Earnings Review: Wal-Mart Stores

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Wal-Mart Stores (NYSE: WMT), the world’s largest retailer, on Thursday reported its financial results for the third quarter ended Oct. 31. While the company’s third-quarter earnings beat Street estimates by a penny, revenue for the quarter fell short of estimates. Here is a closer look at Wal-Mart's third-quarter results.

A Decent Quarter

The world’s largest retailer reported third-quarter diluted earnings per share of $1.08, in-line with the guidance range of $1.04 per share to $1.09 per share and better than the consensus forecast of $1.07 per share. The retailer had reported earnings of $0.97 per share.

Revenue for the quarter was $113.93 billion, representing an increase of 3.4% over the same period in the previous year. Net sales, however, fell short of the consensus forecast of $114.96 billion.

Sales on the Rise

Wal-Mart's U.S. comparable store sales rose 1.5% in the 13-week period ended Oct. 26. Although same-store sales in the U.S. rose for the fifth straight quarter, they fell short of the consensus forecast. U.S. Same-store sales also slowed from the previous quarter, when the company reported a 2.2% gain.

Wal-Mart International net sales rose 2.4% to $33.2 billion. On a constant currency basis, Wal-Mart's International net sales rose 7.6%. Sam’s Club comparable store sales, excluding fuel, rose 2.7% for the 13-week period ended Oct. 26.

Emphasis on Lower Prices

Wal-Mart's profitability has been hurt by lower prices. However, the company is likely to keep prices lower to lure shoppers during the holiday season. Charles Holley, Executive Vice President and CFO of Wal-Mart said, “Current macroeconomic conditions continue to pressure our customers. The Holiday season is predicted to be very competitive, but we are prepared to deliver on the value and low prices our customers expect.”

Mike Duke, President and CEO of Wal-Mart noted that prices will continue to be a major factor for U.S. customers over the holidays and the company’s strong price position and broad assortment are clear competitive advantages.

While Duke is confident ahead of the crucial holiday season, Natalie Berg of Plant Retail in London noted that WMT’s move to offer its layaway program a month earlier this year may have pulled more holiday sales into the third quarter.

Outlook

Wal-Mart expects fourth-quarter earnings from continuing operations to be between $1.53 per share and $1.58 per share, which is below the consensus forecast of $1.59 per share. The retailer also narrowed its range of full-year earnings guidance to $4.88 per share to $4.93 per share from $4.83 per share to $4.93 per share.

Meanwhile, Wal-Mart also said that it is facing additional allegations of bribery. The company said that allegations of bribery have been brought against it in at least three more countries, which include Brazil, China and India. The retailer is already being investigated by government agencies under the Foreign Corrupt Practices Act (FCPA) on charges that its foreign subsidiary, Wal-Mart de Mexico, paid bribes to Mexican officials so that it could open stores faster in the country.

Shares Attractively Valued

While the bribery allegations have created some uncertainty, WMT shares look attractively valued. In addition, the company’s performance in the U.S., which is by far its biggest market, has been improving. The company’s comparable store sales in the U.S. have now risen for five straight quarters. Although the company is facing margin pressure due to lower prices, the strategy will help in luring customers during the all-important holiday season.

However, investors reacted negatively to the fourth-quarter profit outlook, sending shares down more than 4% in early trading on Thursday. Still WMT’s YTD performance has been impressive. The stock has gained more than 14% this year, easily outperforming the S&P 500.

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Source: stockcharts.com

In terms of valuation, WMT looks attractive at the current level. The stock is trading on a P/E (ttm) ratio of 14.43, which is below the industry average of 19.75. The company’s P/S (ttm) ratio of 0.52 is also below the industry average of 0.93. WMT currently has a dividend yield of 2.32%, compared to Target’s (NYSE: TGT) dividend yield of 2.33% and Costco Wholesale Corporation’s (NASDAQ: COST) dividend yield of 1.17%.

Competition Landscape

Target and Costco are two major competitors of Wal-Mart. While WMT has a market cap of over $200 billion, both Target and Costco are in the $40 billion range. Overall, Costco has a lower EPS and a higher PE than both Wal-Mart and Target.

Target also declared strong third quarter results on Thursday. It saw earnings per share of 96 cents, compared to $1.08 of Wal-Mart's. As its CEO Gregg W. Steinhafel noted in the earnings call, this result has been achieved through "disciplined expense management" as well as through innovative new ideas like CityTarget stores and overall good performance of its credit card segment.


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