Walmart delivers uneven growth amid profit pressures

A modest increase in fourth quarter same store sales at Walmart’s U.S. stores marked a sixth consecutive period of growth and helped the company exceed analysts’ profit targets, but a reduced 2016 sales outlook caught some investors by surprise.

Walmart’s total sales increased 2.2% to $129.7 billion, excluding the negative effects of a stronger U.S. dollar. On a reported basis, sales actually declined to $128.7 billion from $130.6 billion. Walmart’s net income as reported fell to $4.57 billion from $4.96 billion and earnings per share fell to $1.43 from $1.53. On an adjusted basis to excluding non-recurring expenses, such as those related to the recent closure of 269 stores globally, earnings per share were $1.49, which was three cents better than analysts’ forecast.

“We continue to be pleased with the fundamental trends. We’re making progress with customers and associates, and feel good about where we’re heading,” said Doug McMillon, Wal-Mart Stores, Inc., president and CEO. “We are improving our stores, adding critical capabilities, and deepening our digital relationships with customers as we work to become the first to deliver a seamless shopping experience at scale. We’ll save our customers not only money but time, and shopping with us will be simple, convenient and fun.”

That proved to be the case at the company U.S. stores in the fourth quarter, if only modestly so, as same store sales increased 0.6%, compared to the company’s guidance offered last fall that comps would be around 1%. Walmart U.S. total sales increased 2.4% to $81.5 billion during the fourth quarter and for the year increased 3.6% to $298 billion. However, operating profits tumbled 17.1% to $5.1 billion and for the year fell 10.5% to $19 billion as Walmart increased investments in hourly pay rates and store experience elevated expenses.

As for the tepid sales growth, Walmart U.S. President and CEO Greg Foran noted that customers benefitted from lower gas prices, but topline pressures were caused by a lack of deflation in meat and dairy products, warm temperatures and delays in IRS tax refund checks at the end of the quarter.

“Overall, we were pleased with our performance over the six week holiday season. We made a strategic decision to sensibly pull back on short-term, deep price investments, as we looked to simplify the experience for both our customers and associates, and shift back towards a more EDLP focus,” Foran said. “Investments in e-commerce fulfillment centers allowed us to extend the shipping cutoff date, and customers took full advantage of Pickup, ordering their gifts online and conveniently picking them up alongside their grocery trips. As we approached the end of the season, customers transitioned from online to in-store, and we delivered, driving strong performance across the box as customers stocked up on last-minute gifts and food for their holiday meals.”

A less pleasing performance was delivered by Walmart’s Sam’s Club division where same store sales excluding fuel fell 0.5% for the quarter and increased 2% for the year. Total sales for the quarter declined 2.2% to $14.5 billion and for the year declined 2.1% to $56.8 billion.

Sam’s Club President and CEO Rosalind Brewer said fourth quarter comps were below expectations but noted that severe winter storms significantly disrupted approximately 200 clubs towards the end of the quarter, accounting for an impact of about 30 basis points.

“That said, we know that our core comp performance can improve - and it will,” Brewer said, citing work underway to improve business fundamentals in the areas of membership and merchandising.

Walmart’s international division also had a challenging quarter and bore the brunt of the strong U.S. dollar. Sales is the quarter declined 9.7% to $32.7 billion and for the year declined 9.4% to $123.4 billion. Operating income fell 19% to %1.7 billion in the quarter and fell 13.4% to $5.3 billion for the year. Excluding the effects of currency, sales increased 3.3% to $37.4 billion in the quarter.

“Currency exchange rate fluctuations had a significant impact of $17.1 billion on our reported results, by far the largest one year impact in our history, resulting in a net sales decline of 9.4 percent on a reported basis,” said Walmart International President and CEO David Cheesewright.

The increased expenses and currency challenges that negatively affected Walmart in 2015 aren’t going away in 2016 which is why the company offered a bleak outlook that seemed to catch some investors off guard.

“In October, we guided that on a constant currency basis, net sales would grow 3% to 4% annually over the next three years. Excluding the impact of the recently announced store closures and the continuing impact of a strengthening U.S. dollar, our fiscal 2017 sales growth guidance would have remained in that same range,” said CFO Brett Biggs. However, including store closures and the impact of the strengthening U.S. dollar, we now expect net sales growth to be relatively flat in fiscal year 2017.”

That outlook caused Walmart shares to tumble in early trading, but as a consolation the company said it would increase its dividend 2% giving it an annual payout of $2 a share, up from $1.96 last year. It was the 43rd consecutive year Walmart has increased its dividend, prompting Biggs to state, “We are proud of our performance, strong balance sheet and consistent cash flow that enables us to generate significant returns to shareholders while investing for the future to improve our stores, innovate through new initiatives and strengthen digital relationships with our customers.”