Weak Q2 Earnings for Wal-Mart; Cuts View

After the dismal performance in the first quarter, Wal-Mart Stores, Inc. () came up with another weak performance in the second quarter of fiscal 2014. The retail giant met the Zacks Consensus Estimate for earnings but missed the same for revenues due to a gloomy consumer spending environment globally. Moreover, the company slashed both its revenue and earnings expectations for the fiscal year.

Walmarts fiscal second quarter 2014 earnings of $1.25 per share, were in line with the Zacks Consensus Estimate. Earnings (excluding a charge for a non-income tax matter) were up 5.9% year over year and were within the companys guidance range of $1.22 and $1.27 per share.

Total revenue of the worlds largest retailer climbed 2.3% to $116.9 billion (including membership and other income) but missed the Zacks Consensus Estimate of $119.1 billion. A challenging retail environment in the U.S. as well as in most international markets due to cautious consumer spending hurt the top line in the quarter.

The restrained consumer spending environment in the U.S. emanated from the recent hike in payroll taxes and higher gas prices. Payroll taxes in the U.S. have increased 2% since January 2013, which is affecting the lower- and middle-income consumers (who comprise Walmarts core shoppers). In addition, lower-than-expected price inflation of grocery items led to a disappointing quarter.

Total revenue comprised net sales of 116.2 billion (up 2.4% year over year or 2.8% on a constant currency basis) and membership and other income of 0.7 billion (down 4.3% on a year-over-year).

Consolidated operating income increased 1.4% to $6.8 billion, driven by productivity improvements. However, softer than expected sales and higher marketing investments were a drag on profits.

Segment Details

Walmart U.S.: The segment posted net sales growth (including fuel sales) of 2.1% to $68.7 billion in the quarter, including the impact of fuel sales. Operating income increased 5.2% to $5.5 billion.

U.S. same-store sales (comps) for the 13-week period ending July 26 declined 0.3%; much lower than the 2.2% growth in the prior-year quarter and also at the bottom end of the guidance range of flat to 2% increase. Weak consumer spending environment and lower than expected inflation hurt comps in the quarter. The comps decline was however less sharp than the first quarters decline of 1.4%. Comp traffic declined while average ticket increased in the quarter.

Walmart International: Segment net sales, including fuel sales, increased 2.9% (4.4% on a constant currency basis) to $33.0 billion. The sales performance in the segment was softer than management expectations due to sluggish consumer spending environment in both mature and emerging markets. Operating income declined 1.3% to $1.47 billion due to poor operating expense leverage.

Sams Club: The segment, which comprises membership warehouse clubs, posted net sales growth, including fuel impact, of 2.6% to $14.5 billion. Net sales, excluding fuel impact, increased 2.4% to $12.8 billion. Sams Club operating income grew 8.0% to $0.56 billion in the quarter.

Sams Club's comps, excluding the impact of fuel sales, grew 1.7% in the quarter, as positive traffic increase was offset by decline in average ticket. The same-store sales growth was within the guidance range of 1% to 3.0% but lower than comps growth of 4.2% in the prior-year quarter. However, the comps improved from the flat growth seen in the first quarter due to better business member traffic and favorable response to the recent membership enhancements.

FY14 Outlook Lowered

The company sharply lowered its net sales growth guidance from a range of 5%-6% to a range of 2%-3% due to weaker than expected performance in the first half. Moreover, the challenging sales environment as well as currency headwinds are expected to hurt the second half sales as well. Walmart also lowered its earnings expectations from a range of $5.20 to $5.40 to $5.10 and $5.30 per share.

For the third quarter of fiscal 2014, Walmart expects its earnings to range between $1.11 and $1.16 per share. Walmart expects U.S. comp sales to be relatively flat for the 13-week period ending October 25, much lower than last year quarters growth of 1.5%. Sams Club comp sales growth, without the impact of fuel sales, is expected to range between flat and 2% for this 13-week period, also lower than last year quarters growth of 2.7%.

Other Stocks to Consider

Walmart carries a Zacks Rank #3 (Hold). Other retailers that are presently doing favorable business include Marks & Spencer Group plc (), J. Sainsbury plc () and Delhaize Group (). All three companies carry a Zacks Rank #2 (Buy).

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Weak Q2 Earnings for Wal-Mart; Cuts View