Wal-Mart Stores Inc. (WMT - Free Report) reported mixed third-quarter fiscal 2017 results, wherein earnings exceeded the Zacks Consensus Estimate, while revenues marginally missed the same. Unfavorable currency and higher investments in wages and e-commerce activities took a toll on the company’s results. Shares declined about 1.25% in pre-market trading as the company narrowed its earnings view for fiscal 2017.
Wal-Mart’s third-quarter fiscal 2017 adjusted earnings (excluding non-cash gain from the sale of Yihaodian in China and tax impact of that gain) of 98 cents per share beat the Zacks Consensus Estimate of 96 cents by 2.1% probably on higher comps. Earnings were within management’s guided range of 90 cents to $1.00 per share.
However, the figure declined 4.9% from the year-ago earnings from continuing operations of $1.03 per share. Though the company reported higher sales at Wal-Mart U.S. and Sam’s Club, a decline in sales at the international business resulted in the year-over-year fall in earnings. Currency headwinds also impacted earnings by 3 cents per share.
Quarter in Detail
Total revenue of the retailer came in at $118.2 billion (including membership and other income). The figure missed the Zacks Consensus Estimate of $118.5 billion by 0.3% but increased 0.7% year over year. Currency depleted sales by approximately $2.14 billion. The decline in the International business was more than offset by growth in sales at Wal-Mart U.S and Sam’s Club divisions.
On a constant currency basis, revenues rose 2.5% to $120.3 billion. E-commerce sales increased approximately 20.6% globally on a constant currency basis. However, e-commerce growth was higher than the preceding quarter’s growth of 11.8%.
Total revenue comprised net sales of $117.2 billion (up 0.5% from the year-ago quarter) and membership and other income of $1.0 billion (up 23.8% year over year).
Operating income declined 10.4% to $5.12 billion in the reported quarter. This includes last year's lease accounting benefit of $156 million and currency impact of $134 million. Excluding this gain, consolidated operating income fell 7.9% as the company continued to invest in people and technology.
Higher investment in e-commerce initiatives 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, alongside the impact of negative currency. On a constant currency basis, operating income decreased 8.1%.
Wal-Mart U.S.: The segment posted net sales growth of 2.5% to $74.6 billion in the reported quarter, including the impact of fuel sales. Operating income, however, declined 11.3% to $4.0 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 Oct 28, 2016 increased 1.2% compared with 1.5% comps growth in the prior-year quarter. This was the ninth consecutive quarter of positive comps. Comp sales growth was in line with the company’s expectations of around 1%−5% increase. While comp traffic rose 0.7%, average ticket increased 0.5% 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 5.2%, with strong customer growth. E-commerce sales positively impacted comp sales at Wal-Mart U.S. by 0.50% in the quarter.
Wal-Mart International: Segment net sales, including fuel sales, declined 4.8% year over year to $28.4 billion. The same, however, increased 2.4% on a constant currency basis to $30.5 billion. Operating income, on the other hand, went up 1.2% to $1.4 billion. On a constant currency basis, it rose 11.2%.
Sam’s Club: The segment, which comprises membership warehouse clubs, posted net sales growth, including fuel impact, of 1.1% to $14.2 billion. Sam’s Club operating income, however, decreased 26.5% to $396 million in the quarter.
Sam’s Club comps, excluding the impact of fuel sales, rose 1.4% compared with 0.4% growth in the prior-year quarter. Comp sales growth was better than the company’s expectations of slightly positive comps. While comp traffic decreased 0.5%, average ticket increased 1.9%. E-commerce sales positively impacted comps by approximately 0.6% in the quarter.
Other Financial Updates
Wal-Mart ended the quarter with cash and cash equivalents of $5.94 billion, total long-term debt of $36.2 billion, long-term capital lease obligations of $5.9 billion and shareholders’ equity of $80.5 billion.
During the nine months period ended Oct 31, 2016, Wal-Mart generated cash flow from operations of $19.6 billion and incurred capital expenditures of $7.5 billion, resulting in free cash flow of $12.2 billion.
Wal-Mart paid $1.5 billion in dividends during the quarter. The company repurchased about 20 million shares worth $1.4 billion in the quarter, with shares worth $11.3 billion remaining out of $20 billion authorized in Oct 2015.
Fourth-Quarter Fiscal 2017
Wal-Mart expects U.S. comp sales growth in the range of 1%−1.5% for the 13-week period ending Jan 27, 2017. Sam’s Club comp sales, without the impact of fuel sales, are expected in the range of 1%−1.5%.
The company has narrowed its fiscal 2017 guidance to reflect the impact of the gain from the sale of Yihaodian in China. Wal-Mart now expects its adjusted earnings in the range of $4.20−$4.35 per share, compared with $4.15−$4.35 projected earlier. Earnings are, however, anticipated to be lower than $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.
The company now expects full-year effective tax rate in the range of 31%−32%. Previously, management anticipated tax rate at the low end of the guidance range of 31.5%−33.5%.
Despite the company’s efforts to boost 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 #3 (Hold).
Some better-ranked stocks in the retail sector are Foot Locker, Inc. (FL - Free Report) and Boot Barn Holdings, Inc. (BOOT - Free Report) . Both these stocks hold a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
While Foot Locker carries an expected long-term earnings growth of 9.88%, Boot Barn has an expected earnings growth of 14.5%, for the next three to five years.
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