Wal-Mart Warned Us: Weak Consumers Mean Weak Sales
Wal-Mart Stores (NYSE:WMT) stock closed Wednesday’s regular session up a fraction at $78.90, but shares fell as much as 2 percent in early trading Thursday after the retailer reported underwhelming third-quarter results. Consolidated net sales increased 1.6 percent on the year in the three months ended October 31 to $114.876 billion, missing the mean analyst estimate of $116.84 billion. Earnings did beat expectations, though, climbing 6.5 percent on the year to $1.14 per diluted share, edging out the mean analyst estimate of $1.13 per share.
So the earnings are pretty good — sales, not so good. But this result was not entirely unexpected. Wal-Mart management began planting the seeds of weak sales in the second half of the year in the first half of the year, citing economic headwinds that have proven to be particularly adverse for lower-income consumers. Total U.S. sales for the quarter decreased by 0.2 percent on the quarter, or by 0.1 percent excluding the impact of fuel. Over the past 39-week period, total sales were down 0.5 percent, or 0.4 percent excluding the impact of fuel.
“Our most important priority is growing top-line sales, including comps,” said President and CEO Mike Duke on the earnings call. “The retail environment, both in stores and online, remains competitive. At the same time, some customers feel uncertainty about the economy, government, jobs stability, and their need to take care of their families through the holidays.”
Wal-Mart’s return on investment over the trailing 12-month period declined to 17.5 percent from 18 percent. The decline was primarily the result of fixed-asset investments, acquisitions, and an increase in working capital. One of these acquisitions was Yihaodian, a Chinese e-commerce business, which added $314 million in sales.
Looking ahead, Wal-Mart is expecting fourth-quarter earnings in a range between $1.50 and $1.60 per share. This estimate includes the expected impact of the closure of 50 stores in China and Brazil (dilutive to EPS by about 6 cents) and by a change in its retail business arrangement in India (dilutive by about 4 cents). This range is below the current mean analyst estimate of $1.69 per share.
For the full year, earnings are expected in a range between $5.01 and $5.11 per share, a range that is also below the current mean analyst estimate of $5.20 per share.
Charles Holley, Wal-Mart’s CFO, said that the company anticipates “continued pressure on sales, as consumers face tough economic conditions around the world and the competition remains aggressive for every holiday purchase.”