The largest U.S. discount retail chain, Walmart (WMT, Financial), reported its third quarter earnings on Thursday, November 13, and the decent set of numbers send a wave of positive news to the stock market which was facing a bumpy ride in the last three days after its rivals, Macy's (M, Financial) and JC Penney (JCP, Financial), reported a bad quarter dragging their stock prices lower than anticipated. In fact, analysts and investors rejoiced after the news came into the market and the best part was that the results did reflect the supremacy of Wal-Mart over its major rivals. Let’s take a sneak peek into the quarter highlights to decipher the major takeaways which indicate that Walmart remains the leader in its sector.
The quarter numbers were an impressive lot
Walmart’s Q3 numbers were a bit better than the analysts’ were expecting, with comparable store sales in the U.S. climbing 0.5% during the quarter. This surge in same store sales came in after the six-quarter streak of flat or declining sales in the region topping expectations for a gain of 0.1%. Truly, the retailer has struggled as many of its consumers have felt pinched economically. Revenue came in at $118.01 billion, somewhat meeting the expectations of the Street that had predicted revenue of $118.32 billion for the quarter. Comp sales for Neighborhood Market format increased approximately 5.5%. U.S. net sales improved $2.3 billion, or 3.4%, to approximately $70 billion.
Earnings improved to $1.15 a share from $1.12 a share forecasted by Wall Street analysts. CEO, Doug McMillon shared, “We're investing in key areas of our business, including wages in our U.S. stores and in e-commerce and mobile capabilities. … Being the price leader is an ongoing priority for us and a commitment to customers. As with every year, that is even more important during the holiday season. We have some things in our favor this fourth quarter, including lower fuel prices in the U.S. and other key markets, and we're set to deliver for customers during this time.”
Looking ahead into the fourth quarter
The fourth quarter guidance does remain a bit weak as the retailer anticipates intense competition during the quarter. Management expects to earn $1.46 a share to $1.56 a share during the quarter, which falls a bit short of analysts’ expectations of $1.57 a share.
In the words of CFO Charles Holley with regard to the guidance meted out for the fourth quarter, “Our earnings per share guidance assumes several important factors, including the economic conditions in several of our largest markets, and a highly promotional holiday season. … As a reminder, our full-year EPS guidance includes the four factors we discussed last quarter, which were higher U.S. health-care costs, incremental investments in e-commerce, ongoing investments in Sam's Club and our effective tax rate.”
For the full year, while analysts are expecting the company to earn $4.99 a share, the company itself projects full-year earnings to be in the range of $4.92 a share to $5.02 a share.
Retaining the leadership positon
In fact it is surprising that while retailers like Macy's and JC Penney accused the weather conditions for the low same-store sales in their third quarter, Walmart’s sales actually picked up in the same quarter. The company saw strong back-to-school results in apparel, home and school supplies which helped in ending the quarter well.
But since the company warns of headwinds in the holiday season, it has taken measures to thwart its increasingly competitive Internet rivals such as Amazon.com (AMZN, Financial). Walmart is making an official price matching offer against such online retailers. Greg Foran, Walmart’s CEO for the U.S., said that this offer was already common at many of the company’s 4,300 domestic stores.
But analysts are a bit worried as this offer will certainly draw more attention of daily shoppers, but it would intensify the price battle with brick-and-mortar stores and the web that could eat away at already thinning margins.
Starting this Friday, November 14, shoppers will be able to request an item’s list price at Walmart.com or any online competitor, and the store managers will have the authority to match that price.
Besides attracting customers by providing price parity, it’s also investing heavily on the coming holidays. Also the company is relying more on online shopping and digital sales and has slowed down the new store openings, especially of its large format superstores. Online sales worldwide have jumped 21% during the quarter, and the company expects it to get even better in the coming quarter.
Walmart has been heard to be overhauling some of its international operations, such as,Seiyu, Walmart’s unit in the difficult Japanese market, announced last month the closing of at least 30 underperforming stores to improve the profitability. Such cost-cutting measures have led to improved net sales internationally which has grown 1.7% to $33.7 billion in the third quarter.
Concluding thoughts
Walmart shares climbed up 3.4% to $81.92 after the retail giant posted improvement in the third quarter top and bottom line. Though the retailer faces several headwinds in the fourth quarter, the strong strategies adopted by the management will surely bear fruit and will aid in building both its top and bottom lines in the upcoming quarters. Investors need to closely watch the company’s moves in the coming months.
