Image Source: Mike Mozart
Walmart’s US operations turned in its best two-year comp sales stack in nine years, and e-commerce sales continue to advance at an impressive double-digit rate. Solid top-line growth is expected to continue in fiscal 2020.
By Kris Rosemann
Retail giant Walmart (WMT) finished fiscal 2019 (ended January 2019) on a strong note thanks to a solid economic environment and progress on its growth-accelerating initiatives in its fiscal fourth quarter, results released February 19. Total revenue advanced 1.9% as reported and 3.1% in constant currency on a year-over-year basis. Walmart US comp sales grew 4.2% from the year-ago period, driven by a 0.9% rise in comp traffic and 3.3% growth in comp ticket, and US e-commerce sales jumped 43% from the comparable period of fiscal 2018 due to the expansion of grocery pickup and delivery in addition to the growing assortment of products available on Walmart.com. Walmart US’ two-year stack of 6.8% comp sales growth marked a nine-year high-water mark for the segment.
Walmart International sales increased 2.7% in constant currency on a year-over-year basis in its fiscal fourth quarter, but the figure fell 2.3% on an as-reported basis. The segment reported positive comp sales growth in Mexico, the UK, and Canada, which represent three of its four largest international markets, but comp sales in China were weighed down by a shift of the Mid-Autumn Festival, increasing competition, and slower economic growth, as comp traffic gains were more than offset by a lower comp ticket. Sam’s Club comp sales advanced 3.3% from the year-ago period due to a 3.1% decline in comp ticket only partially offsetting a 6.4% increase in comp traffic growth.
Walmart’s gross profit margin contracted 21 basis points from the year-ago period in its fiscal fourth quarter. Gross profit pressure in the US came via mix effects from e-commerce, its planned pricing strategy, and higher transportation costs, while its international business’ gross margin was weighed down by the impact of the recent Flipkart acquisition, which is working to combat new e-commerce regulations in its home country of India, and currency headwinds. Sam’s Club gross profit margin in the quarter was boosted by higher fuel sales margin, the lapping of markdowns and inventory liquidation related to club closings in January 2018, and lower tobacco sales.
Walmart US physical stores leveraged expenses for the eighth consecutive quarter thanks to top-line growth and productivity improvements more than outweighing increased investments in e-commerce and technology. The inclusion of Flipkart provided pressure to Walmart International’s operating profit, but operating expenses as a percentage of net sales on a company-wide basis declined 138 basis points on a year-over-year basis. Adjusted earnings per share, which excludes a one-time charge related to related to US tax reform and an unrealized gain in its equity investment in JD.com, advanced 6% from the year-ago period to $1.41.
In fiscal 2019, Walmart’s operating cash flow faced slight pressure, declining 2% from fiscal 2018 levels, and free cash flow in the year came in at $17.4 billion, a ~5% drop from the prior year as capital spending grew nearly 3%. Free cash flow coverage of cash dividends paid remains strong, and the company returned $13.5 billion to common shareholders ($6.1 billion in dividends and $7.4 billion in share repurchases) in fiscal 2019. Management announced a ~2% increase in its annual dividend for fiscal 2020, and shares now yield ~2.1%. As of the end of fiscal 2019, Walmart held $58 billion in total debt (up from $46.5 billion at the beginning of the year) and $7.7 billion in cash and cash equivalents (up from ~$6.8 billion at the beginning of the year. This significant net debt position provides a drag on its Dividend Cushion ratio, which sits at 1.9 at last check, despite the significant coverage of dividend obligations with free cash flow generation.
Walmart expects fiscal 2020 to bring continued top-line growth, and consolidated net sales in constant currency are projected to be at least 3%. Comp sales growth at Walmart US and Sam’s Club is expected to come in at 2.5%-3% and ~1%, respectively, with both measures excluding fuel sales, while US e-commerce net sales growth is anticipated to remain strong at ~35% on a year-over-year basis. 3,100 grocery pickup and 1,600 grocery delivery locations are expected to be in place by the end of fiscal 2020, which marks a notable increase from 2,100 and 800 such locations, respectively, from the end of fiscal 2019.
Walmart International net sales growth is expected to be ~5% in constant currency in fiscal 2020, and the company expects to add more than 300 new international stores, most notably in Mexico and China, in the fiscal year. Flipkart is anticipated to continue providing a drag on consolidated operating income, which is projected to decline by a low-single-digit rate when including the impact of Flipkart but increase at a low-single-digit rate when excluding Flipkart, in fiscal 2020. Adjusted earnings per share in the year is expected to roughly follow consolidated operating income, with guidance coming in at a low- to mid-single-digit growth rate when excluding the impact of Flipkart. Capital spending is projected to rise to $11 billion (was ~$10.3 billion in fiscal 2019) due to store remodels, customer initiatives, and investments in e-commerce, technology, and supply chain in fiscal 2020.
Walmart’s continued progress in executing its strategic initiatives, consisting mostly of significantly enhanced e-commerce operations, has been notable, and the company’s massive store base may ultimately prove to be a key strategic advantage over Amazon (AMZN), at least in the near term, as evidenced by e-commerce sales growth alongside increased grocery pickup capabilities. Flipkart may continue to provide operating income headwinds in the near term as domestic regulatory issues are ironed out, but the investment in the Indian e-commerce leader remains a key part of Walmart’s long-term strategy due in part to the massive future addressable market it is expected to bring.
We’re not interested in adding exposure to Walmart at this time, due in part to both simulated newsletter portfolios being ‘fully invested’ since December 26. Shares are currently changing hands in the upper half of our fair value range, and we think there are more attractive dividend growth options available for investors seeking income generation. Slow and steady is likely the name of the game for Walmart’s payout growth moving forward, and we prefer our dividend growth ideas to couple strong free cash flow generation, which Walmart has, with a strong balance sheet.
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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.