Wal-Mart (WMT) announced mixed third-quarter fiscal 2012 results Tuesday that came in roughly in line with the mid-point of its previously-issued earnings guidance. Though we were disappointed by weak traffic trends in the quarter, we’re holding the line with our fair value estimate for Wal-Mart.
Net sales increased 8.2% (6.8% constant currency) from the same period a year ago, as comparable sales in the US and Sam’s Club jumped 1.3% and 5.7%, respectively – the latter excluding fuel. This compares to a negative US comp and 2.4% for Sam’s Club in last year’s quarter. The major driver behind the positive reversal in US comps (they had been negative for the previous nine quarters) was an increase in the average ticket, not from improved traffic—something we view negatively for Wal-Mart in light of encroaching competition from discount dollar stores—Dollar Tree (DLTR), Dollar General (DG)—and online retailers like Amazon (AMZN). However, we view the general increase as a positive datapoint for the economy, as the low-end consumer, weighed down by high unemployment, is spending more. Though US traffic performance was somewhat of a disappointment, Wal-Mart International had a nice showing led by China, Mexico and Argentina, with revenue jumping 20% (15.3% constant currency) from last year’s quarter.
Wal-Mart’s segment operating income advanced 5.1% in its US stores, 6.3% at Sam’s Club, and 14.2% at Wal-Mart International. However, excluding fuel and adjusting for currency, the operating-income growth at Sam’s Club and Wal-Mart International was more subdued, respectively. All-in, consolidated operating income increased 4.8%, which includes a currency tailwind (excluding currency, the growth came in at 3.9%). Income from continuing operations fell 2.5% due to a higher tax rate, but on a diluted basis, it came in at $0.97, which roughly hit the mid-point of the guided range of $0.95 to $1.00 for the period. Wal-Mart was able to hit its target due in part to its aggressive share repurchase program. During the third quarter, the firm returned $2.7 billion to shareholders through dividends ($1.3 billion) and stock buybacks ($1.4 billion).
Looking ahead to the holiday quarter, Wal-Mart guided fourth-quarter fiscal 2012 to the range of $1.42 to $1.48 (consensus was at $1.45), which is roughly $0.08 better than what it achieved in the same period a year ago (excluding a $0.07 tax benefit). Management also suggested that US comps would remain positive and hit the range of flat to up 2% (this compares to a fall of 1.8% last year), and we suspect most of this will come from the firm’s price investment strategy. Comparable sales, ex fuel, at Sam’s Club are expected to rise as much as 6% in the holiday quarter, which compares to a 2.7% jump last year. We think Wal-Mart is fairly valued at these levels.