Investing Commentary

Walmart Beats Q2 Estimates but US Stores Still A Drag

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If you haven’t heard yet, Walmart released it’s second quarters earnings today, and they sure were a doozy.

First, let’s knock out the good stuff – net sales increased 5.5% to 108 billion, and when membership and other income are added in, total revenue was up 5.4% quarter to quarter, and 4.9% for the first six months of the year. The biggest increase in sales was Walmart International (no surprise there), where sales grew 16.2%, including the currency exchange rate benefit. On a constant currency basis, sales were up 7.1%.

Sam’s Club also had strong sales growth, up 9.5% quarter to quarter and so far up 9.4% for the first six months. Walmart US remains the red-headed step child here, managing a measly 0.4% sales growth quarter to quarter, and about the same for the first half of the year.

Earnings were a real show-stopper, rising 12.4% to $1.09, beating Wall Street’s estimates of $1.08. In addition, WMT is feeling good about 2011, and raised full year earnings guidance to $4.41 – $4.51. Based on todays closing price of $51.92, Walmart is trading at an estimated forward p/e of about 11.7.

Now that all the rainbows and unicorns are out of the way, it’s time to dig up the dirt. I’ve found two worrying trends, both of which apply directly to that bastard Walmart US.

First, as per usual same stores sales are falling. Though slight, in the past quarter comparable sales, including fuel, are down 0.9% – and for the six months ended in July, they were down 1.8%. Walmart throws a little fluff into the release about comparable sales improvement and some “plan” they are ready to implement, but you can put lipstick on a pig…

Secondly, during the 13 week period of Q2, average ticket was up, but average traffic was down. There are two huge problems here.

  1. Less people are visiting Walmart US than in years past. Less traffic = less customers = less money. Enough said
  2. At first glance, increased ticket price looks promising – less people are there, but the ones who are spend more money per visit, and help cover the shortfall of customers. But Walmart has been getting dinged recently for not having the lowest prices around, and while I don’t have any concrete evidence, I can honesty say lately I’ve found Walmart is not always the cheapest in town. Also, raising prices on goods would be a slick way of increasing sales numbers in the short term, even though their customer base is dwindling.

I’m still an owner of Walmart, as I like it’s international growth and strong fundamentals. And I think any analysis needs to take into account Walmart US is a stalling business in a dead-stop economy. That doesn’t mean I won’t keep my eye on that troublemaker Walmart US, but I don’t think that’s enough to warrant a sell-off of this great company.

Full disclosure: I am long WMT. My portfolio holdings can be seen here

5 Comments

  1. I recently bought WMT within my wife’s Questrade USD RSP account and settled in US currency. I locked in at about $50 per share and with an approximate 3% yield.

    I think the company offers great long-term capital appreciation and it’s one of those recession-resistant plays. As with many companies, there will be challenges and issues, but as you mention, WMT is internationally-based and given their size and market cap, I think the company’s future prospects remain strong.

    Nice post!

  2. I’m with my friend, TWC.

    I think WMT is still a great holding, long-term. In good times, people shop at Walmart. In bad times, people shop at Walmart. Very much recession proof.

    Good post…I liked reading your take on this.

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