Wal-Mart Lowers Outlook As Profit And Same Store Sales Decline; Could A Family Dollar Acquisition Turn Things Around?

Feb 20 2014, 9:15am CST | by

Superstore chain Wal-Mart offered a mixed bag of quarterly results Thursday morning, posting fourth quarter profit that beat the Street by a penny but fell compared to the same quarter last year, revenue that increased but same store sales that decreased, and lowering its outlook for fiscal year 2015 while raising its dividend for the same period. Meanwhile, some analysts are proposing that an acquisition of Family Dollar could help stabilize Wal-Mart’s business and provide a much needed boost.

Wal-Mart posted $129.7 billion in fourth quarter 2014 revenue, a 1.5% increase over the prior-year quarter that just about matches Street expectations. Fourth quarter net income fell 21% to $4.4 billion, resulting in earnings of $1.34 per share. Adjusted for special items — which Wal-Mart said included factors like store closures in Brazil and China and Sam’s Club restructuring — Wal-Mart’s fourth quarter earnings came in at $1.60 per share, a figure that beat the Street consensus by a penny.

On a full year basis, Wal-Mart saw $476.3 billion in total revenue, a 1.6% increase over full-year 2013 revenue. Full-year net income fell 5.7% to $16 billion, resulting in full-year earnings of $4.85 per share, a 3.2% drop compared to the $5.01 per-share profit reported for full-year fiscal 2013.

Also disappointing was Wal-Mart’s fourth quarter same store sales in the U.S., which fell 0.4%, about as much as analysts were expecting. Bill Simon, Walmart U.S. president and CEO, said that the decline is extending into the company’s first quarter results, and same store sales were down for the first two weeks of February thanks to “continued severe winter storms.” However, United Food and Commercial Workers senior capital markets economist John Marshall said that snowy weather is an easy excuse that doesn’t completely explain the sales decline.

“They’ve got 4,000 stores in the U.S. and the majority were completely unaffected by the weather,” Marshall said in a recent phone interview. “When people know a storm is coming, they buy things to help them hunker down in their homes. We often see a boost in spending” in advance of bad weather, he explained.

The same-store sales figure also includes an 0.4% boost from e-commerce sales, which Marshall noted is a newer segment growing at a higher annual rate because it has a lower baseline — which translates to even worse news for Wal-Mart brick and mortar traffic. One possible reason for this decline, Marshall said, is that there has been a “significant decline” in the company’s pricing advantage, and recent research has shown that the price premium consumers have to pay at Wal-Mart’s competitors is, in some markets, completely gone. “Wal-Mart for a long time said you may not like us, we might not always have products on our shelves, but when you find our products, they’ll be the lowest price. If that’s not the case anymore, and evidence is growing that it’s not, Wal-Mart is in a difficult position,” he said.

In a statement released Thursday morning, Wal-Mart president and CEO Doug McMillon said that same store sales improvement is a “key priority, and we’ll focus on being even stronger item and category merchants, delivering value and improving our service levels.”

McMillon said that in an effort to deliver more convenience and increase the brand’s relevance, the company is accelerating its small-store growth. To that end, the company is expanding its original plans to open 120 to 150 smaller-format stores this year, and is now planning on opening between 270 and 300 small format stores this year alone.

“Neighborhood Markets continued to deliver consistent solid comp sales growth, and customers appreciate the convenience of our small stores. They are a proven model,” U.S. division president Simon said in a statement. “We’re also pleased with how well the 20 Express stores are doing, and we’re expanding our pilot beyond the initial three markets.”

Some Wall Street analysts, however, think Wal-Mart’s small-store expansion would be better served if it acquired an existing dollar-store brand, like Family Dollar, Dollar General or Dollar Tree. A recent Credit Suisse report said that Family Dollar would be the smartest of the bunch to acquire, because of the relatively low overlap in market share.

“Our proprietary geographic analysis suggests that acquiring Family Dollar could be the most logical way for Wal-Mart to significantly jumpstart the small store effort. Compared to Dollar General and Dollar Tree, Walmart has the lowest overlap in store locations with Family Dollar,” wrote reserach analyst Michael Exstein, noting that this low market share overlap translates to the least risk in opposition from the FTC. “We think Wal-Mart could pay a 20-30% premium for Family Dollar in an immediately accretive deal,” he said.

Looking ahead to its fiscal year 2015, Wal-Mart provided more bad news for investors, saying that economic factors are weighing on its outlook. Chief among these factors are reductions in government benefits (like the SNAP food-stamp program), higher taxes and tighter credit, said Charles Holley, Wal-Mart executive vice president and CFO. “Further, we have higher group health care costs in the U.S. These concerns, combined with investments in e-commerce, will make it difficult to achieve the goal we have of growing operating income at the same or faster rate than sales,” Holley said. “In October, we forecasted a 3 to 5% net sales increase for fiscal 2015. Given these factors and the ongoing headwind from currency exchange, we expect to be toward the low end of the net sales guidance.”

In a separate release Thursday morning, Wal-Mart also announced that it is increasing its annual dividend in fiscal year 2015, up to $1.92 per share from the prior-year’s $1.88 per share. The dividend will be paid in four quarterly installments of 48 cents per share.

Following the release of the earnings results and the dividend increase, shares of Wal-Mart fell more than 2% in pre-market trading Thursday morning, opening at $73.38, lower than its Wednesday closing price of $74.85. Year-over-year, the stock has seen an 8.2% return. Potential acquisition target Family Dollar, meanwhile, also opened Thursday trading with a slight downturn, and is currently down about 0.8%. Year-over-year, the dollar store chain has posted a near-20% return.

Source: Forbes Business


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