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Wal-Mart quarterly and annual revenue misses the mark (Updated)

That was ugly. The global retailer’s full year net income was down 5.7% compared to the prior year and its overall U.S. comp sales for the year was down 0.4%.

Officials with Bentonville-based Wal-Mart reported fourth-quarter and full year earnings Thursday morning (Feb. 20) prior to the markets opening.

Full year total revenue for the company was $476.294 billion, up 1.6% over the previous year, but below the analysts’ consensus estimate of $476.83 billion. The retailer said it felt a $5 billion negative impact from foreign currency headwinds last year. Operating income was $26.872 billion, down 3.1% compared to the previous fiscal year. Wal-Mart’s fiscal year and fourth quarter end on Jan. 31.

Net income for the year was $16.022 billion, 5.7% less than the previous year. Full year diluted earnings per share was $4.88. Global e-Commerce sales, including acquisitions, grew to more than $10 billion during fiscal 2014.

Fourth quarter revenue totaled $129.706 billion, up 1.5% compared to the fourth quarter of the prior year and was below the consensus estimate of $130.23 billion. Operating income during the quarter was $7,347 billion, down 14.4% compared to the previous fourth quarter.

Net income during the quarter was $4.431 billion, down 21% compared to the previous year. Earnings per share of $1.37 missed the consensus estimate of $1.59. However, the company posted one-time charges during the fourth quarter that reduced quarterly earnings by 26 cents per share. The charges were related to tax and employment issues in Brazil, store closures in Brazil and China, a transaction in India, and restructuring of Sam’s Club operations in the U.S.

Nevertheless, Wal-Mart Stores President and CEO Doug McMillon and other executives pushed an optimistic view of the numbers in the company’s earnings report. It’s McMillon’s first earnings report since becoming CEO on Feb. 1.

“Our company grew net sales this year to reach more than $473 billion. Global eCommerce sales, including acquisitions, surpassed the $10 billion mark, a 30 percent increase over last year," McMillon said in the statement. "We will continue to grow our global business by focusing on customers and serving them how they want to be served."

McMillon said Wal-Mart will embrace more change this year as it focuses more intensely on customer relevance.

“We must be more nimble and flexible as we operate our businesses to adapt to changing customer shopping habits. Our focus is to invest in capabilities that connect with customers on their terms,” he said.

CAUTIOUS GUIDANCE
One big takeaway from Wal-Mart’s announcements was the cautious guidance the company gave for this year. The retailer forecast first quarter earnings per share of $1.10 to $1.20 with negative U.S. comparable sales recorded in the first two weeks of February because of weather.

Budd Bugatch, retail analyst with Raymond James & Associates, said that guidance is lower than the $1.26 his firm had predicted.

“Clearly there are macro pressures at work here. The weather impact has been hard for investors to gage. Concretely, the company did say it was facing $330 million in added health care costs this year. We know the SNAP cuts are having an impact as well. I think the company using this macro headwind as a time when it invests for longer term results,” he said.

Wal-Mart Chief Financial Officer Charles Holley said during the first quarter of this year, the company will begin to anniversary the increased costs incurred for Foreign Corrupt Practices Act matters, including compliance program enhancements and the ongoing investigations. These costs are expected to range between $200 million and $240 million for the year. 

The company gave a full-year guidance range of $5.10 and $5.45, a wide gap noted by the retailer and analysts. Joe Feldman, assistant director of research for the Telsey Advisory Group, said although Wal-Mart expects to hit the high-end of the estimate, it’s still below Wall Street consensus.

Investors focused on the weaker guidance and tempered outlook as Wal-Mart stock fell more than 2% after the earnings release. Shares traded at $73.25, down $1.60 in heavy volume during the morning market session. For the past 52 weeks the share price has ranged from a $69.72 low to a high $81.37.

In an effort to rally support among investors, Wal-Mart raised its annual dividend by 2.12% in fiscal 2015. The company will pay $1.92 per share, in four quarterly installments of 48 cents per share. 

Wal-Mart said this is the 41st consecutive time it has increased the dividend for its shareholders. While Wal-Mart is a widely held stock, the largest shareholders are still the Walton family. During fiscal year 2014, the retailer returned $12.8 billion to shareholders in the form of dividends and share repurchases.

WALMART U.S.
The cash cow for Wal-Mart Stores Inc. is its U.S. business comprising 59% of the retailer’s total consolidated sales last year. But the business faces a number of problems which showed up in negative same-store sales quarter after quarter.

Comparable store sales are a key metric in the retail industry. Last year Walmart U.S. posted negative comps of 0.6%, compared to 1.6% positive comps the year before. In the recent 13-week period comp sales slid 0.4%, compared to a 0.3% gain a year ago.

