Arkansas-based retail giant Wal-Mart (WMT, Financial) came out with the numbers of its fiscal 2015 first quarter, and the digits failed to impress the street as both top-line and bottom-line missed estimates. While several analysts were taken aback by this, for several others this was no shock. Industry experts believe the strong dollar, increase in employee wage, consumer spending habits, as well as softness in the e-commerce space resulted in the not-so-impressive numbers. Here’s a look at the quarter’s numbers and a few other noteworthy areas.
Numbers of the quarter
For the first quarter of fiscal 2015, Wal-Mart reported revenue diluted earnings per share of $1.03 on revenue of $115 billion. The diluted EPS came from continuing operations and was down $0.07 per share compared to prior year period’s $1.10. The bottom-line represented a 7% decline compared to the same period last year, and top-line dropped marginally by 0.12%. On a positive note, gross margin improved 11 bps over the prior year period to 24.7%. All this tricked down to the operating margin as it improved by more than 42 bps to reach 4.9%. However, operating income dropped 8.3%. Absent the effect of currency fluctuations, operating income dropped 6.1%. Foreign exchange rate fluctuations took a toll on the performance of the retail giant.
The fluctuations negatively impacted net sales by approximately $3.3 billion and the effect on the bottom line was $0.03 a share. Apart from currency headwinds, Wal-Mart’s performance was affected by the company’s incremental investment in e-commerce and this pulled down the EPS by $0.02. Another $0.02 drop in the EPS was due to the investment in U.S. associates. Because of all these investments, operating expense increased by 2.8% and interest expense surged by a whopping 45.1%. Nevertheless, Wal-Mart had positive sentiments about the quarter. Doug McMillion, Wal-Mart U.S. CEO, mentioned during the earnings call, “Our objective is to make changes to improve our short to mid-term performance while, at the same time, position the company for the long-term.”
Comps and markets
Wal-Mart delivered positive comps during the quarter as customer response to Neighborhood Markets improved. However, the performance could have been even better. The company expected lower gas prices to boost its sales. But consumers preferred to pay off their debt obligations and put their money in savings instead. Because of this the sales didn’t get much boost. Even Wal-Mart International’s performance wasn’t far off. It posted strong constant currency sales growth, with Mexico and Canada showing great sales numbers.
Update on Sam’s Club
Wal-Mart’s retail warehouse club, Sam’s Club took a beating when it came to comp sales and profit – both the figures came in lower than analyst estimates. On a positive note, during the three month period its membership income was up more than 7%. This clearly shows that the club is winning over the target audience. It’s newly launched service promise improved member acquisition and retention. Even the investment in Club Pick-up and e-commerce have started paying off. Wal-Mart management is on its toes and is doing all in its control to make the warehouse club report more consistent progress.
The e-commerce situation
Finally, turning to e-commerce, the segment took a toll on the company’s performance. But analysts and industry experts are all very optimistic about the long term prospects of the business. While the e-commerce market witnessed some softness, it still witnessed double-digit comps growth across various departments. Wal-Mart’s focus has always been on convenience and e-commerce plays an extremely crucial role in delivering that to the end consumers. Greg Foran said “Our customers are using their mobile devices to access our site on the go. Mobile traffic was up over 100% for the quarter, and we saw higher conversion rates as well. We continue to learn from our grocery home shopping tests where we recently added another location to the Huntsville, Alabama market” during the first quarter earnings call. For the period, e-commerce contributed 20 bps to overall comps.
Several headwinds bogged down Wal-Mart during the quarter and some of them, such as stronger dollar and heavy investments, will continue to put pressure on the performance numbers during the year. However, the first quarter earnings clearly suggest the company is making progress in getting back its customers. Once the company gets the fundamentals are in place, the company will be in a much better position in terms of comps and overall performance.
