Wal-Mart Stores Inc. is taking on all comers.
Just two weeks after Wal-Mart inked a $3.3 billion deal to acquire Jet.com and strengthen its competitive stance against Amazon, the discount giant turned in solid second-quarter results with a focus on the basics of retail that helped it outshine Target Corp., which reported a 1.1 drop in comparable sales for the quarter on Wednesday.
At Wal-Mart, cleaner stores, improved inventory levels, plus a fast checkout has led to an increase in U.S. sales for the second quarter. Lower gas prices and unseasonably warm weather also helped, pushing traffic higher for the U.S. stores and leading net sales to grow 3.1 percent to $76 billion and comp sales up 1.6 percent. Total company revenue for the three months increased 0.5 percent to $120.9 billion from $120.2 billion a year earlier. That gain helped produce net income of $3.7 billion, better than the consensus estimate for $3.1 billion.
“This was the eighth straight quarter of positive comp sales and our seventh consecutive quarter of positive traffic,” said chief executive officer Doug McMillon.
The retailer said apparel delivered consistently strong performance in areas such as children’s and ladies. The growth in category was attributed to a focus on basics across both the seasonal and the base apparel business.
Kate McShane of Citi Research said, “The bigger takeaway is probably Wal-Mart’s ability to comp [up] 1.6 percent in its U.S. segment vs. negative 1.1 percent for Target during the second quarter and is guiding to a 1 to 1.5 percent range for the U.S. segment vs. negative 2 to flat for Target for the third quarter.”
McShane said Wal-Mart’s results will raise questions regarding Target’s initiatives to develop e-commerce fulfillment options and improve in-store merchandising.
Wal-Mart also reported that U.S. inventory declined about 2.9 percent in the second quarter versus last year. Chief financial officer Brett Biggs said, “By cleaning up our store back rooms, leveraging technology and changing certain processes, we are improving product availability and enabling associates to be on the sales floor serving customers in a more effective way.”
“Wal-Mart inventories are in clean shape at negative 6.5 percent year-over-year, per store,” said Oliver Chen, analyst at Cowen & Co. He was pleased with the company’s results and pointed out that the only reason his rating was at market perform was due to the premium stock price. He acknowledged that the retailer’s steady earnings performance was keeping the stock price from rolling back.
Chen said Target’s slow traffic tempered expectations for Wal-Mart, which caused the exuberant market reaction. “The improved service and the investment in people is paying off,” said Chen. “Service is mattering more than ever.”
Overall, analysts and investors seemed pleasantly surprised with Wal-Mart’s second-quarter performance and ability to beat the estimates. The U.S. market seems to be on solid ground, while the International business is lagging.
Wal-Mart International net sales fell 6.6 percent to $28.6 billion due to a $2.7 billion currency headwind. However, on a constant currency basis they grew 2.2 percent. Nine of 11 markets posted positive comps, with China and the U.K. turning in weak performance. Wal-Mart believes that its alliance with JD.com will drive improvement in the Chinese market. In the U.K., its strategy is to focus on retail basics to drive down prices and match the fierce competition.
Wal-Mart said that e-commerce gross merchandise values increased 13 percent and sales increased 11.8 percent with the U.S. market stronger than international. The retailer touched on its Jet.com acquisition and warned investors that they are still waiting for government approval and that necessary tech platform changes means customers won’t see updates immediately. Wal-Mart cut a deal this month to acquire online discount retailer Jet.com for $3.3 billion as part of its effort to compete with Amazon.com Inc.
“The recently announced Jet.com acquisition, which we expect to close during the fourth quarter, while unlikely to generate a profit for awhile, provides Wal-Mart with additional ammunition in the intensifying online battle, potentially as early as the back end of the holiday season,” said Charlie O’Shea, analyst at Moody’s Investors Services. O’Shea thinks Wal-Mart is making the right long-term investments in its e-commerce business.
McMillon said: “One of the things we like about the technology [Jet] developed is that it rewards customers in real time with savings on a basket of goods and puts them more in charge of the price they pay. This empowers customers in a way that is true to the spirit of Wal-Mart. When customers build a basket of goods online rather than ordering one item at a time, shipping economics are in their favor and ours. Wal-Mart’s advantage has always been in providing the lowest prices on a basket, and Jet has created a unique way to deliver the lowest-cost basket online. It’s important to remember that customers won’t see changes immediately as we await government approval and the necessary tech platform changes, which will take time.”
The stock rose 1.9 percent to $74.30, as the earnings topped most analyst forecasts.
Most analysts covering Wal-Mart have neutral ratings due to the elevated stock price. Earnings per share were $1.21 a diluted share, while adjusted earnings per share totaled $1.07 and were 5 cents above the $1.02 that FactSet analysts projected. This was lower than last year’s $1.08. The adjustment included 14 cents from the sale of Yihaodian in China. Consolidated gross margin increased 53 basis points.
Looking ahead, Wal-Mart is now projecting its fiscal year 2017 earnings to be in the range of $4.15 to $4.35. This is an increase from the previous guidance of $4 to $4.30. Wal-Mart is also forecasting that comp sales for the next quarter ending Oct. 28 will be in the range of 1 to 1.5 percent for Wal-Mart U.S. and slightly positive for Sam’s Club. Last year’s U.S. comp sales increased 1.5 percent for the same period.