Bill Simon, CEO of Walmart U.S., said about 0.4% of the decline in comp sales in the last quarter relate to SNAP cuts. He expects that impact to continue for the rest of the year as consumers adjust. He said last year it was the 2% payroll tax increase that pressured comp sales and the weather is what it is.

“The weather isn’t an excuse but it did have a short-term effect as we had between 200 and 300 stores (closed) at times because of the winter storms,” Simon said in the media call.

One particular area of concern is the continued decline in store traffic, despite slightly higher overall ticket sales. Simon said they are seeing more consumers stock up at a supercenter, but know they are losing out on the fill-in trips as consumers are going to convenience stores, dollar or drug stores for the loaf of bread or gallon of milk.

"Comp sales improvement is a key priority, and we’ll focus on being even stronger item and category merchants, delivering value and improving our service levels," McMillon said. "Well remain focused on our expense structure, and innovate to improve productivity and aid our ability to deliver every day low prices.”

Simon said the Neighborhood Market format compares favorably for these quick fill-in trips, and is seeing strong comp sales at 5% or better in recent quarters. The company plans to accelerate the expansion of its small-store format this fiscal year.

“In our small formats we’re seeing increased traffic, we think we can compliment the stock-up trip with the small store rollout planned this year,” he said.

Simon was asked about Wal-Mart’s position on raising the minimum wage and he said the company’s stance has not changed as it remains neutral on the issue.

“Less than 1% of our workforce makes minimum wage. In states that have already raised the wage, we see very little overall impact,” Simon said.

CNBC analysts said a minimum wage hike is largely a neutral issue for retailers like Wal-Mart who have to ability to pass along the extra cost to consumers.

A larger concern — $330 million this year — is a headwind Wal-Mart said it faces with added health care costs as more of its employees are signing up for coverage because of the Affordable Health Care Act.

INTERNATIONAL CHALLENGES
David Cheesewright, the new CEO of Walmart International, said the division has operated in a challenging global environment, with low inflation, relatively high unemployment and fragile consumer confidence leading to modest consumer spending.

Walmart International grew annual net sales to $136.5 billion, an increase of 1.3%. On a constant currency basis, International net sales would have increased 4.6% to $140.9 billion. Operating income for this segment totaled $5.454 billion, down 17.6% year-over-year.

In the recent quarter, International net sales were $37.7 billion, down 0.4%  On a constant currency basis, sales increased 4.3%. Operating income fell 45.8% from the prior-year period.

Cheesewright said a combination of soft sales, price investments, higher expenses and e-commerce expenditures were reasons for the lower operating results.

“We are especially pleased that in this tough environment, we grew market share in most countries and maintained share in a challenging Mexico market. We did experience share loss in the U.K. and Brazil. Competitors remained very aggressive with vouchering in the U.K., and around the world. We continue to focus on expanding price leadership,” he said.

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Bright spots for Walmart International include:
• Solid performance in Central America, where net sales increased by 6.1% with comparable store sales increasing 1.8%.

• Fourth quarter net sales grew 5.3% in Brazil, with total comp sales up 4.6%%Average ticket grew 8%, and traffic declined 3.4%
 
• Walmart China sales grew by 3.7% during the fourth quarter, with comp sales up 0.4%. Comps were driven by an 8.6% increase in ticket, while traffic declined 8.2%, as customer behavior continued to shift towards fewer trips and larger baskets.

STREAMLINING SAM’S
Sam’s Club reported full-year revenue of $57.157 billion last year, up 1.3%, fueled by an increase in membership fees. Operating income, excluding fuel, was $1.949 billion, up 1.9% year-over-year.

In the recent quarter Sam’s Club had total revenue of $14.679 billion, up 1.4% from the year-ago period. Operating income declined 15.7% to $412 million from the same period last year. Those numbers exclude fuel sales.

Sam’s Club grew its membership income 9% in the recent quarter, one of the few positives reported by this division, which is undergoing a streamline effort to reduce overhead, increase online presence and combat declining sales from the burdened small business sector.

Sales charged to the Sam’s Club credit card reached record highs in the quarter resulting in a financial benefit from a profit sharing arrangement with the company’s credit card provider. Sam’s Club also earned $24 million for the sale of two real estate properties. These factors contributed to Sam’s membership and other income growth of 23.4% in the quarter.

Continued severe winter storms have resulted in a soft start to this quarter. Sam’s expects comp sales, without fuel, for the 13-week period from Feb. 1 to May 2, to be flat. For the 13-week period last year, comp sales, excluding fuel, increased 0.2%.

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