Wal-Mart Stores Inc. (WMT, Financial) is scheduled to report its first quarter results for fiscal 2016 on May 19. The company is the world’s largest retailer, serving nearly 260 million customers through its network of over 11,000 stores under 72 banners across 27 countries and e-commerce websites in 11 countries. Wal-Mart is also a constituent of the Dow Jones Industrial Average and its results could heavily influence the direction of equity index futures as well as fellow retailers such as Costco Wholesale Corporation (COST, Financial) and Target Corporation (TGT, Financial).
Wal-Mart delivered better-than-expected earnings in both the fourth quarter and full-fiscal 2015, while revenues missed the consensus estimate for both periods. The company logged 0.6% year-over-year growth in fourth quarter adjusted earnings to $1.61 a share beating the consensus estimate of $1.54 a share on the back of positive comparable-store sales in the US, higher operating income and improved performances in Sam's Club, as well as the retailer’s international business. However, although overall revenues increased 1.4% year-over-year to $131.6 billion, the figure missed the consensus estimate mark of $132.2 billion, with foreign exchange headwinds depleting sales by around $2.6 billion. Wal-Mart shares are currently down 6.2% since its last earnings report.
New Initiatives Likely to Pay-off in the Long Run
Q4 2015 was a bad quarter for Wal-Mart, with multiple factors hurting the company’s top-line. These included wage increases, slowdown at the West Coast Port, currency headwinds and e-commerce investments. Since then, the company has been working towards correcting the downward trend, paying more attention to its online sales that saw a 22% jump in Q4 2015 compared to the just 2% year-over-year growth in Wal-Mart’s overall sales for the quarter. The company announced several new initiatives to increase online sales, including its plan to invest to the tune of $1.2-$1.5 billion in its e-commerce operations and digital initiatives for FY2016, up from $1.0 billion in FY2015.
More recently, Wal-Mart also took on online giant Amazon's (AMZN, Financial) $99 Prime subscription service, announcing that WMT Prime would offer online customers unlimited free shipping for just $50 per year. Further, the company is also in talks for collaborating with Alibaba (BABA, Financial) on its Alipay initiative to attract more online customers. Consequently, experts foresee Wal-Mart's turnaround strategy eventually paying out in the long-term, if not in the immediate future. While Wal-Mart also recently announced plans to launch 115 stores in China, creating as many as 30,000 jobs in the country, the retailer is also actively expanding its Canadian operations following Target’s exit from the country.
Sluggish Economy, Currency Headwinds Likely to Drag Revenues
However, a recent industry report indicated that pan-US retail sales remained flat in April as customers cut back on big-ticket purchases. Moreover, with the retail sector also witnessing 5.1% year-over-year decline in department store sales during the month, Wal-Mart is likely to have felt the pinch on its Q1 revenues. Other factors such as foreign currency headwinds and a sluggish global and domestic economy also remain major concerns for the retailer. While Wal-Mart’s projected earnings for Q1 2016 is in the range of $0.95-$1.10 a share on the back of 1%-2% growth in comparable-store sales in the US and a similar growth in Sam’s Club comparable-store sales, consensus estimates peg the figure at $1.04 a share.
Final Thoughts
Wal-Mart posted better-than-expected first quarter earnings, although earnings and revenues declined significantly on a year-over-year basis and investors were quick to note that this was Wal-Mart’s first year-over-year decline in earnings since 1991. Despite the retailer’s attempts to reverse the trend, it is likely to repeat itself in the second quarter when consensus estimates peg Wal-Mart’s to decline 5% year-over-year to $1.04 a share on revenues of $116.26 billion. Consequently, experts have reduced their consensus estimate from $1.06 over the last three months, and the company probably needs to report earnings of $1.09 on revenues of $117.0 billion to sustain market interest. Wal-Mart shares have mostly traded in the $76-$84 range in the last three months. The Wal-Mart stock carries a price estimate of $79.02 a share, and a ‘hold’ guidance.
