Wal-Mart Q3 Earnings Beat, Sales Lag on Currency Headwind

Wal-Mart Stores Inc.WMT earnings in the third quarter of fiscal 2016 beat the Zacks Consensus Estimate, while revenues missed the same. Both earnings and revenues declined year over year. Unfavorable currency and soft sales at Sam's Club and international business took a toll on the company's results. The company also narrowed its fiscal 2016 earnings guidance. Shares rose around 3% in pre-market trading .

Wal-Mart's fiscal third quarter 2016 earnings of $1.03 per share beat the Zacks Consensus Estimate of 97 cents by 6.2%. However, it declined 10.4% from the year-ago earnings from continuing operations of $1.15 per share. Earnings were however within management's guided range of 93 cents to $1.05 per share.

Though the company reported higher sales at Wal-Mart U.S., a decline in sales at Sam's Club and the international business resulted in the year-over-year decline in earnings. Currency also negatively impacted earnings by 4 cents.

Wal-Mart Stores, Inc. (WMT) - Earnings Surprise | FindTheCompany

Quarter in Detail

Total revenue of the retailer was $117.4 billion (including membership and other income). Revenues slightly missed the Zacks Consensus Estimate of $117.9 billion by 0.4% and decreased 1.3% year over year. Currency depleted sales by approximately $5 billion. The decline was also due to soft sales at Sam's Club and the International business.

On a constant currency basis, revenues increased 2.8% to $122.4 billion. E-commerce sales increased approximately 10% globally on a constant currency basis. However, e-commerce growth was weaker than the preceding quarter's growth of 16% due to a challenging scenario in key international markets.

Total revenue comprised net sales of $116.6 billion (down 1.3% from the year-ago quarter but up 2.9% on a constant currency basis) and membership and other income of $810 million (down 12.4% year over year).

Operating income declined 8.8% to $5.71 billion in the third quarter. On a constant currency basis, operating income declined 5.4%, as the company continued to invest in people and technology. Besides currency, higher investment in e-commerce initiatives in order to compete with online retailer, Inc. AMZN and in associates through higher wages and training seem to have dampened operating income.

Segment Details

Wal-Mart U.S.: The segment posted net sales growth of 3.8% to $72.7 billion in the quarter, including the impact of fuel sales. Operating income however declined 8.6% to $4.5 billion, as the company incurred huge expenses as a result of e-commerce initiatives and higher wages and training.

U.S. same-store sales (comps) for the 13-week period ending Oct 30 increased 1.5% compared with 0.5% growth in comps in the prior-year quarter. This was the fifth consecutive quarter of positive comps. Comp sales growth was within the company's expectations of 1%-2% increase. While comp traffic rose 1.7%, average ticket decreased 0.2% in the quarter. The lower fuel prices benefited consumers and the impact was seen in improved traffic during the quarter.

Neighborhood Market comps also increased approximately 8%, with strong growth from new stores. E-commerce sales positively impacted comp sales at Wal-Mart U.S. by 0.15% in the quarter.

Wal-Mart International: Segment net sales, including fuel sales, declined 11.4% year over year to $29.8 billion. It however increased 3.2% on a constant currency basis to $34.7 billion, led by improved performance in Mexico and Canada. Operating income declined 6.4% to $1.3 billion. On a constant currency basis, it increased 8.5%.

Sam's Club: The segment, which comprises membership warehouse clubs, posted net sales decline, including fuel impact, of 2.2% to $14.1 billion. Excluding fuel impact, sales increased 1.6%. Sam's Club operating income increased 9.3% to $0.5 billion in the quarter. Excluding fuel impact, operating income grew 8.4%.

Sam's Club comps, excluding the impact of fuel sales, remained flat at 0.4%. Comp sales were within the company's expectations of flat to up 2%. While comp traffic decreased 0.3%, average ticket increased 0.7%. E-commerce sales positively impacted comps by approximately 0.6% in the quarter.

Other Update

Wal-Mart paid $1.6 billion in dividends during the quarter. The company repurchased 6 million shares worth $437 million in the quarter.


Fourth Quarter Fiscal 2016

In the fourth quarter of fiscal 2016, earnings are expected in the range of $1.40 to $1.55 per share, compared with the prior-year quarter's earnings of $1.53 per share.

Wal-Mart expects U.S. comp sales growth in the range of around 1% for the 13-week period ending Jan 29 compared with 1.5% comps growth last year.

Sam's Club comp sales, without the impact of fuel sales, are expected to be flat to up 1% compared with 2% growth last year.

Fiscal 2016

Wal-Mart continues to expect relatively flat total sales growth for fiscal 2016. On a constant currency basis, net sales growth would be around 3%.

The company has narrowed its earnings guidance for fiscal 2016. It now expects earnings per share in the range of $4.50 - $4.65, compared with the previous guidance of $4.40 - $4.70. However, it is lower than last year's adjusted earnings per share of $5.07. Currency is also expected to impact full year earnings by 16 cents, up from 15 cents expected earlier.

Earlier the company had stated that Wal-Mart will continue to invest in e-commerce initiatives and in associates through higher wages and training, which in turn would put pressure on operating income in fiscal 2016. These initiatives are expected to pull down fiscal 2016 earnings by 24 cents per share.

Pharmacy headwinds along with higher-than-expected ongoing shrink in Wal-Mart U.S. are expected to impact fiscal year 2016 earnings by 11 cents. Also, the company expects incremental investment of 6 cents to 9 cents in global e-commerce.

Our Take

Though the company is making efforts to boost its sales and regain investors' confidence, it still faces many headwinds, which will reduce earnings in the near term. Higher expenses, lower margins at Wal-Mart U.S. and currency headwinds are also expected to negatively impact results.

Wal-Mart carries a Zacks Rank #5 (Strong Sell).

Stocks to Consider

Better-ranked retailers include Burlington Stores, Inc. BURL and the Kroger Co. KR . Both of them hold a Zacks Rank #2 (Buy).

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WAL-MART STORES (WMT): Free Stock Analysis Report

KROGER CO (KR): Free Stock Analysis Report

AMAZON.COM INC (AMZN): Free Stock Analysis Report

BURLINGTON STRS (BURL): Free Stock Analysis Report

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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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