The consumer’s back — for now — and Walmart Inc. is riding the wave.
The retail giant, which has been spending heavily to add digital savvy to its brick-and-mortar bulk, reported a 4.5 percent comparable sales gain in the second quarter — its best showing in more than a decade.
Investors took that strength as a sign that retail can still be relevant in the digital age and is able to convert solid economic growth and low unemployment into real gains at the cash register.
Shares of Walmart shot up 9.3 percent to $98.64, boosting the company’s market capitalization by $24.8 billion to $291 billion.
Up until the mass merchant shot the lights out, investors clearly weren’t ready to give stores a chance. (On Wednesday, the government said July retail sales grew 0.5 percent, topping expectations for a 0.1 percent rise, and retail still got beaten up over a relatively modest net sales at Macy’s Inc.).
Walmart’s unexpected strength jibed well with hopes that the trade tension between the U.S. and China might ease as the two sides appeared to agree to talk again.
Investors, feeling bullish again after worries about currency troubles in Turkey stoked selling earlier this week, sent shares of the Dow Jones Industrial Average, which includes Walmart, up 396.32 points, or 1.6 percent, to 25,558.73.
Walmart’s success in demonstrating that even a massive retailer could still connect and grow, made the weakness of others stand out all the more.
The struggling J.C. Penney Co. Inc., which is searching for a chief executive officer, posted continued sales declines for the quarter and got pummeled on Wall Street, its stock falling 27 percent to $1.76, leaving it with a market cap of just $553.2 million.
And at Dillard’s Inc., the losses continued for the three months and led to a stock market decline of 8.7 percent to $75.80 for a market cap of $2.1 billion.
Here, a closer look at what went right and what didn’t at Walmart, J.C. Penney and Dillard’s during the quarter.
Walmart’s second-quarter comp sales rise of 4.5 percent sailed past Wall Street’s consensus estimate calling for just a 2.5 percent gain.
Traffic and ticket growth rose more than 2 percent, an indication of solid market share gains against a backdrop of consumer spending confidence, retail analysts said.
“With today’s report, Walmart has finally returned to the ranks of superior performers,” said Craig Johnson, president of Customer Growth Partners. “The steady rebuilding [chief executive officer] Doug McMillon has led for several years now has slowly been gathering steam, but the moves have been so wide-ranging, it’s taken time to break out. The break-out quarter has now occurred, albeit aided by pent-up winter demand that was unleashed in May.”
Walmart’s adjusted earnings per share of $1.29 for the second quarter, a 19 percent increase over $1.08 per share a year earlier. That beat Wall Street’s consensus estimate of $1.22 per share. Total revenues tallied $128 billion, a 3.8 percent gain over $123.4 billion a year earlier.
Charges related to the company’s sale of its Brazilian business and other one-off items pushed it to net losses of $861 million, down from earnings of $2.9 billion a year earlier.
Besides the strong performance of Walmart’s domestic brick-and-mortar fleet, Walmart U.S. e-commerce sales revved up to post 40 percent growth; Sam’s Club comp store-sales rose 5 percent excluding fuel. The international unit recorded positive comps in its top four markets, U.K., Canada, China and Mexico, where Walmex logged a comp-store sales increase of more than 5 percent.
McMillon said the retailer is working to expand omnichannel capabilities and innovate to save customers’ time. “Two years ago, we had no pickup towers and by the end of this year, we’ll have more than 700,” he said. “We now have more than 1,800 locations with grocery pickup locations and we’re making good progress on activating grocery delivery to cover 40 percent of the U.S. population by year-end.”
The retailer is testing self-driving cars in Arizona for grocery pickup and automated picking capabilities for grocery pickup in Salem, N.H. “Overall, our omnichannel initiatives are contributing to comp sales growth and providing customers with new levels of shopping convenience,” McMillon said.
