Warm Weather, Food Prices Pull Down Wal-Mart’s Sales

Online sales rose to 20.6% aided by investments in technology and manpower

w1Retailing behemoth Wal-Mart Stores Inc. (NYSE: WMT) announced its Q3 FY17 financial results on November 17th, 2016.

The Bentonville Arkansas-based Company operates retail stores in various formats around the world through three reportable segments: Wal-Mart U.S., Wal-Mart International, and Sam’s Club. The Wal-Mart U.S. segment includes the company’s mass merchant concept in the U.S., operating under the Walmart or Wal-Mart brand, as well as walmart.com. The Wal-Mart International segment includes numerous formats of retail stores, restaurants, wholesale clubs, including Sam’s Clubs, and various retail websites that operate outside the U.S. The Sam’s Club segment includes the warehouse membership clubs in the U.S., as well as samsclub.com. Each week, nearly 260 million customers and members visit its 11,539 stores under 63 banners in 28 countries and e-commerce websites in 11 countries.

With FY16 revenue of $482.1 billion, Wal-Mart employs about 2.4 million associates worldwide. Read more about Wal-Mart’s financial results below.

Q3 FY17 financial highlights

During Q3 FY17, Wal-Mart’s total revenue slowed down to just 0.7% to $118.2 billion versus $117.4 billion in the year-ago period. On a constant currency basis, total revenue grew 2.5% to $120.3 billion versus $117.4 billion in the year-ago period. The Company’s Chief Financial Officer, Brett Biggs, said that revenue growth was stunted due to lower-than-expected quarterly sales at established U.S. stores, with declining food prices and warmer-than-usual weather curbing demand for seasonal items. Wal-Mart, which generates 55% of its sales from grocery, saw pressure on prices lowered comparable sales in grocery by 1.5%.

Source: Wal-Mart
Source: Wal-Mart

Wal-Mart’s Q3 FY17 net sales grew 0.5% Y-o-Y to $117.17 billion on a reported basis and by 2.3% Y-o-Y to $119.31 billion on a constant currency basis. Globally, on a constant currency basis, e-commerce sales and GMV increased 20.6% and 16.8%, respectively, representing continued acceleration.

Excluding Yihaodian, GMV increased 28.6% during the reporting quarter. Consolidated operating income decreased 10.4% Y-o-Y due to investments in people and technology, including a two-year, $2.7 billion investment in wages, as well as currency exchange rate fluctuations. Wal-Mart is also making efforts to keep inventory leaner to protect its profit margin from unsold merchandise; as a result, inventory was down 1.7% during the quarter.

During Q3 FY17, Wal-Mart began reaping the benefits of its strategy that included heavy spending to improve physical stores, enhancing e-commerce operations, and executing its omni-channel plan. The company’s strategy helped it deliver a ninth consecutive quarter of positive comps. The Company also focused on building e-commerce capabilities globally with its recent alliance with JD.com in China and acquisition of Jet.com in August 2016 for $3 billion.

Online sales were the brightest spot in Wal-Mart’s Q3 FY17 results. Online sales increased 20.6%, accelerating from the previous quarter, and adding 50 basis points to Q3 FY17 comparable sales, its biggest contribution to date, with the U.S. outperforming other major markets. Prior to Q2 FY17, Wal-Mart’s e-commerce growth had been shrinking for two years. On the other hand, growth in the number of shoppers who came into its U.S. stores slowed, inching up 0.7%. Ahead of the all-important holiday season, Wal-Mart has over 20 million product listings on Walmart.com after lifting a product cap on the site earlier this year that limited listing to around 8 million.

In all, Wal-Mart’s Q3 FY17 net income fell more than 8% to $3.03 billion, or $0.98 per share, from $3.3 billion, or $1.03 per share, a year earlier. Currency negatively impacted Q3 FY17 EPS by approximately $0.03.

Wal-Mart’s year-to-date operating cash flow was $19.6 billion and free cash flow was $12.2 billion, w3both approximately $5 billion higher than the year-ago period, due to improved working capital management, significant inventory improvement, and timing of payments.

Segmental highlights

Wal-Mart U.S.: This segment reported a 2.5% growth in net sales to $74.5 billion in Q3 FY17, versus $72.71 billion in the year-ago period. On the other hand, comp sales declined to 1.2% from 1.5% in the year-ago period. Neighborhood Market comp sales increased approximately 5.2%. U.S. store visits rose 0.7%, a decline from a growth of 1.7% a year earlier and 1.2% in Q2 FY17, while ticket and online sales reported significant growth. On a 2-year stack basis, comp sales and traffic were up 2.7% and 2.4%, respectively. Market food deflation negatively impacted food comps by approximately 150 basis points. Strength in general merchandise and health & wellness was led by home, toys, sporting goods, and automotive. The segment’s operating income fell 11.3% to $3.99 billion during the reporting quarter.

