Wal-Mart Stores Inc (NYSE:WMT) is rallying Thursday morning on a second straight positive earnings report — amid a lousy season for retail, no less. WMT stock bears might be forced to admit it: This looks like a turnaround.
Back in mid-February when Walmart unveiled fiscal fourth-quarter results, investors had good reason to think the comeback effort being led by CEO Doug McMillon was finally getting traction. Although sales fell a bit short of expectations and per-share profits were down by a fair amount, earnings topped expectations. Best of all, same-store sales were up 1.8% versus estimates of only 1.3%.
Walmart stock jumped 3% on the newfound glimmer of hope then, and though shares ebbed a little a week later (to fill a gap left behind by the jump), shares rallied to record levels when the buying was rekindled in late March.
As it turns out, those investors were right to be encouraged.
The world’s biggest retailer just reported its second consecutive earnings beat, and though sales once again fell just a bit short of expectations, comps were solidly higher.
Walmart Earnings in Focus
For the quarter ending April, Walmart earned $1.00 per share on sales of $117.5 billion. Analysts were calling for earnings of 96 cents per share, down just a bit from the 98 cents per share earned in 2016’s comparable quarter. Those same analysts were also looking for revenue of $117.74 billion, up 1.6% year-over-year.
Same-store sales in the U.S. were higher by 1.4%, versus the company’s guidance for an improvement between 1.0% and 1.5%.
McMillon commented on the company’s first quarter results:
“We delivered a solid first quarter and we’re encouraged by the start to the year. We’re moving faster to combine out digital and physical assets to make shopping simple and easy for customers. Our plan is gaining traction.”
Walmart stock was up 3% in Thursday’s premarket trading on the fact that McMillon’s plan is indeed getting traction.
It was something of a standout quarter relative to most other retailers’ reports, as Amazon.com, Inc. (NASDAQ:AMZN) continued to chip away at traditional brick-and-mortar chains by offering lower-priced merchandise online, often with free (or very cheap) shipping options.
Walmart has been fighting fire with fire, so to speak, allocating $2 billion two years ago to grow its online presence. The expenditures appear to be paying off too, as does the September acquisition of e-commerce newcomer Jet.com.
After the company’s online sales growth pace deteriorated all the way through the end of 2015, its e-commerce arm started to ramp up its growth beginning in the second quarter of 2016 when online sales grew 29% on a year-over-year basis. Last quarter, online sales in the U.S. grew 63%, while the volume of merchandise sold online was up 69%.
A big piece of that e-commerce growth stems from the company’s most recent strategy. That is, Walmart has made a point of matching or beating Amazon’s low-cost shipping offering, sacrificing margins to gain market share. Orders of $35 per more qualify for free two-day shipping.
Other bright spots on the retailer’s income statement include improved operating income on a constant-currency basis (though down when factoring in the adverse impact of foreign exchange rates).
The Minimum Wage Effect
Last quarter’s results also mark the last time Walmart’s payroll expense will look comparatively high.
In January of last year, Walmart upped its minimum wage to $10 per hour for 1.2 million workers. The retailer also put a program in place shortly after that to ensure new hires get raises earlier than they may have in the past.
While it has been an obvious hit with workers, it has been something of a drag on the year-over-year numbers. Walmart’s operating/selling expenses were up 2.2% on a year-over-year basis — to $24.6 billion — exceeding revenue growth. With that added cost now in place for four quarters now, operating expenses will normalize on a year-over year basis.
Looking Ahead for WMT Stock
Walmart’s results, though distinctly better than most other retailers’ first quarter numbers, didn’t come as a complete surprise.
Rival Target Corporation (NYSE:TGT) posted its quarterly results on Wednesday morning, topping both its sales and its earnings estimates. Although sales were down on a year-over-year basis, that was somewhat expected given a myriad of headwinds the company only created for itself. Target suggested it was clear retailers — at least value-oriented staples names –can do OK in the environment. Walmart just confirmed the idea.
For the second quarter of the year, WMT anticipates earnings between $1.00 and $1.08 per share. Analysts were modeling earnings of $1.07 per share for the quarter currently underway, on revenue of $122.73 billion. That income level would match Q2 2016’s per-share profit figure, and would mark another small lift in sales.
Perhaps more important, Walmart believes comps will grow between 1.5% and 2.0% in its United States stores, with Sam’s Club on pace for same-store sales growth of between 1.0% and 1.5%.
They might be low-balled numbers, setting the stage for another bullish surprise three months from now, and continued gains for WMT stock.
While Walmart didn’t address the number in its earnings release, for the full year, those pros are expecting the same tepid progress … a 2% increase in revenue, to $496.7 billion, and earnings of $4.33 per share. Walmart earned $4.32 per share last year.
If it’s going to meet or exceed those growth outlooks, Walmart’s newest initiative — online grocery shopping (complete with curbside pickup service) to fend off discount grocer Aldi, and eventually, Lidl — is going to have to help.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.