Wal-Mart Exceeds Expectations In Q3 As Solid Store Performance Drives Top Line

The last month or so has been full of negativity around WalMart 's ( WMT ) ability to sustain growth in a changing retail landscape. The company's decision to ramp up investments did not help either, as WalMart's stock price plunged by almost 20% during the month following the announcement.

In contrast with this backdrop was Wal-Mart's performance in the quarter ending October, as it achieved robust sales growth across multiple geographies. On a constant currency basis, the company's revenues increased by $3.40 billion, taking the total revenues to more than $122 billion. However, the operating margin continued to be under pressure due to increased wages and investments in technology, which was largely expected. Despite higher expenses, the company was able to generate an earnings per share of $1.03, exceeding consensus estimates by more than 6%. Reflecting the confidence in its performance, the company narrowed the full-year earnings guidance range to $4.50 to $4.65, from a prior guidance of $4.40 to $4.70.

Below, we discuss the trends observed during this quarter and their effect on WalMart's earnings in more detail. We are in the process of updating our model per the Q3 earnings release.

See our complete analysis for Wal-Mart

Robust Comps Growth Drives Top-line

During the August-October period, WalMart grew sales in its existing U.S. stores by a solid 4% year on year, driven by an increase in store traffic (up 1.7%). What is even more encouraging is that all of WalMart's store formats had positive comps this quarter, with the highest being in its traditional neighborhood markets, which delivered 8% growth. In international markets, sales growth was a bit mixed as strong growth in Mexico and Canada was partially offset by the U.K., Brazil and China.

This strong growth in revenues can be partially attributed to more favorable economic conditions in the U.S.. After falling to levels of about 1% earlier in April, retail sales growth has been consistently higher during the quarter, at an average of about 2%.

During the same period, WalMart also started to focus on improving its in-store experience through investments in people and technology. The company had set aside a total of $1.2 billion this year towards investments in its front-line store associates. These efforts, we believe, played a key role in driving store traffic and sales growth. The results are evident in the form of higher customer experience scores, as 70% of the company's stores have already achieved the initial goals it had set internally.

Margins Lower, But Nothing To Worry About

The increased focus on improving the customer experience, along with the ongoing e-commerce investments, led to an increase in operating expenses. As a result, operating income declined 10% compared to the year ago period, excluding one-off benefits from lease adjustments.

By building a strong online presence and an improved in-store experience, WalMart aims to cater to the population of customers who shop through multiple channels. According to the company, spending among such customers is almost 80% higher compared to an average store-only customer. The company expects operating margins to decline until FY17, after which margins are expected to recover to the current level by FY19 and remain stable thereafter.

Therefore, we believe this period of high capex is critical for the retail giant to prepare itself for another phase of growth. As long as it puts WalMart back on a sustainable growth path in the long-term, it is nothing for investors to be worried about.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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