The world's largest retailer, Wal-Mart (NYSE:WMT), came out with its third-quarter numbers on Nov. 13. The company reported better than expected earnings but reduced its outlook for the fiscal year. Wal-Mart's struggle to grow sales in the domestic market and its overseas challenges are well known in Wall Street. But the recent performance revealed some solid trends to the liking of investors. So much so that stock price increased 4.7% on the day of the earnings release, marking the best single-day increase since December 2008. What fuelled this optimism? Let's find out.
Positive U.S. comps at last
Wal-Mart's third quarter revenue came in at $119 billion, translating into a 2.9% increase over the prior year period per S&P Capital IQ data. Net sales for Wal-Mart U.S. went up by 3.4% or $2.3 billion, while international segment net sales increased 1.7%. If we exclude currency fluctuations, international net sales would show a 2.9% improvement. Performance of the Sam's Club division met expectations, registering 2.3% net sales growth as memberships increased. E-commerce revenue was up by a healthy 21% (on constant currency basis) with key markets such as Canada and Mexico showing encouraging progress.
Earnings per share came to $1.15, ahead of $1.12 per share expected by Bloomberg analysts. Apart from the comps growth, earnings benefited from lower taxes. Though the company remains "cautiously optimistic" about its prospects, its lowered its full-year estimates to $4.92-$5.02 per share compared with earlier expectation of $4.90-$5.15 per share, citing higher health care costs and spends on e-commerce initiatives.
U.S. comps increased 0.5% for the 13-week period -- the first increase in the last seven quarters. Bloomberg analysts were expecting a drop of 0.1%. Average transactions increased 1.2% and offset a 0.7% decline in traffic. Most of the U.S. comps growth came from Neighborhood Market stores where comps increased 5.5% over the prior year period. According to Bloomberg analyst Julie Hyman, the better than expected comps growth could mean the turnaround promised by new Wal-Mart chief Doug McMillon is happening sooner than expected.
E-commerce going strong
During the quarter, e-commerce contributed 20 basis points to the retailer's overall comps. Wal-Mart expanded its online offerings in Mexico and Canada, and added more than 148 collection points for online customers in the U.K. and China. China looked especially promising as online traffic surged by more than 40%. However, the highest change in online sale was witnessed in Mexico, growing 66%.
Wal-Mart's latest strategy to "deliver a seamless shopping experience" by focusing on four crucial aspects -- price, assortment, experience, and access -- is proving fruitful. In the earnings call, McMillon told analysts:
Our customers want to be able to buy just about anything from us, so we are expanding our e-commerce assortment to give them that opportunity. In the area of service, we're investing to provide a shopping experience at Walmart that exceeds customer expectations. For access, we are developing the capabilities to save our customers time and give them the choices they want by integrating digital and physical retail in ways that are convenient for what they want at that moment.
Focus on small-format stores seems to be working
For some time now Wal-Mart has been focusing on narrow-format stores to ward off competition from dollar stores, and the strategy seems to be working as evident from the solid comps growth. The retailer's increased focus on smaller stores is driven by the changing consumer preference in favor of stores that offer a quick buying experience and are located nearby.
As the company expands its network of Neighborhood Markets, it will be able to tap into a larger market segment. Wal-Mart is also using the small-format stores as pick-up centers for items that have been bought online. Wal-Mart plans to open 270 to 300 small-format stores in the current fiscal year.
Foolish bottom line
For a company as big as Wal-Mart, generating incremental growth becomes challenging. Its domestic market is nearly saturated and it's facing difficult economic conditions beyond its control in several overseas markets. But management is keen to turnaround the business, and is shifting its focus to newer growth avenues like smaller stores and e-commerce. Though new ventures call for investments and involve a reasonable payback time, it's heartening to see that the initiatives are starting to bear results. This could be a sign of a brighter tomorrow for the retail giant.
ICRA Online and Eshna Basu have 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.