The ceo ticked off several new brands from the 1,100 that have been added to walmart.com such as Zwilling J. A. Henckels cutlery and cookware, Therm-a-Rest outdoor products, O’Neill surf and water apparel, Shimano cycling products and brands such as Steve Madden that are available on the dedicated Lord & Taylor shop. “We have more work to do on our e-commerce assortment to get to the margin levels we desire and we’re in discussions to bring more key brands to our site,” McMillon said.
Strength in grocery was driven by strong comp sales and traffic in the quarter, health and wellness continued to grow in the low-single-digit range, general merchandise accelerated to midsingle-digits, electronics comped strongly and warm weather boosted traffic and sales in apparel.
Jet.com will open a fresh fulfillment center to offer same-day grocery delivery in New York. A same-day subscription service that fills requests made via text, called JetBlack, is gearing up to serve customers, while at the Outdoor Retailer trade show, two Walmart acquisitions, Spatialand and Moosejaw teamed up to showcase a virtual reality camping experience.
“We’re pleased to have received an unconditional approval by the Competition Commission of India for our acquisition of a majority stake in Flipkart and we continue to work through the approval process regarding the proposed combination of Asda with Sainsbury’s in the U.K.,” McMillon said. “We were pleased to gain regulatory approval in Brazil and closed the sale of 80 percent of that business earlier this month. We continue to partner in the areas where it makes sense. The recent announcement with Microsoft is related to our ongoing digital transformation. Our ongoing relationships with Google, Rakuten and JD.com are productive and we enjoy building win-win collaborations to serve customers more effectively.”
Brett Biggs, executive vice president and chief financial officer, said Walmart expects sales for this fiscal year to increase 2 percent in constant currencies, compared with previous guidance of 1.5 percent to 2 percent growth, while same-store sales are expected to expand 3 percent versus earlier guidance of 2 percent growth, excluding fuel. Adjusted EPS is expected be in the range of $4.90 to $5.05 compared with prior guidance of $4.75 to $5. Wall Street’s consensus was $4.81.
“The updated guidance doesn’t include any assumed change in value in our investment in JD.com. Also, the guidance excludes any impact from our pending investment in Flipkart, as this transaction is yet to close,” he said. “At the time we disclosed the transaction, we estimated a 25 cents to 30 cents negative EPS impact assuming the transaction closed mid-year.”
Previous guidance for consolidated net sales growth of 1.5 percent to 2 percent includes headwinds of about 140 basis points due to the closure of Sam’s Club locations in the U.S. and removal of tobacco from certain clubs. “The other significant change is related to the divestiture of the majority of Brazil, which was not anticipated when we gave sales guidance,” Biggs said. “Given that we won’t be consolidating this entity in the future, we expect a negative impact of approximately 60 basis points, which is included in the updated guidance.” —Sharon Edelson
J.C. Penney, struggling to turn itself around, will be cutting inventory, doubling down on catering to its core middle-aged female customer, and seizing opportunities in categories new to the business, namely baby products, toys and workwear.
The chain plans to reduce inventory by at least $250 million by the end of fiscal 2019, as part of the evolving strategy for the ailing $12 billion department store.
“It is critical for us to better manage our inventory levels, and focus on providing our core customers the assortment and shopping experience she expects from J.C. Penney,” said Jeffrey Davis, Penney’s chief financial officer, who outlined the turnaround strategy just after the company posted poor results for the second quarter, which seemed all the more disappointing in light of the strong results posted this week by Walmart while Macy’s showed good bottom-line improvement.
“Now, more than ever, we must be more intently focused on executing upon fundamentals of our core business. The time for discussion has passed, and the time for action is now,” said Davis during a conference call.
On Thursday, Penney’s reported that its net loss for the second quarter widened to $101 million versus $48 million in the year-ago quarter.
The adjusted net loss was $120 million in the three months ended Aug. 4 compared to $23 million in the year-ago period.
