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

Wal-Mart and Big Lots are large-box retailers with the same problem: declining market share. The challenge is figuring out a way to grow sales without giving away margin. Look for these three things on the next earnings call as a sign that Wal-Mart's on the right track.

Apr 30, 2014 at 5:00PM

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.

Walmart Revenue Penetration

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.

What's surprising analysts?
If you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now... for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.

C Bryant has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers