Wal-Mart Tops Q1 Earnings On Higher Comps & Traffic

Wal-Mart Stores Inc. (WMT - Free Report) reported better-than-expected earnings in first-quarter fiscal 2018, while revenues marginally lagged the Zacks Consensus Estimate. Shares were down 0.16% in the pre-market trading session.

Wal-Mart’s first-quarter fiscal 2018 earnings of $1.00 per share beat the Zacks Consensus Estimate of 96 cents by 4.2% and increased 2.0% from the year-ago earnings of 98 cents on higher comps. Earnings reached the top end of the guided range of 90 cents to $1.00 per share.

Quarter in Detail

Total revenue came in at $117.5 billion (including membership and other income). The figure fell short of the Zacks Consensus Estimate of $117.6 billion by 0.07% but increased 1.4% year over year. Currency impacted sales by approximately $1.21 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 improved 2.5% to $118.8 billion.

Total revenue comprised net sales of $116.5 billion (up 1.3% from the year-ago quarter and up 2.4% on a constant currency basis) and membership and other income of $1.0 billion (up 10.7% year over year).

Operating income declined 0.7% to $5.24 billion in the reported quarter as the company continued to invest in e-commerce initiatives to compete with the online retailer Amazon.com, Inc. (AMZN). Currency had a negative impact of $106 million on the same. On a constant currency basis, operating income increased 1.3%.

Wal-Mart’s shares have rallied 8.7% on a year-to-date basis, higher than the Zacks categorized Retail-Supermarkets industry’s growth of 5.3%.

Segment Details

Wal-Mart U.S.: The segment posted net sales growth of 2.9% to $75.4 billion in the reported quarter, including the impact of fuel sales. Operating income increased marginally by 0.9% to $4.3 billion, despite incurring huge expenses as a result of e-commerce initiatives.

U.S. same-store sales (comps) for the 13-week period ended Apr 28 increased 1.5% compared with 1.0% comps growth in the prior-year quarter. This was the 11th consecutive quarter of positive comps. Comp sales growth reached the top end of the company’s expectations of 1−1.5% increase. While comp traffic improved 1.5%, average ticket declined 0.1% in the quarter. The impact of rising consumer spending was seen in improved traffic during the quarter. e-commerce sales positively impacted comp sales at Wal-Mart U.S. by 0.80%.

Wal-Mart International: Segment net sales, including fuel sales, declined 3.5% year over year to $27.1 billion. The same, however, increased 0.8% on a constant currency basis to $28.3 billion. Operating income declined 0.1% to $1.16 billion. On a constant currency basis, it grew 9.0%.

Sam’s Club: The segment, which comprises membership warehouse clubs, posted net sales growth, including fuel impact, of 2.8% to $13.9 billion. Sam’s Club operating income increased 0.2% to $414 million in the quarter.

Sam’s Club comps, excluding the impact of fuel sales, rose 1.6% compared with a growth of 0.1% in the prior-year quarter. Comp sales growth was better than the company’s expectations of around 1% growth. Comp traffic grew 1.1%, while ticket increased 0.5%. e-commerce sales positively impacted comps by approximately 0.8% in the quarter.

Wal-Mart Stores, Inc. Price, Consensus and EPS Surprise

Wal-Mart Stores, Inc. Price, Consensus and EPS Surprise | Wal-Mart Stores, Inc. Quote

Other Financial Updates

Wal-Mart ended the quarter with cash and cash equivalents of $6.55 billion, total long-term debt of $33.8 billion, long-term capital lease obligations of $6.3 billion and shareholders’ equity of $76.1 billion.

At the end of first-quarter fiscal 2018, Wal-Mart generated cash flow from operations of $5.39 billion and incurred capital expenditures of $1.99 billion, resulting in free cash flow of $3.39 billion.

Wal-Mart paid $1.55 billion in dividends during the quarter. The company repurchased about 31 million shares worth $3.7 billion in the quarter, with shares worth $7.0 billion remaining out of $20 billion authorized in Oct 2015.

Guidance

Second-Quarter Fiscal 2018

Wal-Mart expects U.S. comp sales growth in the range of 1.5−2.0% for the 13-week period ending Jul 28. Sam’s Club comp sales, without the impact of fuel sales, are expected to increase 1–1.5%. The company expects adjusted earnings in the range of $1.00–$1.08 per share.

Fiscal 2018

The company has not provided any update on fiscal 2018 guidance during the current quarter. In fourth-quarter fiscal 2017, the company had forecasted adjusted earnings in the range of $4.20−$4.40 per share, assuming full-year effective tax rate around 32%.

Our Take

Despite the company’s efforts to boost sales and regain investors’ confidence, it still faces many headwinds, which are likely to impact earnings in the near term. Higher e-commerce investments, declining international sales and currency headwinds are also expected to impact the results negatively.

Zacks Rank and Key Picks

Wal-Mart currently carries a Zacks Rank #3 (Hold).

Better-ranked stocks in the retail sector are Rocky Brands, Inc. (RCKY - Free Report) , The Children’s Place, Inc. (PLCE - Free Report) and Sequential Brands Group, Inc. (SQBG - Free Report) . While both Rocky Brands and Children’s Place sport a Zacks Rank #1 (Strong Buy), Sequential Brands carries a Zacks Rank #2 (Buy).

Rocky Brands posted a positive surprise of 42.9% in the preceding quarter. While Children’s Place has expected long-term earnings growth of 8.00%, Sequential Brands has expected long-term earnings growth of 15.0% for the next three to five years.