On Sep 15, 2014, we issued an updated research report on Wal-Mart Stores Inc (WMT). The retail giant reported second-quarter fiscal 2015 results on Aug 14.
Though the company delivered in-line earnings and better-than-expected revenues in the second quarter after reporting five weak quarters in a row, the company disappointed its investors again by lowering its fiscal 2015 earnings guidance.
The biggest retailer’s fiscal second quarter 2015 adjusted earnings of $1.21 per share matched the Zacks Consensus Estimate, but declined 1.6% from the year-ago earnings of $1.23 per share due to soft comps in the U.S. and Sam’s Club. Operating income also declined in the quarter mainly due to medical cost inflation and higher health care expenses in the U.S. from increased enrollment in health care plans.
Total revenue increased 2.8% to $120.1 billion (including membership and other income) and beat the Zacks Consensus Estimate of $119.1 billion on improvements in the International business, higher neighborhood market sales in the U.S. and strong e-commerce growth.
However, muted same store sales growth, cut in government food stamps and sluggish economic environment continue to hurt the top-line. Currency fluctuations reduced sales by $2.3 billion in the quarter. (Read: Walmart Falls After Cut in Fiscal View, Q2 Earnings In Line)
While Walmart undoubtedly enjoys sound long-term fundamentals such as a huge scale, geographic and product diversities, solid e-commerce business, aggressive cost savings and strong international presence, it has not had the best of times of late.
Walmart has been witnessing sluggish comps in the past few quarters owing to a weak consumer spending environment.Middle-class consumers are struggling to cope with rising gas prices and delayed income tax refunds. In fact, headwinds including higher payroll tax, a reduction in government food benefits in Nov 2013 and severe weather have impacted the U.S. comp sales in the last six months.
Amid sluggish economic scenario and currency headwinds, a major portion of Walmart's future revenue growth is expected to come from international markets. But disappointingly, Walmart has been experiencing weakness in Mexico, Brazil and China, as a result of which its international revenues grew by a mere 1% in fiscal 2014.
In Mexico, the recent slowdown in the economy has been the main reason for Walmart’s dismal sales. In China, which is a strategic market for Walmart, the company has only 405 stores even after 18 years of operation. The company faces problems in understanding discerning Chinese consumers as their buying decisions aren’t always price driven.
To add to the woes, during the second-quarter fiscal 2015 conference call, the company lowered its fiscal 2015 earnings guidance to a range of $4.90 to $5.15 per share from the previous range of $5.10 to $5.45 in anticipation of higher health costs and increased online investment.
Medical cost inflation and increased health care enrollments in the U.S. have increased the costs of the company. During the second quarter fiscal 2015, management stated that more and more U.S. employees and their families are enrolling in its health care plan than expected. The company has thus raised its estimate for U.S. health care costs this year to $500 million from $330 million, previously anticipated.
In addition, the company has been focusing on making huge investments in the e-commerce business in order to compete with other online retailers like Amazon.com, Inc. (AMZN). Walmart's focus on e-commerce will in turn lower profit margin potential because of shipping costs and price competition involved in it.
Walmart currently has a Zacks Rank #3 (Hold).
However, better-ranked stocks in the retail sector include Citi Trends, Inc. (CTRN) and Foot Locker, Inc. (FL). While Citi Trends sports a Zacks Rank #1 (Strong Buy), Foot Locker carries a Zacks Rank #2 (Buy).
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