General merchandise retailer Walmart, Inc. (WMT – Fee Walmart Stock Report) reported solid results for the three-month period ended July 31, 2018. Earnings per share advanced more than 19% on a year-over-year basis. The top line rose 3.6% in constant-currency terms, but the gross margin still dipped 34 basis points, owing to price investment, higher oil prices lifting transportation costs, and an unfavorable product mix shift toward less profitable e-commerce merchandise. Still, the operating margin expanded 26 basis points, as strong sales and cost efficiencies offset higher wages. Too, the company identified opportunities to save on utility costs using connectivity monitoring and advanced analytics within stores to optimize energy expenditure on air conditioning, lighting, and refrigeration.
Walmart U.S. delivered the best quarterly comp-sales results in over a decade. That important metric rose 4.5% excluding fuel, with traffic and ticket growth contributing around the same amount. Walmart brass acknowledged that those figures benefited from a favorable economic environment, and relatively warm weather drove seasonal merchandise higher. Management added some helpful color, saying its average customer feel's better about the current health of the economy, their employment opportunities, and their personal finances.
We were encouraged by an impressive 40% rise in e-commerce receipts. This was much better than the 23% growth rate in the April quarter, and contributed 100 basis points to the domestic same-store sales advance. We point out that even with the sales growth, the domestic division managed to reduce store inventory by 70 basis points and keep in-stock levels high. Management expects 40% e-commerce growth for the full year.
Meanwhile, innovative functionality continues to be the hallmark of WMT's omnichannel initiative. It continues to build out infrastructure of automated pickup towers for general merchandise. This feature should be present in 700 locations by the end of this year. Too, it now has 1,800 locations with grocery pickup, and ought to be able to deliver groceries to 40% of the U.S. population by yearend. Further, the company is experimenting with self-driving cars, and recently launched JetBlack, a new subscription service in New York City that uses text messaging for same-day delivery on merchandise orders. For the back-to-school season, WMT is making supply lists available through the Walmart app.
At Sam's Club, comps were up a strong 6.5%, excluding fuel and a 150-basis-point headwind from less tobacco offerings. This marked the best same-store sales performance in six years. Price investment is driving traffic at warehouse clubs and online. Favorable membership trends are another positive.
Taking a look at overseas operations, Walmex is gaining momentum, with comp sales growth of more than 5% and continued market share gains. Customers are responding well to an improved store experience in that country. In China, comps grew at a decent 1.5% clip, owing mostly to merchandise improvements in key categories like fresh food and private brands. Walmart plans on expanding omnichannel capabilities in this important region over the coming quarters. Further, Canada had comps sales growth of 2.6%, and U.K. stores grew revenue for the fifth-consecutive quarter. Management is finding it difficult to forecast the potential impact of higher tariffs, but past efforts to increase local inventory sourcing overseas makes the company relatively less exposed to tariffs than some other retailers.
In light of recent progress, management raised its full-year adjusted share-earnings outlook to $4.90-$5.05, which is narrower and higher than the prior range of $4.75-$5.00. In response, we are raising our estimate by $0.15, to $5.00. These forecasts exclude any impact from the acquisition of Indian e-commerce outfit Flipkart, as the deal hasn't closed yet.
Although strong sales were largely driven by favorable domestic economic conditions, we think initiatives to improve the shopping experience are also paying off. A cutting-edge omnichannel strategy should ensure momentum continues. However, the recent price appreciation will probably make these high-quality shares less attractive to value-oriented investors.
About The Company:Walmart Inc. is the world’s largest retailer, operating 3,522 supercenters (includes sizable grocery departments), 415 discount stores, 660 Sam’s Clubs, and 735 Neighborhood Markets in the U.S., plus 6,363 foreign stores (mainly in Latin America, with the balance in Asia, Canada, and the U.K.) for total square footage of 1.164 billion (as of 1/31/18). Most stores are owned and are within 400 miles of an expanding network of distribution centers. Groceries accounted for 56% of U.S. sales, while sales per square foot were about $420.
- Kevin Downing
