Wal-Mart Stores, Inc.'s Investments in People and Technology Are Beginning to Pay Dividends

Image source: Walmart.com.

Wal-Mart Stores (WMT -0.08%) reported fiscal 2017 first-quarter results on May 19. The retail titan is increasing wages for its employees in an effort to improve customer service and investing heavily to strengthen its online offerings. These initiatives have weighed on Wal-Mart's profits in recent quarters, but are also beginning to boost customer satisfaction, store traffic, and sales.

Wal-Mart Stores results: The raw numbers

YOY = year over year. Data source: Wal-Mart Stores Q1 2017 earnings press release.

What happened with Wal-Mart Stores this quarter?

Total revenue rose nearly 1% to $115.9 billion, and 4% on a constant currency basis. U.S. comparable-store sales edged up 1% -- making Q1 2017 Wal-Mart's seventh consecutive quarter of positive comps -- as traffic increased 1.5%. The performance of Wal-Mart's smaller-format Neighborhood Market stores was particularly strong, with comps increasing 7.1%.

"We are encouraged by the Walmart U.S. comp and believe it's attributable to real improvement in our store experience," said CEO Doug McMillon during a conference call with investors. "Our customers are giving us positive feedback. I'm seeing it myself on store visits and you can see it in the traffic numbers."

These rising comps helped fuel a 4.3% year-over-year increase in Wal-Mart's U.S. sales to $73.3 billion. Sales at Sam's Club also rose, jumping 1% to $13.6 billion. However, Wal-Mart's international results were again dampened by foreign currency fluctuations, which led to a 7.2% decline in net sales to $28.1 billion. Excluding the negative impact of these foreign exchange rate movements, Wal-Mart's international sales likewise rose 4.3% to $31.6 billion.

Importantly, global e-commerce sales increased 7% on a constant currency basis, as Wal-Mart continues to invest heavily in this area to meet the growing threat from online retailers such as Amazon.com.

"We're pleased with our e-commerce operating system and happy to have our new e-commerce fulfillment centers operational," said McMillon. "Those are necessary building blocks. I'm excited about the ways we're using technology to deepen our relationships with customers and help them save both money and time."

Yet this growth has come at a cost. Wal-Mart's e-commerce investments -- along with its decision to boost wages for many of its employees in order to improve morale and by extension, customer service -- have taken a toll on profits, with first-quarter operating income falling 7.1% to $5.3 billion.

Despite the lower profits, Wal-Mart's strong cash flow generation was on full display during the first quarter. Improved inventory and working capital management helped operating cash flow jump 39% to $6.2 billion and free cash flow surge 78% to nearly $4 billion. That allowed Wal-Mart to return $4.3 billion to shareholders via dividends and share repurchases during the quarter.

Looking forward

For the second quarter, Wal-Mart expects comparable-store sales growth of about 1% for its U.S. locations, while Sam's Club comps are forecasted to be "slightly positive" when excluding the effects of fuel sales. In addition, the company believes second-quarter earnings per share will be between $0.95 and $1.08.

"We are proud of the overall results in the first quarter, and there is momentum in many parts of the business," added CFO Brett Biggs.