Wal-Mart Q2
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Wal-Mart Q2
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(FOOL CONFERENCE CALL SYNOPSIS)* By Debora Tidwell (MF Debit)
Wal-Mart Stores Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %> UNION CITY, Ca., August 13, 1996/FOOLWIRE/ --- Wal-Mart announced that total sales increased 13% and the company had record net income for Q2 1996 of $706 million or $0.31 per share compared with $633 million or $0.28 per share in the prior year. This represents a 12% increase in profits on a 13% increase in sales.
Domestic discount stores comparable sales including supercenters were up 6.1% and their comp store sales and clubs increased 1.9%. Their cash flow after capital expenditures, working capital changes, and payment of dividends was positive by over $850 million for the first half of the year.
The second quarter increase in earnings fell slightly short of their objective to have earnings grow at least as fast or faster than sales growth. They are looking forward to achieving that in the last half of the year. They think that the first quarter of this year was probably their most difficult comparison followed closely by Q2. They think they should begin to see more momentum in Q3. Q4 is going to be unusual this year because there are many fewer days between Thanksgiving and Christmas and retailers will have to approach that differently. But Wal-Mart is excited about the prospects, the momentum they have, and their opportunities in the last half of the year.
They have also made significant progress in reducing their inventory levels. They started out the year with the objective of improving their supply chain management to the point where they thought they could take at least $1 billion out of the merchandise going from the vendor to the consumer during the course of the year. They have taken about $500 million out at this point and believe that the opportunity to get the other $500 million is there for the second half. This reduction in inventory and some other things they have done to improve their cash flow should enable them to use their operating cash flow to fund all their capital expenditure requirements plus the dividend this year -- the first time they have done that in some time. It's not that the capital expenditure numbers are way down, they will spend over $3 billion in new locations, remodels, and internatonal development this year, so they still have a very strong program there.
The retail environment, not just domestically but seemingly all over the world remains difficult according to the company. They indicated that the consumer is a different consumer than they were dealing with a few years ago and they have to approach it a different way. Although they have little or no inflation in their business and the consumer is more lifestyle-driven today and experience-driven than they are materialistic, the opportunity is still there to serve them better with Wal-Mart's concept, they believe, than any other. They are gaining market share and that is really the name of the game right now for them. They will continue to push in that regard. They believe that the last half of the year will be an opportunity to have a good year, but in the aggregate they don't see much opportunity for the overall pie to grow, so they are going to have to gain share and believe that they will.
They are very pleased with their domestic operations in all divisions which are all large supercenters and Sam's. They are a little disappointed in their international profitability but are making very good progress in all areas. The are seeing the beginning signs of the Mexican economy strengthening a little bit. They continue to gain significant market share in Canada. They are getting better all the time in Argentina and Brazil. They are excited and optimistic about the international operations at this point in time and believe that the tuition they have paid to get to where they are is a necessary travelling of that learning curve which will give them a big head start on others as they begin to compete more in a globel economy.
Yesterday they opened their first operations in China -- a Sam's Wholesale Club and a 3-story supercenter. Early indications from the tremendous response to membership in the clubs to the crowds at the club and the supercenter cause them to be very optimistic that they can learn to merchandise to the Chinese consumer and do a very good job there. With 1.4 billion people in China, they feel there is a tremendous opportunity.
They signed a contract to sell their photofinishing plants to Fuji. They think it will be a very good deal for them. In conjunction with that, they have taken a 10-year service agreement where they will continue to have their photofinishing done in the same labs they've been operating in with the same people. So, from an operational standpoint it doesn't result in a big difference. It will provide them with a significant amount of cash which will help their cash flow through the balance of the year. In the photofinishing industry, Wal-Mart is making a big move into one-hour photo labs in their stores. That is separate from the photofinishing they have been doing centrally in these labs for the traditional photofinishing customer. Both are important, but the technology is changing dramatically and in the central labs that supply lots of stores, the technology is going to be changing so rapidly and so much in the next 5-10 years that they are really not able to keep up with it. They feel that their emphasis should be on retailing and not seeing whether they can keep up with the latest photofinishing technology. They believe others can do that better than they can do it. Anytime they can outsource or have a third-party service do something better than they can do it, they don't feel they need to be in that business. They need to be in a business only as long as they can do it better than the services offered to them. So, consequently, the photofinishing labs will be better run by Fuji than by Wal-Mart and they can concentrate on serving the consumer at retail better and they think it is going to be a very good deal for everyone.
Domestic sales were up 11.6% for the quarter and comps in both their major divisions were at the upper end of their plan. Supercenter food growth continues very strong, in the 10% range. Their clothes sustained a positive sales growth and experienced improvements with their advantage member which is the consumer side of their business. The discount store gross margins were flat with last year's Q2 and were marginally up from Q1 this year. Margins have historically declined from Q1 levels.
Supercenter gross margin was down slightly in general merchandise but still runs ahead of the discount stores' general merchandise margin. They have experienced good improvement in gross margin on the food side of the business. Their club's gross margin improved by 15-20 basis points over the prior year's Q2 and are up over 40 basis points on a year-to-date basis. Much of this improvement results from an emphasis on net/net pricing, where the allowances are included in the original cost. This will negatively impact the other income line. Gross margin for the total company was flat and was positively impacted by the mix of merchandise from each of the divisions since they had slower sales growth from the low-margin business and strong sales growth from the discount store and special divisions.
A real highlight was the excellent expense control in all their divisions. SG&A as a percentage of sales was down for the first time in almost 4 years. The Wal-Mart division, including supercenters, was up only slightly in operating expenses -- despite 10 additional supercenter openings in the current year versus the prior year. Comp discount stores had a 35 basis point improvement and operating expenses for the quarter over the similar prior year period. The clubs and McLane's also saw good improvement in expenses and the international division experienced an almost 200 basis point reduction in expenses.
The Sam's operating profit was down slightly, mainly as a result of the reduction in other income from the movement of buying allowances and volume rebates in the cost of sales. They believe this is going to have a short-term impact on the other income account but will result in long-term benefits on the cost of sales line. The base units lost $5 million on a pre-tax basis and have lost approximately $20 million year to date. They continue to see improvement in sales with comps in the base clubs running 400-500 basis points ahead of the division. They expect the base units will generate a profit in the second half of the year.
The international division lost $10 million for the quarter compared to a $17 million gain in the same period last year. Last year's gain, in large part, was due to a real estate gain that they booked of approximately $14 million in Puerto Rico. If they take into account the minority interest adjustment including the income they get the division was profitable for both the quarter and the year and that does not show up in the operating income number, that comes in on the other income line. Canada was profitable for the quarter and the year to date, despite its first quarter losses. Comp sales are growing in the 20% range and average ticket continues to increase. Unaided awareness in Canada of Wal-Mart approaches 90% now. Almost half of the consumers in their survey list Wal-Mart as the discount store at which they shop most frequently. Mexico is basically break-even for the year before adjustment for the minority interest although it did experience a small loss for the quarter. The clubs in Mexico have experienced inflation adjusted positive comp sales. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. |
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Copyright 1996, The Motley Fool |