Wal-Mart’s 2Q2011: strong abroad, still suffering from recession in the US

the results

WMT reported 2Q2011 (fiscal 2011 ends January 2011) before the market open in New York yesterday.  The company earned $.97 a share, up 9% vs.  $.89 a share achieved in the same period of the previous fiscal year.  That was a penny ahead of the Wall Street consensus.  The company raised its full year earnings guidance by $.05 to a range of $3.95 to $4.05.  (2Q2010 was originally reported as $.88, but the installation of a new SAP management control software system has given WMT better knowledge of its inventories, resulting in the restatement.)


Three-quarters of WMT’s revenues come from the US.  The other quarter of the firm’s sales, along with virtually all its growth at present, comes from abroad.  The company is very strong in Mexico, and is expanding rapidly in Brazil and China.

Overall sales for the three months for Wal-Mart US were flat for the three months ending July, same store sales down 1.8% and operating incoe doan .2%.

Sam’s Clubs’ sales were up 2% for the July quarter, same store sales (ex fuel) up 1% and operating income up 2.4%.

International sales were up 11% and operating income up 16.8% (on a constant currency basis, both figures would have been about 4 percentage points lower).  Same store sales were up about 6% in China and 3% in Mexico and Brazil.  Japan and the UK were up slightly.

It seems to me that this general picture, aided by cost control, will continue at least for the rest of the fiscal year.

Since Wal-Mart is such a dominant factor in retail in the US, and because about a third of its customer base consists of lower middle class shoppers, Wal-Mart’s US results give some insight to the economic condition of ordinary American residents.

a Wal-Mart’s-eye view of the US

Wal-Mart reported that its business exited the quarter stronger than it began the three months and the traffic was improving sequentially.  But the image the company reveals of its customers’ buying tendencies–Wal-Mart has superb information systems–is one of continuing struggle.

For example, many customers are living paycheck to paycheck.  So Wal-Mart sees a surge in sales on payday, followed by a gradual tailing off until the next paycheck is issued.  Use of food stamps and other forms of government assistance is rising.  Use of the company’s check-cashing services is up by more than 10%.  Credit card usage, now at 15% of sales (30% is about average for retail overall), continues to fall.

Grocery sales are up.  Baking and cooking supplies are, too, as more people shift from eating out to preparing meals at home.  Apparel sales (never a Wal-Mart strength) are down, as are home goods and appliances and electronics.  In other words, necessities are in, discretionary purchases are out.

This may not be a strictly apples to apples comparison.  Wal-Mart performed relatively well during the worst of the recession, helped in part by shoppers trading down from more expensive stores.  Industry evidence is that many of these customers have begun to trade up again.  Still, it’s clear that many Wal-Mart customers are having a very rough time.

Last year, apparently in a bid to woo more affluent customers, Wal-Mart tried two experiments.  It cleared its normally crowded aisles and reduced the number of items sold in many categories–apparently to give a more Target-like look.  It also increased advertising.  Neither experiment worked.  So the company is increasing assortments again, delegating more merchandising authority to local managers and stopping the extra advertising.

On the positive side, Wal-Mart says that after its success in entering the Chicago urban market it has been contacted by a number of large cities asking the company to do the same for them.

the stock

WMT (I own it) is trading at under 13x earnings and yielding 2.4%.  It is generating free cash flow of over $4 billion a quarter and has used $7 billion of that in the first half to buy back stock.  the earnings growth rate should gradually improve, both as international operations become a large part of the whole and as the economy rebounds from the current cyclical low point for Wal-Mart customers.  For an income-oriented investor, I think WMT is way better than a government bond–admittedly more volatile–but way better.

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