Investors want to know whether the U.S. momentum is for real

Walmart’s U.S. stores regained customer traffic during the fourth quarter and president and CEO Mike Duke said the company had a great Christmas, but it didn’t feel that way to investors who couldn’t dump shares of the company fast enough after earnings were released on Tuesday.

Total company sales for the quarter increase by 5.8% to $122.3 billion and profits from continuing operations increased 3.4% to nearly $5.2 billion while earnings per share increased 7.5% to $1.44 from $1.34 if one time gains are excluded from both reporting periods.

“We are pleased with Walmart’s earnings performance for both the fourth quarter and the full year,” said Mike Duke, Wal-Mart Stores, Inc. president and CEO. “Today, every segment of our business is stronger than it was a year ago, and we’re in a great position for fiscal year 2013.”

Those figures weren’t good enough for the market, especially the earnings, which were two cents shy of the analysts’ consensus estimate and a sell off ensued. Shares of Walmart had enjoyed a nice run up this year and were trading near a 52-week high at last Friday’s close of $62.48. Walmart reported before the market opened on Tuesday morning and shares opened sharply lower at $60.33. The sell off continued throughout the day and then on Wednesday fell further and by the close of trading Thursday were down to $58.54.

Whether the sell off is justified remains to be seen, but one source of concern is whether the turnaround at the company’s U.S. stores division is for real. The 1.5% comps increase that was reported for the fourth quarter was a sequential improvement from the 1.3% gain in the third quarter that ended two years worth of negative numbers, but both figures were aided by inflation in food categories. In addition, inventory growth of 8.5% was well in excess of sales growth and gross margins were flat while expenses increased.

The company reported that its full-year return-on-investment declined to 18.6% from 19.2% and cited a number of factors as adversely impacting the metric, such as investments in property, plant and equipment, global e-commerce and higher inventories. Also noteworthy was mention that price investments were made ahead of full realization of productivity improvements and that in future quarters productivity gains are expected to more closely align with price investments.

As in the past, Duke asserted that Walmart remains the best positioned global retailer and touched on progress made in the United States where divisional president and CEO Bill Simon and chief merchandising office Duncan Mac Naughton have spent the past year implementing a back-to-basics strategy focused on asserting price leadership, controlling expenses, enhancing product assortment and ensuring products are on shelves. Progress on all those fronts is why Duke said Walmart had a great Christmas and, “the plan that Bill and his team put in place a year ago was the right plan.”

Duke said Walmart would continue to lower prices in the coming year and that positive trends will continue.

“Our price leadership is making a difference across the United States, as many families are settling into a new normal. Core customers remain cautious about their finances, and they rely on Walmart’s EDLP promise to help them manage through today’s economic challenges.”

While the comps increase was noteworthy and toward the upper end of the company’s guidance range that called for flat to a 2% increased, the bigger deal was the increase volume of customers who shopped at Walmart during the quarter.

Simon said it was “the first positive traffic quarter in quite awhile” thanks to the addition of 10,000 items to the product mix and advertising that effectively conveyed Walmart’s core value proposition of low prices on a broad and in-stock assortment of merchandise.

“Our business model is working and we continue to drive progress on three major fronts,” Simon said, referring to price leadership, expanded assortment and on-shelf availability.

During the year, Walmart added 119 supercenters and 27 small formats for a total of 9.6 million new square feet. This year, between 210 and 235 new units are planned with 80 to 100 of those being small formats, primarily Neighborhood Markets.

For the year, Walmart’s sales increased 5.9% to $443.9 billion and full-year profits increased 2.7% to $15.8 billion. The company ended the year with 10,130 stores operating under 69 different banners in 27 countries and more than two million employees.