It is in the nature of the modern world that whatever a corporation does, management of the message is paramount. If you stop and think, an earnings release should, for the most part, be a simple matter of fact. A company gives us historical facts about sales and profit in the last quarter and that is what we, as potential or current investors, should focus on.
They may also come up with a guess as to what the next three months will be like, and we can take that guess as gospel, with a grain of salt, or somewhere in between. Seemingly, however, no company can avoid also coming up with the kind of qualifying statement that those of us with children hear every day: ”Well, I did do that, yes, but...”
Wal-Mart (WMT) released their earnings this morning. Their announcement comes towards the end of the season and it would seem that they have been listening as others have reported and are fully aware of what constitutes an acceptable excuse this quarter, at least in the eyes of the market. I was beginning to think that I would scream if I heard one more corporate board blame either the weather or foreign exchange fluctuations for a disappointing quarter, and then along comes Wal-Mart, blaming both. They even went so far as to offer excuses in advance for the possibility of disappointing results next quarter!
The really crazy thing here is that WM had nothing to excuse. After adjustments, they declared earnings of $1.60 per share, a penny over consensus estimates, on revenue up 1.5% from last year at $129.7 billion. The board also authorized a penny increase in the quarterly dividend. There is no great wow factor in those numbers, but for a mature, heavily analyzed company, they aren't too shabby either. That didn't stop the excuses from flowing.
It's not that there isn't some validity to what they say. Most of us, after all, are aware that the weather on the East Coast has been bad; many of us that live there could confirm that by looking out of the window at some point in the last few weeks. Nor should it come as a major surprise to anybody that the US Dollar fluctuates against other currencies.
As the above 1 year chart for the Dollar index shows, the US currency overall is back to the same levels it was a year ago, so I am not quite sure if it was the strength in the first half of last year or the relative weakness in the second half that is being blamed here.
I mean, do you honestly expect me to believe that the company expected relative dollar strength to continue forever or that they have never heard of hedging? During the quarter in question, the Dollar index basically fluctuated between 80 and 81.5, which you wouldn't think would be too troublesome.
The simple fact is that Wal-Mart, just like every large corporation, feels the need to excuse decent results. They also started to manage expectations for Q1, issuing guidance of $1.10 - $1.20 for the quarter, lower than street estimates, which generally ran around $1.24. This was where the excuses really got going.
CFO Charles Holly blamed lower expectations on economic factors that would affect their customers, including “...reductions in government benefits, higher taxes and tighter credit.” I understand that Food Stamps are being cut and that credit is tighter than in 2007, but taken as a group these excuses are not that impressive.
The market's reaction to all of this so far this morning has been interesting. The stock dropped immediately in the pre-market, then recovered to slightly up before dropping again and settling around 2% lower by about 9 AM. In other words, traders didn't know what to make of all of the contradictory signals. The decent numbers were obscured by a cloak of excuses, but eventually, it seems, reaction to the gloomy outlook dominates.
The elephant in the room to some is the proposed hike in the Federal minimum wage, and it is interesting to me that Wal-Mart has not yet indicated a position for or against that proposal. The obvious, knee jerk reaction is that such a move would be bad for the king of low wages, but if the increase applies to all, then they are unlikely to be adversely affected.
Those that believe the cost increase involved in an enforced wage hike will hurt the company are forgetting that it will apply to everybody. In this situation any increase in costs is going to be passed on to the consumer.
What we have, then, is a situation where the company basically matched expectations last quarter, despite what they regarded as some serious headwinds. More headwinds are predicted for next quarter that may or may not pan out, but even if they do there is no reason to believe that Wal-Mart won't adjust and still do OK.
When a company starts to offer excuses for performance that doesn't need excusing, it seems to be more out of habit than anything. The actual data suggest that WMT is doing fine and will likely continue to do so. This period of reduced expectations, in my opinion, just sets up a good opportunity to buy the stock.