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Wal-Mart (WMT) Q3 Earnings Beat on Comps, Revenues Miss

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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, 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%.

Segment Details

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.

WAL-MART STORES Price, Consensus and EPS Surprise


WAL-MART STORES Price, Consensus and EPS Surprise | WAL-MART STORES Quote

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%.

Fiscal 2017

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%.

Our Take

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.

Zacks Rank

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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