On Dec 19, 2014, we issued an updated research report on Wal-Mart Stores Inc. (WMT). The retail giant reported third-quarter fiscal 2015 results on Nov 13.
After six weak quarters in a row, Wal-Mart’s earnings came in line with estimates, while revenues were better-than-expected. The company however disappointed its investors again and narrowed its earnings guidance for fiscal 2015.
The biggest retailer’s fiscal third quarter 2015 adjusted earnings of $1.15 per share also increased 0.9% from the year-ago earnings. Positive comps at Wal-Mart U.S., improved performances in Sam's Club and the international business and a lower-than-anticipated tax rate contributed to earnings, which retained within management’s guidance range of $1.10 and $1.20 per share.
Total revenue of the retailer increased 2.9% to $119.0 billion (including membership and other income), driven by improvements in Sam’s Club and the International business, higher Neighborhood Market sales in the U.S. and strong e-commerce growth.
Sales were encouraging as the company delivered positive comp sales of 0.4% driven by relatively balanced growth in traffic and ticket. The positive comps came after weak comps in the past six quarters due to a tough economic environment.
However, operating income, on a constant currency basis, declined 0.4% to $6.3 billion in the third quarter due to a decline in gross margin.
The company also narrowed its fiscal 2015 earnings guidance to a range of $4.92 to $5.02 per share from the previous range of $4.90 to $5.15 in anticipation of higher investments in e-commerce and higher U.S. health care costs, apart from incremental investments in Sam’s Club and volatile tax rates. Not only this, currency headwinds, cut in food stamps and sluggish economic environment can also hurt the top line in the upcoming quarters. Wal-Mart also anticipates a fierce competitive environment ahead of the holiday season. (Read: Wal-Mart's Q3 Earnings In Line, Sales Beat; View Narrowed).
Amid the weak scenario, the company is making efforts to understand the evolving needs of its customers to re-gain their confidence. The company has shifted its investment plans and will lower investment in larger stores, while investing more in e-commerce initiativesto compete with other online retailers like Amazon.com, Inc. (AMZN). However, Wal-Mart's focus on e-commerce will in turn lower profit margin potential because of shipping costs and price competition involved in it.
All said, the company has sound long-term fundamentals such as a wide scale of operations and a strong international presence. Wal-Mart is also taking initiatives like introducing a price matching policy, improving its grocery offerings and announcing lucrative deals to boost traffic at its stores and thereby revive sluggish sales. It is also encouraging that gas prices have reduced, which should increase consumer spending power a bit and may benefit the company and other retailers in the upcoming holiday season.
Wal-Mart currently has a Zacks Rank #3 (Hold).
Some better-ranked stocks in the retail sector include Ingles Market, Inc. (IMKTA) and The Kroger Co. (KR). While Ingles Market sports a Zacks Rank #1 (Strong Buy), Kroger holds a Zacks Rank #2 (Buy).
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