Wal-Mart: 3 Things to Look for on the Next Earnings Call

With spring comes a new earnings season, and Wal-Mart Stores (NYSE: WMT  ) is set to announce quarterly results on May 15. Look for changes in operating expenses, same-store sales, and average ticket size to gauge how much certain economic factors are affecting the top and bottom lines.

Wal-Mart's expectations
"We expect first quarter fiscal year 2015 earnings per share from continuing operations to be between $1.10 and $1.20," according to the company's last earnings report. But there's a caveat: "We expect economic factors to continue to weigh on our outlook," said Charles Holley, the CFO.

Wal-Mart isn't alone, as large-box stores have had a difficult time over the past two years. Big Lots (NYSE: BIG  ) recently published its eighth consecutive quarter of declining same-store sales.

Change in strategy
Both Wal-Mart and Big Lots have the same issue: same-store sales declines. Wal-Mart is the largest retailer in the world, and Big Lots is the largest closeout retailer in North America. But same-store sales for both have been on a steady decline. Reductions in food stamp benefits and heavy price competition from small-box dollar stores have made it harder for both companies to maintain market share without sacrificing margins.

A new strategy is needed to grow both the top and bottom lines. For Big Lots the new strategy is a rent-to-own program to help boost furniture sales. Wal-Mart has opted for a different approach.

Instead of providing furniture financing, Wal-Mart is offering its customers smaller stores. In February, the company announced the acceleration of its small-store expansion program. These stores are the key to Wal-Mart's long-term growth because they allow it to grow into new markets without cannibalizing super-center sales.

The most ingenious aspect of the strategy is the use of super-centers as distribution centers, which increases the return on super-center square footage. It is this powerful combination that has the potential to supercharge earnings in the long run. Bill Simon, head of U.S operations, said: 

Neighborhood Markets continued to deliver consistent[,] solid comp sales growth, and customers appreciate the convenience of our small stores. They are a proven model.

The degree to which Wal-Mart can meet or beat earnings estimates will be a function of how fast it can implement its small-store expansion plan. Any delays will also postpone improvements in both same-store sales growth and the operating margin. 

Same-store sales growth
For the 13-week period ending May 2, Wal-Mart U.S. expects comp-store sales to be relatively flat. Last year, Wal-Mart's comp sales declined 1.4% for the 13-week period ended April 26, 2013.

We already know the quarter started off poorly due to severe winter weather, but Simon seemed hopeful on the last earnings call, saying:  

At the height of the storm, we had more than 200 stores closed. We're optimistic about the balance of the quarter and believe we will have a positive sales comp for the rest of the period.

Look for positive same-store sales growth this quarter along with a slight increase in average ticket size for signs of top-line growth with bottom-line benefits.

Operating margin
Any company can grow sales if it sacrifices margin. Last year operating-margin results were flat for Wal-Mart U.S but dismal for Wal-Mart international and Sam's Club. While Wal-Mart U.S. grew the operating margin by 0.1% last year, Wal-Mart international's operating margin declined by 45.8% and Sam's Club's fell by 15.3%. David Cheesewright, president of Wal-Mart's international segment, said: 

The combination of soft sales, price investments, higher expenses, and investments in e-commerce caused [Wal-Mart international's] operating income to decrease on a reported and constant currency basis.

Source: Wal-Mart 10-K

As you can see from the sales-penetration chart above, Wal-Mart US comprises almost 60% of the company's revenue; Wal-Mart international and Sam's Club represent 29% and 12% of the company's revenue, respectively, or 40% combined. Look for an improvement in operating income across the board but specifically in Wal-Mart international and Sam's Club for signs of progress in the next earnings release. Any increase in the average ticket size will also contribute to a higher operating margin. 

The bad news is that customer loyalty is fickle in the discount-retail marketplace, and large-box retailers like Wal-Mart are losing market-share. The good news is that Wal-Mart's under new leadership. Doug McMillon, the CEO, is loyal to Wal-Mart -- he started out as an intern in the distribution center and has a proven track record for success.

Wal-Mart surprised analysts three times last year with earnings announcements below the consensus average, but this year may be a different story as the company focuses on initiatives that will help both top- and bottom-line growth.

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Celan Bryant

Celan follows the energy and retail sector. When she isn't reading a 10K, she's watching Ancient Aliens or playing with her dogs. @celanbryant on Twitter.

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8/28/2015 4:01 PM
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