It’s not often a company with the size and scale of Wal-Mart makes a big move on Wall Street, but that doesn’t mean it can’t happen. Following its third-quarter earnings report, shares of the retailer rocketed more than 10 percent on Thursday to an all-time high of $99.62.
Wal-Mart Stores‘ increasingly upscale orientation is getting clearer. While it may sound incongruous for the retailer, which lived and died by its Every Day Low Cost and Every Day Low Price strategies for years, president and chief executive officer Doug McMillon left little doubt of Wal-Mart’s high-end ambitions during Thursday’s fiscal 2018 third-quarter earnings call.
Wal-Mart’s e-commerce platform exploded with a 50 percent surge in net sales in the third quarter ended Oct. 31, over last year’s period, and contributed an 80 basis-point lift to comp-store sales. McMillon said Wal-Mart’s “recent agreement with Lord & Taylor is a great example of how we’ll be creating specialty experiences that complement what we offer and serve customers with the brands they want.
“We’re making good progress attracting premium brands to the site such as KitchenAid and Bose,” he added. “We’re continuing to expand our tests of same-day and next-day delivery, including our test with August Home, and the use of crowdsourced partners for grocery and our own associates. The acquisition of Parcel brings us the ability to deliver items in New York and other major metropolitan areas on the same or next day.”
Jet.com, which Wal-Mart acquired for $3.3. billion, continues to position its business to focus on higher-income, urban customers, McMillon said, adding, “We launched the Uniquely J private brand on Jet.com and began selling ModCloth items on Jet this quarter. In addition, we’ve started to attract more premium brands to Jet, and we expect this to continue.”
But while the Bentonville, Ark.-based retail giant beat Wall Street analyst estimates on three key metrics — revenue, earnings per share and comp-store sales — net income tumbled 42.4 percent in the three months ended Oct. 31, to $1.75 billion, from $3.03 billion in the prior-year period.
Earnings per share in the third quarter rose 2 percent to $1, from 98 cents last year, and increased 1.7 percent in the nine months ended Oct. 31 to $3.07. Analysts were expecting 98 cents per share in the quarter. Net sales rose 4.2 percent to $122 billion, over $117.2 billion in last year’s third quarter, surpassing the $121 billion analyst consensus. Net sales rose 2.6 percent for the nine months to $360.6 billion, from $351.6 billion last year.
Gross profit margin declined 29 basis points during the quarter, partly due to continued execution of the price investment strategy. Strong sales and greater operating discipline led to operating income increasing 0.8 percent in the quarter, while the year’s hurricanes, which benefited top-line results, negatively impacted gross margins and SG&A. The net result was a negative impact to segment income of approximately $150 million, the retailer said.
Wal-Mart logged its 13th consecutive quarter of positive comp-store sales results, posting a 2.7 percent increase over fiscal 2017’s third quarter.
Wal-Mart revised upward its fiscal year 2018 guidance, from a previous projection of $4.30 to $4.40, saying it now expects EPS of $4.38 to $4.46. For the 13-week period ending Jan. 26, the retailer expects comp sales to increase between 1.5 and 2.0 percent on a more difficult comparison.
Brett Biggs, executive vice president and chief financial officer, said on the call that Wal-Mart expects its future top-line growth to be fueled by comp-store sales and e-commerce with less emphasis on new units in the U.S. The company’s capital allocations will focus on e-commerce, technology, supply chain and store remodels over new stores and clubs.
Sam’s Club delivered comp-sales growth without fuel of 2.8 percent in the quarter. “We’re especially pleased with the improvement in member traffic, which was up 3.6 percent,” McMillon said.
Ten of Wal-Mart International’s 11 markets delivered strong top-line results and posted positive comp sales, including Walmex, Canada and China, where net sales grew 4 percent. Asda in the U.K., which has been troubled, will have a new leader, Roger Burnley next year.
“Wal-Mart’s 50 percent year-over-year online growth — well ahead of the company’s stated 40 percent target — continues to validate its substantial investments in this critical channel, which includes the purchase of Jet.com,” said Moody’s lead retail analyst Charlie O’Shea. “U.S. revenue increased a meaningful $3.2 billion, although it came at a cost, since Wal-Mart’s aggressive pricing strategy, amid its battle for market share with lower-margin Amazon, coupled with the ongoing investments, depressed both gross and operating margins.
“We expect this pricing environment to continue throughout the holiday season, as the period is shaping up as being potentially more promotional than even last year,” O’Shea said. “As usual, we expect Wal-Mart to largely set the tone on multiple fronts and in multiple categories for the holiday season.”
Unlike Target, which devoted a good part of its third-quarter earnings call on Wednesday to holiday plans, Wal-Mart’s Biggs said only, “The fourth quarter is underway and we’re offering easy access to great products at excellent value heading into this holiday season both in our stores and online.” McMillon added, “We have good momentum in the business, and we are executing within our financial framework. We expect a solid performance for the important holiday season.”