Walmart Stores Inc. (WMT, Financial) recently reported its first-quarter results for fiscal 2016 with earnings that were in line with the consensus estimate while revenues missed the mark. The retail giant posted 6.4% year-over-year decline in earnings to $1.03 a share, with positive comparable-store sales at Walmart in the U.S. being offset by a drop in sales at the company’s international business and Sam’s Club as well as lower operating income for the quarter. Foreign currency headwinds also ate into Walmart’s Q1 earnings by $0.03 a share. Following the results, Walmart shares fell over 4% to close at $76.43.
High investments in ecommerce, wages drag earnings
Walmart reported revenues of $114.8 billion for the first quarter of fiscal 2015, down 0.1% year over year and missing the consensus estimate of $116.26 billion. The company said that negative foreign currency headwinds depleted sales for the quarter by around $3.28 billion. On a constant currency basis, revenues were up 2.7% for Q1 2016. While net sales accounted for $114.0 billion of the company’s total first quarter revenue, Walmart logged revenues of $824 million from membership and other income, up 3.9% year-over-year. Global online sales also increased 17% year-over-year during the quarter. However, higher wages and greater ecommerce investments dragged Walmart’s Q1 earnings, with operating income declining to $5.81 billion during the quarter.
Segment wise, Wal-Mart US reported 3.5% year-over-year growth in net sales to $70.2 billion in the quarter, while operating income slipped 6.8% to $4.6 billion. The company saw 1.1% growth in same-store sales, within the company’s expected range of 1%-2%, compared to a decline of 0.1% in the year-ago quarter. At the same time, the company saw a second successive quarter of positive comparable-store traffic, with a 1% year-over-year growth, while average ticket size grew 0.1%. Further, online sales contributed to 0.2% of comparable-store sales growth during the quarter. At Wal-Mart International, net sales dropped 6.6% year-over-year to $30.3 billion, while operating income declined 11% to $1.1 billion during the quarter. At Sam’s Club, the company saw 3% decline in net sales to $13.5 billion, while operating income also dropped 8.6% year-over-year to $0.4 billion. The segment saw 0.4% growth in comparable-store sales compared to a drop of 0.5% in the year-ago quarter. However, the growth was below the company’s expectation of 1%-2% growth for the quarter owing primarily to 0.2% decline in comparable-store traffic.
Wal-Mart, which competes with other retailing giants such as Costco Wholesale Corporation (COST, Financial) and Target Corporation (TGT, Financial), paid total dividends of $1.6 billion during Q1 2016, higher than the year-ago quarter’s $1.5 billion. However, the company bought back shares worth only $280 million, compared to the repurchase of shares worth $626 million in the prior-year quarter.
Outlook for FY2016
Following the results, Walmart also announced its guidance for the second quarter of fiscal 2016. The company expects investments in training and the new wage structure to reduce earnings by $0.04 a share, while foreign currency headwinds are also likely to eat into earnings by another $0.04 a share. Consequently, the company projected its second quarter earnings to be in the $1.06-$1.18 a share. This compares poorly to the year-ago quarter’s earnings of $1.21 a share. Further, Walmart projected relatively flat growth in comparable-store sales at around 1%, while comparable-store sales growth at Sam’s Club is also expected to be flat to around 2% up compared to the year-ago quarter.
For the full-fiscal 2016, Walmart expects continuing investments in ecommerce as well as training and higher wages to pull down earnings by nearly 26-29 cents a share. Consequently, the company expects to post earnings in the range of $4.70-$5.05 for the full-fiscal 2016. This compares to the previous fiscal’s earnings of $5.07 a share. While Walmart foresees 1%-2% growth in sales for FY2016, foreign currency headwinds are expected to impact sales by around $10 billion for the fiscal.
Final thoughts
Walmart reported rather lackluster results for Q1 2016, as was anticipated by experts and investors alike. While earnings were in-line with estimates, revenues fell short while also falling on a year-over-year basis. While the company’s continued investment in higher wages, training and ecommerce might reap benefits in the long term, it is expected to eat into near-term earnings. At the same time, Walmart is still grappling with negative foreign currency headwinds that have depleted revenues significantly in the recent few quarters. Although the market is still bullish regarding the company’s prospects, experts are looking at a rather low average annual earnings growth rate of 4.9% for Walmart over the next five years, with a significant drop at the end of fiscal 2016. Consequently, the Walmart stock currently carries a "hold" guidance.
