Why Walmart Earnings Disappointed Investors

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Wal-Mart Stores Inc. (NYSE: WMT) reported second-quarter fiscal 2018 results before markets opened Thursday morning. The retailing giant posted adjusted diluted earnings per share (EPS) of $1.08 on total revenues of $123.36 billion, excluding membership fees in Sam’s Club. In the same period a year ago, Walmart reported EPS of $1.07 on revenues of $120.85 billion. Second-quarter results also compare to consensus estimates for EPS of $1.07 and $122.84 billion in revenue.

U.S.second-quarter same-store sales rose 1.8% at the company’s supercenter and discount stores. Same-store sales in the company’s Sam’s Club stores were up 1.2% excluding fuel and up 1.4% including fuel sales. Total U.S. net sales, including fuel, rose 1.9% for the quarter. U.S. traffic in stores was up 1.3% year over year.

Consolidated operating income fell by 3.2% year over year in the second quarter. U.S. operating income rose 2.2% for the quarter while the company’s international segment saw a quarterly decline of 2.0%. Operating income at Sam’s Club stores tumbled by 14.4% in the quarter.

The good news for Walmart is that e-commerce growth came in at 60% and gross merchandise value rose 67%. These totals are slightly lower than those reported for the first-quarter, but the company continues to invest heavily in e-commerce.

Walmart guided third-quarter EPS at $0.90 to $0.98. Second-quarter same-store sales are expected to rise 1.5% to 2% at U.S. stores and 1% to 1.5% at Sam’s Club stores, excluding fuel sales.

The company raised its guidance for fiscal year 2018 adjusted EPS from a prior range of $4.20 to $4.40 to a new range of $4.30 to $4.40.

Consensus estimates call for third-quarter EPS of $0.98 and revenues of $120.81 billion. For the 2018 fiscal year, analysts are looking for EPS of $4.37 and sales of $495.49 billion.

Walmart CEO Doug McMillon said:

Traffic increases at the store level and the eCommerce growth rate are key highlights. We are moving faster and becoming more creative as we strive to make every day easier for busy families.

Traffic might be up and Walmart’s online initiatives may be working, but results are not showing up in profits. Gross profit at U.S. stores fell by five basis points in the second quarter and operating expenses rose by 13 basis points. Consolidated gross profit fell 11 basis points and operating expenses rose by 10 basis points.

The other thing investors won’t like is the lower guidance on third-quarter earnings per share.

Walmart’s shares traded down about 2.2% in premarket trading Thursday, at $79.18, in a 52-week range of $65.28 to $81.99. The consensus 12-month price target was $81.77 before the results were announced. The high target is $92.00.