Walmart’s Fiscal Fourth-Quarter Results and Outlook Disappoint; US Comparable Sales Performance Continues to Improve

Walmart (WMT) reported disappointing fiscal fourth-quarter results Tuesday that showed improving domestic traffic trends but modest bottom-line expansion. Though the firm’s outlook fell a bit lower than what we were expecting, we don’t expect to make a material change to our fair value estimate for the world’s largest retailer.

Consolidated net sales for its fiscal fourth quarter increased 5.8% from the same period a year ago, with 4.5 percentage points of the increase coming from organic means. Walmart International led the charge in sales growth, advancing 13.1% in the period (8.5% organic), while revenue at Sam’s Club expanded 6.8% (5.4% excluding fuel). Both of these increases, however, lagged the full-year growth pace in the respective segments, suggesting decelerating fourth-quarter revenue expansion. Walmart US showed material improvement, however, with sales increasing 2.4% thanks to positive comparable store sales of 1.5% (including positive traffic). In the same period a year ago, comparable store sales at Walmart US fell 1.8%. Such improved domestic year-over-year performance suggests to us the big-box discount retailer may be getting a better handle on competing with Amazon (AMZN) and dollar-store rivals, which have been gaining traction in the current economy.  

Income from continuing operations for the fourth quarter, however, edged up a very modest 3.4% (5.1% excluding acquisitions and currency) from last year’s quarter as operating-income growth at Walmart US slowed from previous quarters due to lower gross margins (driven by its pricing actions). Excluding fuel, operating income at Sam’s Club advanced 8.3% in the fourth quarter, growing faster than sales (and the segment’s adjusted growth rate for the year). Segment operating income at Walmart International expanded over 15% (compared to 10.8% in the year ago period), even after excluding the impact from acquisitions (Netto stores in the UK and Massmart in South Africa) and currency. Fourth-quarter diluted earnings per share of $1.44 (adjusted for certain tax benefits) missed the mid-point of the firm’s guidance range ($1.42 to $1.48 per share) and analyst expectations of $1.46 per share, despite a lower-than-expected share count (Walmart repurchased nearly 23 million shares in the quarter). Full-year free cash flow also moderated a bit, falling nearly $200 million, to $10.7 billion, from the same period a year ago.

Looking ahead, Walmart expects fiscal 2013 diluted earnings per share from continuing operations to be in the range of $1.01 to $1.06, the mid-point below consensus expectations of $1.05 per share. The firm expects Walmart US comp sales and Sam’s Club comp sales in the fiscal first quarter to range from flat to positive 2% (the mid-point below consensus) and 3% to 5%, respectively. For the full year, Walmart expects earnings per share from continuing operations to be in the range between $4.72 and $4.92, the mid-point below consensus expectations of $4.90 per share.