Sales soft at Walmart, Q3 challenging too

Walmart lowered its full year profit forecast early Thursday after reporting weaker that expected second quarter same store sales at its U.S. division and suggested global economic conditions remain challenging.

Total company net sales increased 2.8% to $116.7 billion on a constant currency basis and profits increased 1.3% to $4.1 billion while earnings per share grew 5.1% to $1.24. That was a penny below the consensus forecast of analysts, although earnings per share included a charge related to international operations that reduced earnings by a penny.

Wal-Mart Stores, Inc., president and CEO Mike Duke characterized the earnings growth as a solid increase and also found a reason to be optimistic about the worse than expected same store sales increase at U.S. stores.

“Consolidated net sales and our Walmart U.S. comp were below expectations,” Duke said. “While the retail environment was challenging across all of our markets, the Walmart U.S. and Sam's Club businesses improved comp sales from the first quarter, and the growth of International sales was consistent.”

Duke said he is, “encouraged by our position to execute in the second half of the year, particularly with the steps we're taking to improve performance. There are areas of our business where we can do a better job, and we will.”

One of those areas is the U.S. stores division where total sales increased 2.1% to $68.7 billion, but same store sales fell for the second consecutive quarter, dropping 0.3% and missing a company forecast of flat to up 2%. The division’s operating profits rose 5.2% to $5.5 billion.

The company said spending was negatively affected by the payroll tax increase earlier this year and a lack of inflation. Slightly fewer shoppers visited its stores with traffic down 0.5% and average transaction sizes growing a modest 0.2%.

“While I'm disappointed in our comp sales decline, I'm encouraged by the improvement in traffic and comp sales as we progressed through the quarter,” said Walmart U.S. president and CEO Bill Simon. “The 2% payroll tax increase continues to impact our customer. Furthermore, we also expected an increase in the level of grocery inflation, which did not materialize in a meaningful way. We were pleased that both home and apparel had positive comps.”

It was a little different story at the Sam’s Club division where sales increased 2.6% to $14.5 billion, same store sales excluding fuel increased 1.7% and operating profits increased 3% to $551 million.

“Sales were up, traffic continued to improve, and comp sales were within our guidance,” said Sam’s Club president and CEO Rosalind Brewer. “Response to our recent membership enhancements has been favorable, resulting in solid membership income growth and positive response to our Instant Savings Book. We were pleased with our improvement in business member traffic, reversing the decrease from the prior quarter."

Walmart’s international division struggled during the quarter, growing sales 2.9% to nearly $33 billion, but operating profits declined 1.3% to $1.47 billion.

“Across our International markets, growth in consumer spending is under pressure," said Doug McMillon, Walmart International president and CEO. "Consumers in both mature and emerging markets curbed their spending during the second quarter, and this led to softer than expected sales. While this creates a challenging sales environment, we are the best equipped retailer to address the needs of our customers and help them save money.”

As a result of worse than expected sales during the first half of the year and still uncertain global economic outlook, Walmart tempered its expectations for full year sales and earnings growth. Same stores sales at the U.S. division are expected to be flat during the third quarter while Sam’s is looking for a gain in the range of flat to 2%.

“Net sales in the first six months were below our expectations, so we are updating our forecast for net sales to grow between 2% and 3% for the full year versus our previous range of 5% to 6%,” said Walmart CFO Charles Holley. "This revision reflects our view of current global business trends, and significant ongoing headwinds from anticipated currency exchange rate fluctuations."

Accordingly, the company reduced its third quarter profit forecast to a range of $1.11 and $1.16, a penny below analysts’ forecast. The full year forecast was reduced to a range of $5.10 to $5.30 compared to an earlier range of $5.20 to $5.40.