $5.10 - $5.30 to $5.11- $5.21 per share. The adjusted earnings figure will exclude the impact of closing approximately 50 under-performing stores in Brazil and China. It will also exclude the impact of end of its franchise agreement with India-based Bharti Retail for the retail business.

For the fourth quarter of fiscal 2014, Walmart expects its adjusted earnings to range between $1.60 and $1.70 per share. Walmart expects U.S. comp sales to be relatively flat for the 14-week period ending Jan 31, lower than last year quarter’s growth of 0.3%. Sam’s Club comp sales growth, without the impact of fuel sales, is expected to range between flat and 2% for this 14-week period, compared with last year quarter’s growth of 1.8%.

Other Stocks to Consider

Walmart carries a Zacks Rank #3 (Hold). Other retailers worth considering include Best Buy Inc (BBY - Free Report) , Conn’s Inc (CONN - Free Report) and Gamestop Corp Holding Co. (GME - Free Report) . While Best Buy carries a Zacks Rank #1 (Strong Buy), Conn’s and Gamestop hold a Zacks Rank #2 (Buy).

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