Wal-Mart’s total inventory in this segment declined 2% and comp store inventory declined approximately 6%, while in-stock levels improved. Store growth included net openings of 9 Supercenters (including conversions and relocations) and 18 Neighborhood Markets. The company expanded online grocery to around 35 new markets and to nearly 200 more locations; this service is now available in over 100 markets and nearly 600 locations.

w4Wal-Mart International: This segment reported a 4.8% decline in net sales to $28.4 billion, versus $29.81 billion in the year-ago period. Excluding currency impacts, net sales grew 2.4% to $30.5 billion, versus $29.8 billion in the year-ago period. The segment’s operating income grew 1.2% to $1.3 billion during Q3 FY17. Excluding currency impacts, operating income grew 11.2% to $1.4 billion during the reporting quarter.

During Q3 FY17, 10 of 11 markets reported positive comp sales, while 7 of 11 markets had comp sales greater than 4%. Focus markets of Walmex, Canada, and China reported robust growth. Currency exchange rate fluctuations negatively impacted net sales by $2.1 billion.

Sam’s Club: This segment reported a 1.1% rise in net sales to $14.2 billion versus $14.0 billion in the year-ago period. Comp sales excluding fuel grew 1.4% during the reporting quarter. Market deflation negatively impacted comp sales, primarily in food, by approximately 110 basis points. Categories such as tobacco, health & wellness, and home & apparel were the top performers. E-commerce sales contributed approximately 60 basis points to comp sales. Club pick-up and the direct to home businesses continue to have strong results.

During Q3 FY17, membership income grew 2.3% led by Savings member growth. Total inventory grew 5.7% led by grocery, tobacco and apparel. Comp inventory rose 4.0% during the reporting quarter.

Other highlights

Preparation for peak shopping season: Wal-Mart has been focusing on making its stores cleaner and faster to shop, with an eye on better customer service. During the critical holiday shopping period, the company is hiring designated holiday helpers to direct shoppers to the shortest checkout line, and open additional registers when the store gets busy. It is also enhancing the shopping experience by doubling the number of product demonstrations it holds to 150,000, and setting up festive selfie-booths. The company has also expanded its online assortment, and will roll out its Black Friday deals on Walmart.com hours before they hit stores on Thanksgiving.w5

To speed up payments, Wal-Mart is in talks with several mobile wallet companies to offer more payment options in its Walmart Pay app. Customers can pay within the app with any major credit, debit, pre-paid, or Walmart gift card. Walmart Pay was launched in December 2015 and can be used in all of the retailer’s 4,600 U.S. stores. Over 90% of transactions on the app indicate customers are using the service more than three to four times a month. U.S. mobile payments accounted for an estimated $67 billion in 2015, and are expected to grow to about $83 billion in 2016, or 24% of all purchases made via smartphones.

Investments in e-commerce: To reverse the deceleration of its e-commerce business and take competition head-on with rival Amazon.com Inc. (NASDAQ: AMZN), Wal-Mart is investing $2 billion over two years to boost e-commerce sales and setting up new fulfillment warehouses to speed up delivery times and increasing the number of products sold on its website.

Agreement to buy Jet.com: On August 8th, 2016, Wal-Mart signed a definitive agreement to acquire Jet.com for approximately $3 billion in cash. Additionally, Wal-Mart will transfer $300 million worth of its common stock over time to Jet.com as part of the transaction. The acquisition, which will enable Wal-Mart to effectively compete with Amazon.com, will complement the Company’s multi-channel strategy already in place to serve customers across the Wal-Mart app, sites, and stores.

The Wal-Mart-Jet.com deal is a win-win situation for both parties since it would also allow Jet.com plans to leverage Wal-Mart’s massive physical store network to grow its online business. Besides the reach and convenience, Wal-Mart’s massive network of physical stores would offer both companies another channel to acquire customers while providing a faster purchasing experience. Jet.com crossed US$1 billion run rate in GMV with over 4 million shoppers on its platform in July 2016. The acquisition is expected to close by the end of December 2016.

w6Share repurchases: Wal-Mart returned just under $3 billion to shareholders through of $1.5 billion and share repurchases of $1.4 billion during the reporting quarter.

Guidance for FY17

Wal-Mart raised the low end of its FY17 estimates, as per which it expects adjusted EPS of $4.20 to $4.35 (previously $4.15 to $4.35) and GAAP EPS of $4.34 to $4.49 (previously $4.29 to $4.49), both of which include an estimated dilutive impact to EPS of approximately $0.05 in Q4 FY17 due to expected operating losses and one-time transaction expenses related to the planned acquisition of Jet.com. The adjusted EPS guidance excludes the non-cash gain of $0.14, net of tax, from the sale of Yihaodian in China to JD.com.w7

Stock Performance

w8Wal-Mart’s stock ended the day at $68.54, slipping 0.94%, at the close on Friday, November 18th, 2016, having vacillated between an intraday high of $69.40 and a low of $68.44 during the session. The stock’s trading volume was at 11,058,063 for the day. The Company’s market cap was at $214.02 billion as of Friday’s close.

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