Walmart Jumps 4%, Pushes Dow Futures Higher After Beating, Boosting Guidance

Walmart is trading 4% higher, pushed Dow futures higher, after reporting Q3 earnings that beat expectations on the top and (adjusted) bottom line - in big part due to the recent hurricanes - while boosting Q4 guidance, despite reporting a decline in profit margins.

The company reported GAAP EPS of $0.58, which however management claimed had to be adjusted for a charge of $0.29 for loss on extinguishment of debt in connection with the company's recently completed debt tender offer, a charge of $0.09 based on discussions with government agencies regarding the possible resolution of the FCPA matter, and a charge of $0.04 based on the decision to exit certain properties in one of the company's international markets. As a result, WMT's non-GAAP Q4 EPS was $1.00, beating the $0.97 expected by Wall Street, as well as its own prior guidance of $0.90-$0.98.A major part of the beat, however, was a one time item: as the company said, Hurricane-related impacts benefited comp sales by approximately 30-50 basis points.

Total revenue was $123.2 billion, an increase of $5.0 billion, or 4.2% from a year prior, and higher than the $121.1 billion expected (the number includes $1.04b from membership and other income).

There were less good news in the margin line which declined again: gross margin rate declined 36 basis points in the quarter. "The margin rate was pressured by the continued execution of our price investment
strategy and the mix effects from our growing eCommerce business. In addition, we estimate that hurricane-related impacts contributed to about one-third of the overall decline."

Additionally, WMT's free cash flow continued to decline, and for the 9 month period ended Sept 30, WMT saw FCF decline from $12.322BN in 2016 to $10.152BN in 2017.

Back to the good news, which was mostly in E-commerce, where sales were up 50%, while GMV rose 54%, "mainly driven by Walmart.com", with the company noting it now has more than 1,100 online grocery locations.

Looking at working capital, WMT said that total inventory was flat versus last year and comp store inventory declined approximately 3.5%, while in-stock levels remained high.

WMT's effective tax rate rose from 32.9% one year ago to 33.9%.

Breaking down the results:

The company provided the following merchandise highlights breakdown:

Commenting on the results, Doug McMillon, President and CEO said "Wal-Mart Stores, Inc.We are pleased with the strong results in the quarter across each of our business segments, and I want to thank our associates for their commitment and great work to make it happen. We have momentum, and it's encouraging to see customers responding to our store and eCommerce initiatives. We are leveraging our unique assets to save customers time and money and serve them in ways that are easy, fast, friendly and fun."

CFO Brett Biggs chimed in too: "Our overall third quarter results were strong, which is a testament to all of our associates and their great work serving our customers and communities around the world. Walmart U.S. posted its strongest quarterly comp in more than eight years and eCommerce sales grew 50 percent. We saw broad-based momentum across our international business and Sam’s Club delivered a really solid quarter. We have good momentum in the business, we are executing within our financial framework, and expect a solid performance for the important holiday season."

Despite some non-GAAP magic, the internals were sollid and Walmart U.S. posted its strongest quarterly comp in more than eight years, with 3Q total consolidated U.S. comps. ex-fuel up 2.7%, above the 1.7%  estimate.

  • Wal-Mart U.S. comps. up 2.7%, est. up 1.8%; forecast up 1.5%-2.0%
  • Wal-Mart U.S. traffic up 1.5% y/y, avg ticket up 1.2%
  • Wal-Mart U.S. E-commerce sales up ~50% y/y, GMV up 54%
  • Sam’s Club comps. ex-fuel up 2.8%, est. up 1.2%; co. saw up 1%-1.5%
  • Sam’s Club traffic up 3.6%, avg ticket down -0.8%

As WMT reports, comp sales increased 2.7% led by a strong comp traffic of 1.5%, but the biggest benefit was eCommerce which contributed approximately 80 bps to segment comp sales growth. Hurricane-related impacts benefited comp sales by approximately 30-50 basis points. On a 2-year stack basis, comp sales and traffic were up 3.9% and 2.2%, respectively.

Some more highlights from the upcoming call transcript:

Walmart U.S. had a strong quarter with comp sales growth of 2.7 percent led by a traffic increase of 1.5 percent. While difficult to quantify precisely, we estimate hurricane-related impacts benefited comps by 30 to 50 basis points. On a two-year stacked basis, comp sales were up 3.9 percent and comp traffic increased 2.2 percent. This is the strongest quarterly and two-year stacked comp performance in more than eight years. The food business continued to accelerate with sales, traffic and unit growth across categories. In fact, food categories delivered the strongest quarterly comp sales performance in almost six years.

 

Market inflation was around or slightly less than what we saw in the second quarter. All formats had positive comps and eCommerce contributed approximately 80 basis points to the segment.

 

Gross margin rate declined 36 basis points in the quarter. The margin rate decreased in part due to the continued execution of our price investment strategy and the mix effects from our growing eCommerce business. In addition, we estimate that hurricane-related impacts were about one-third of the overall decline.

 

Operating expenses as a percentage of net sales decreased 10 basis points, with stores leveraging at a higher level than that. The U.S. team has made great progress while maintaining high customer service levels, as associates are more efficient with improved technology, training and processes.

 

The combination of strong sales and greater operating discipline led to operating income increasing 0.8 percent in the quarter. Recent hurricanes benefited top line results, but negatively impacted gross margins and SG&A. We estimate the net result was a negative impact to segment income of approximately $150 million.

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But the best news for longs was the company's guidance: WMT now sees fiscal year 2018 Adjusted EPS of $4.38 to $4.46, above its prior guidance of $4.30 to $4.40, and higher than the sellside consensus of $4.38. Walmart also sees 4Q Wal-Mart U.S. comp sales ex-fuel up 1.5%-2% and Sam’s Club ex-fuel comps. up 1.5%-2%.

The company's full presentation below: