Wal-Mart's Q3 earnings, reported minutes ago, were a masterclass in bottom-line fudgery.
While the company reported a slightly better US comp store sales (ex-fuel even though the fuel impact was none for the quarter), higher than the 0.0% expected, and up from -0.3% a year ago, it appears this was largely due to further liquidations and profit-eating discounts. Because the all important datapoint, the company's EPS did beat expectations by 3 cents at $1.15, the following line that was snuck into the press release explains it all:
... the company's effective tax rate was 31.8 percent, below the previous guidance of around 34 percent, due to certain discrete tax matters. While the company benefited in the quarter from a lower than anticipated tax rate, the benefit was offset by a number of discrete charges.
So what happens if one uses the previously guided tax rate of 34%? One gets a "Consolidated net income attributable to Walmart" number of $3,587 or down $124 million from the reported number. It also means that the EPS beat of $1.15 would actually be a 1 cent miss at $1.11!
Expect the algos to thoroughly ignore this nuance. Also expect everyone to ignore the magic of buybacks, because while WMT reported an as adjusted EPS of $1.15, or the tiniest of increases from a year ago, when WMT reported $1.14, the actual Earnings not per share declined by 0.7% from $3,738 to $3,711. Ah... buybacks.
So if WMT's bottom line was artificially boosted by the oldest trick in the tax book, where did the weakness come from? Here is what it says:
Operating expenses were impacted by an organizational restructuring in the U.K. and the Hurricane Odile losses in Mexico. Net interest expense was impacted as a result of reclassifying certain store leases from operating leases to capital leases.
Finally, while everyone is expecting the US economy to soar in the coming quarters even as growth in the rest of the world grinds to a halt or goes into reverse, WMT is not quite as euphoric. To wit:
"Our earnings per share guidance assumes several important factors, including the economic conditions in several of our largest markets, and a highly promotional holiday season," said Charles Holley, executive vice president and chief financial officer. "As a reminder, our full year EPS guidance includes the four factors we discussed last quarter, which were higher U.S. health-care costs, incremental investments in e-commerce, ongoing investments in Sam's Club, and our effective tax rate. We anticipate our full year effective tax rate will range between 32 and 34 percent.
Highly promotional? Just make up for lower profits with volume: works for Amazon every time, all the time. The bottom line:
"Taking all of these factors into account, we are forecasting EPS for the fourth quarter between $1.46 and $1.56," said Holley," and EPS for the full year to range between $4.92 and $5.02, which compares to our previous guidance of $4.90 to $5.15. These ranges include our estimate of approximately $0.03 per share in charges related to the previously announced future closure of underperforming stores in Walmart Japan."
Which means that the full year guidance on an apples to apples basis was actually cut by 1 cent. As for Wall Street's consensus expectation for Q4, it was 1 cent higher at $1.57. WMT better get quite creative with those Q4 taxes. Or not:
"While historically our tax rate tends to moderate toward the end of the fiscal year, it is important to remember that assessments of certain tax contingencies, valuation allowances, changes in tax law, outcomes of administrative audits and the impact of discrete items could affect our rate," added Holley. "We are monitoring progress in Congress with respect to the extension of certain U.S. income tax legislation that expired at the end of calendar year 2013, which if not passed, could drive our effective tax rate toward the high end of our estimated range for the full year.
Which means that WMT can just blame the Q4 miss on Congress not passing the desired tax laws.
And that concludes our masterclass in EPS gimmickry.