Net sales decreased 7.5 percent to $2.76 billion compared to $2.99 billion in the year-ago quarter due to store closings. About 140 have closed over the past year. Comparable sales increased 0.3 percent with the children’s, jewelry, Sephora, women’s apparel and salon divisions performing the best.
Darkening the outlook was Penney’s lowered guidance for the year. The company is now expecting comps to be flat, and a loss of $1 to 80 cents on adjusted earnings per share.
Penney’s turnaround efforts have been hampered by the recent departure of two key executives — chief executive officer Marvin Ellison left in May to become ceo of Lowe’s, and in July, Joseph M. McFarland, executive vice president and chief customer officer, joined Ellison at Lowe’s as executive vice president of stores. The company also has over $4 billion in debt.
It’s possible Penney’s next ceo comes up with a new set of turnaround strategies and reshapes the management team.
“The board (has) met with highly qualified candidates who have expressed their strong interest to become the next leader of J.C. Penney. The hiring of a new ceo is a top priority of the board of directors,” said Davis.
It’s not all bleak. Women’s apparel, which is critical to Penney’s revival, continues to improve and “outperformed” the total company comp in the second quarter. And there’s room for growth.
In active, “We will continue our expansion…with key brands like Nike, Adidas, Champion and Puma,” Davis said. Big and tall and kids offerings are also being expanded.
“We also have very good, exciting, new brand launches planned this fall to further enhance our women’s apparel assortment and build on the momentum we are experiencing in this critical category,” said Davis. “We know that while our women’s business performs well, the balance of the assortment typically receives a lift ,” through cross-shopping.
Davis also cited substantial improvement in our sales trends across “modern” styles and swimwear, and said that plus sizes are tracking double-digit gains. Liz Claiborne, a Penney’s exclusive, is “continuing to resonate with our core customer,” the executive said.
Other steps being taken:
* Continuing to rebrand salons and “leverage winning strategies in higher-margin jewelry.”
* Launch 500 baby shops later this month.
* Deliver enhanced presentations in workwear and toys.
* Shifting from the buying philosophy from loading up to store capacity to “chasing into demonstrated sales trends.”
“Looking at where we are today, we are taking the necessary steps to mark down and clear excess inventory position across many of our categories, which encompasses more than just seasonal products or fashion misses,” he added. “Improvements to our inventory position will enable us to enhance our store environment…showcase our improved assortment and provide a better shopping experience to our customers.”
Davis suggested that Penney’s quest to expand its customer base to attract younger and trendier customers, came at the expense of its core customers — women in the 45-to-55-plus age range. “We were no longer necessarily having the broad array of merchandise silhouettes that is most important for her.
Penney’s core customer “influences across a broad array of individuals, in their direct family and extended family, across multiple age ranges,” said Davis. “So we need to make sure that we win her, that we have the merchandise that’s important to her, such that she thinks about cross-shopping, not only for herself, but for her family.” — David Moin
Dillard’s Inc. managed to narrow its net losses in the second quarter, but that bottom improvement wasn’t enough to satisfy the department store’s investors or management.
The Little Rock, Ark.-based company posted a net loss of $2.9 million, or $0.10 per share, for the 13 weeks ended Aug. 4, compared with a net loss of $17.1 million during the same period a year earlier.
William T. Dillard 2nd, Dillard’s chief executive officer, admitted that the company was “not happy” with the loss, but pointed to a “positive” 32 percent improvement in year-to-date pretax income.
“We believe this reflects the continued strength of our customers and their interest in our merchandise selections, and it is encouraging as we head into the important back half of the year,” he said.
Net sales at Dillard’s, which has 296 stores across the country, were $1.47 billion, up slightly from a year earlier, with men’s apparel and accessories and children’s apparel leading the way. In contrast, ladies’ accessories and lingerie were slightly below trend.
It said sales were slightly above trend in the Western region, consistent in the Eastern region and slightly below trend in the Central region. — Kathryn Hopkins