Wal-Mart fell just short of expectations in the third quarter, with the acquisition of e-commerce startup Jet, improvements to stores and rising wages driving up expenses 9%, causing shares to tumble 2.8% in premarket trading after the retailer posted results Thursday.
Wal-Mart posted Q3 revenues of $118.2 billion, just shy of the Zack’s consensus estimate of $118.5 billion and same-store sales rose 1.2%, missing analysts’ expectation for 1.3%, though that was driven by a traffic increase of 0.7%. Neighborhood Market same-store sales increased approximately 5.2%.
Wal-Mart's e-commerce efforts seem to be paying off: Global Q3 e-commerce sales rose 20.6%, and the retailer boosted the low end of its fiscal year earnings forecast from $4.15 per share to between $4.20 and $4.35.
The mild results reflect a pull-back from the previous quarter, when Wal-Mart reported its largest same-store sales increase in four years, but analysts see that as an expected short-term rise in expenses, which will later be bolstered by growth in sales and traffic to stores and online.
“We take the view that profitability decline is a necessary evil over the short term if it allows Wal-Mart to retain its retail prominence,” Conlumino CEO Neil Saunders wrote in an email to Retail Dive. “Indeed, we contrast it to Amazon's acceptance of lower profits in order to drive growth.”
Q3 consolidated operating income decreased 10.4%, hit by human resources and technology investments and currency exchange rates, the company said. Excluding last year’s lease accounting benefit of $156 million, operating income decreased 7.9%. Year-to-date operating cash flow was $19.6 billion and free cash flow was $12.2 billion, both approximately $5 billion higher than last year, led by improved working capital management.
The retailer also reported impressive growth in online sales. Last quarter, e-commerce represented 3% of Wal-Mart's total revenue, according to data supplied to Retail Dive from eMarketer, which also showed that overall Q3 U.S. e-commerce sales were up 1%. While Wal-Mart is the leading retailer in the U.S. in terms of total sales, Amazon continues to be the leader in e-commerce by a wide margin.
The rising success of Wal-Mart's online and its Neighborhood Market stores, in combination with its omnichannel efforts, are strengths that will help Wal-Mart maintain momentum in the coming months, Moody’s lead retail analyst Charlie O’Shea wrote in an email to Retail Dive.
“The focus on improving working capital is generating increasing levels of cash flow, with almost $20 million for the first nine months, and despite Wal-Mart’s myriad price reductions on top of a heavily-promotional quarter in many product categories, gross margin actually expanded by almost 50 basis points,” O’Shea said.
As the all-important holiday season creeps closer, O'Shea said Wal-Mart is set up for success. “For holiday and Q4, we expect Walmart to continue to excel on multiple fronts, particularly online where we expect sales to continue to accelerate on a percentage basis, with a growth rate approaching 30% likely as it leverages its store network to handle online orders, especially via its buy online/pick-up in-store capability, as well as increasing benefits from Jet.com.”