Weather, Taxes, and Currency Bruise (don't scar) Wal-Mart

Wikimedia.org

If you paid attention to the first quarter for Wal-Mart Stores (NYSE: WMT  ) , then you probably weren't impressed. But that's only if you paid attention to the basic numbers and went on your way. If you dig a little deeper, then you would see that much of Wal-Mart's subpar performance related to temporary events, and nothing is more attractive to a savvy long-term investor than negative temporary events impacting a strong underlying company. Weather, taxes, and currency all negatively affected Wal-Mart's quarterly performance, but these negative forces disguised the company's real strength.

Weather
It's often said that the only two guarantees in life are death and taxes, but inclement weather can also be added to that list. When Mother Nature gets angry, it usually has a negative impact on our lives. But did you ever notice that even after the worst of storms, the area hit is built back up and fully operational again, often stronger than before? What if you could invest in that town or city at its darkest moment? It would likely be extremely profitable. The same rule applies for investing. When inclement weather hits a strong retailer hard, you might want to consider opening your wallet.

In this first quarter, severe weather negatively affected Wal-Mart's earnings per share by approximately $0.03. And the overall relatively flat comps sales (sales at stores open at least one year) in the United States weren't as they seemed. Negative comps in the first two weeks of the quarter due to severe winter storms played a major role in this result. However, what most people don't know is that comps were positive for the remaining 11 weeks of the quarter.

The severe weather led to unanticipated double-digit growth in maintenance and utility expenses (i.e., snow removal and higher utility rates in usage), supply chain disruptions (freight backlog), third-party transportation services (to keep stores well stocked), and overtime wages.

The weather obviously isn't a long-term headwind. On the other hand, another retailer, Lowe's (NYSE: LOW  ) , managed to call an effective audible due to the severe weather. Lowe's is a home-improvement store, not a broadline retailer like Wal-Mart. However, the point is that Wal-Mart failed to place itself ahead of the curve like Lowe's did.

In its first quarter, Lowe's managed to deliver a 0.9% comps improvement despite the severe weather. The average ticket increased by 0.8%, and customer transactions improved 0.1%. Part of the reason Lowe's managed to accomplish this was because it placed weather-relevant products at its regional distribution centers. This led to fast deliveries and increased sales at stores located in areas affected by the severe winter weather. This is a testament to the strength of Lowe's management. 

Taxes and currency
Perhaps Wal-Mart will take the same approach Lowe's did the next time severe winter weather hits much of the United States. But the weather is still a temporary event, as is the higher-than-expected effective tax rate.

For the full year, Wal-Mart now expects a tax rate of 32% to 34% with quarterly fluctuations. Once again, short-term tax fluctuations aren't something that will have a long-term impact on a retailer like Wal-Mart. The timing of income tax payments also negatively affected free cash flow, but if you look at the big picture, the hit to free cash flow (for more than one reason) is just a temporary blip:

WMT Free Cash Flow (TTM) Chart

Wal-Mart free cash flow (trailing-12 months) data by YCharts

Keep in mind that Wal-Mart bought back 8 million shares for $626 million in the first quarter, and that it currently offers a dividend yield of 2.5%. This is in addition to new store growth, numerous innovations, and inorganic growth. In other words, cash flow isn't a problem for Wal-Mart.

In regard to currency, it negatively affected sales by $1.6 billion in the first quarter, but if you exclude the currency impact, net sales would have grown 2.1%, not 0.8%, on a year-over-year basis.

The Foolish conclusion
Be careful when looking at quarterly results. If you just read the numbers for sales, comps sales, and earnings per share, you wouldn't know the whole story. Dig deeper and get the facts so you can make the best investment decision for the long haul. As far as Wal-Mart is concerned, first-quarter results should be looked at as an opportunity, not a reason to panic.

Wal-Mart is a steady Eddie, but you might prefer a raging bull....
Imagine the multi-billion dollar sales potential behind a product that can revolutionize the way the world shops and interacts with its favorite brands every day. Now picture one small, under-the radar company at the epicenter of this revolution that makes this all possible. And its stock price has nearly an unlimited runway ahead for early, in-the-know investors. To be one of them and hop aboard this stock before it takes off, just click here.  


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3002513, ~/Articles/ArticleHandler.aspx, 11/26/2014 6:15:20 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 17,827.75 12.81 0.07%
S&P 500 2,072.83 5.80 0.28%
NASD 4,787.32 29.07 0.61%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

11/26/2014 4:04 PM
LOW $62.86 Down -0.09 -0.14%
Lowe's CAPS Rating: ****
WMT $84.98 Up +0.03 +0.04%
Wal-Mart Stores CAPS Rating: ***

Advertisement