Walmart Inc.
Q4 2016 Earnings Call Transcript

Published: 21 Feb 2017

[Steve Schmitt:]

Good morning and thank you for joining us to review Walmart’s fourth quarter fiscal 2017 results. This is Steve Schmitt, Vice President of Investor Relations at Wal-Mart Stores, Inc. The date of this call is February 21, 2017. On today’s call, you will hear from Doug McMillon, President and CEO; and Brett Biggs, CFO. This call contains statements that Walmart believes are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as amended, and that are intended to enjoy the protection of the safe harbor for forward looking information provided by that Act. A cautionary statement regarding forward-looking statements is at the end of this call. As a reminder, our earnings materials include the press release, transcript and accompanying slide presentation, which are intended to be used together. All of this information, along with our fiscal 2018 earnings release dates, store counts, square footage, earnings infographic and other materials are available on the Investors’ portion of our corporate website stock.walmart.com. For fiscal year 2017, we utilized the 52-week comp reporting calendar. Our Q4 reporting period ran from Saturday, October 29, 2016 through Friday, January 27, 2017. Before we get started, I’d like to remind you of a few upcoming dates. Our first quarter fiscal 2018 earnings release will be on Thursday, May 18, 2017 and our Annual Shareholder Meeting will be held Friday, June 2 on the University of Arkansas campus here in Fayetteville. Now, I’d like to turn it over to Walmart CEO, Doug McMillon.

[Doug McMillon:]

Good morning, everyone. As you saw in our earnings materials this morning, we delivered a very solid quarter. And it’s great to see continued momentum in the business. Total revenue grew 3% in the quarter and increased 3.1% for the year, both in constant currency. Comp sales growth of 1.8% in the Walmart U.S. business this quarter was better than expected, and I’m particularly pleased with the traffic in our stores. U.S. GMV grew 36% in the quarter, so we’re headed in the right direction with this important part of our business too. Our international business again delivered solid sales growth in constant currency last quarter and Sam’s Club delivered its best comp sales growth of the year. I’m excited about what’s happening at our company. We’re moving with speed to better serve our customers every day and progressing against our four key objectives, which are

[Brett Biggs:]

Good morning, everyone. As Doug mentioned, this has been an exciting year of transformation at Walmart. We’ve made strategic decisions revolving around the customer that will reposition the business for sustainable growth to win long term. We’re moving with speed to provide customers with a better offer through stores, mobile and e-commerce. And we’re confident this will drive value for shareholders. And, while going through this transformation, our financial strength serves as a great competitive advantage. For fiscal year 2017, there were a number of accomplishments, I’ll highlight just a few. Constant currency net sales were up nearly 3%, a growth of $13.7 billion. Operating cash flow reached $31.5 billion, an all-time record for Walmart. E-commerce GMV growth accelerated throughout the year. Adjusted EPS of $4.32 exceeded our initial full-year guidance. GAAP EPS was $4.38. It has been a very successful year in a number of ways. Now, let’s discuss the results in more detail, starting with the fourth quarter. Total revenue, excluding an unfavorable $2.6 billion currency impact, increased 3% to $133.6 billion. On a constant currency basis, we added $3.7 billion in net sales. It’s important to note that currency impacts on net sales during the quarter were about $600 million higher than anticipated versus when we began the quarter, driven primarily by the depreciation of the Mexican peso versus the U.S. dollar. Walmart U.S. delivered strong top-line performance with comp sales of 1.8%, exceeding guidance. International continued its steady constant currency top-line performance with another solid quarter, and Sam’s Club comp sales of 2.4% were better than expected, with continued strength in e-commerce and omni-channel initiatives. Fourth quarter adjusted EPS was $1.30, which was near the upper-end of our guidance range. Walmart’s consolidated gross profit margin increased 5 basis points in the quarter with expansion in both International and Sam’s Club. Walmart U.S. gross margin declined in the quarter. I’ll get into more detail on this in a moment. Total operating expenses increased 58 basis points in the quarter, primarily due to ongoing investments in people and technology. In both this year and last year’s fourth quarter, we adjusted for discrete items. These included $939 million in charges for store closures across all segments last year as well as $370 million for discontinued real estate projects and severance in the U.S. this year. For comparison purposes, excluding these discrete items for both years, operating expenses increased 97 basis points in the quarter. Now that we will be lapping the U.S. wage increases from fiscal year 2017, we would expect to slightly lever expenses in fiscal year 2018. I’ll provide more details about operating segment performance shortly, but let me first spend a few minutes on e-commerce where we’re changing rapidly and remaining laser-focused on our customers. Globally, on a constant currency basis, e-commerce sales and GMV increased 15.5% and 17.5% respectively. Excluding Yihaodian, GMV increased 29.7%. Going forward, we plan to discuss e-commerce results a little differently from the past in order to give you a clearer view of our performance, particularly in the important U.S. market. Given the organizational framework changes over the past few months, we will no longer be discussing global e-commerce as we have in the past. Sam’s Club e-commerce, and the various international e-commerce initiatives, will be discussed as appropriate within those segment discussions. As we discuss Walmart U.S. eCommerce, which is led by Marc Lore and represents the largest portion of our e-commerce effort, note that it includes all web-initiated transactions including those through Walmart.com such as ship to home, ship to store, pick up today, and online grocery, as well as transactions through Jet.com and the other sites in our family of brands. We saw strong growth this quarter in the Walmart U.S. eCommerce business with GMV and sales growth of 36% and 29%, respectively. Our integrated offering means customers are shopping with us through multiple channels. In fact, over the holidays, Pickup Today, which is available in Walmart U.S. stores, grew by 27% over last year. We are seeing the benefits of our e-commerce investments. During the holiday period, the e-commerce fulfillment network performed very well, supporting record volumes with on-time delivery rates that far exceeded last year. This network is also the backbone of the new free 2-day shipping promise with a $35 minimum order available at Walmart.com. Customers are responding well to this new offer, and ecommerce sales have strengthened since its launch on January 31. Looking ahead, you’ll continue to see us make investments in e-commerce to drive traffic and improve the customer value proposition. We’re excited about the things we’re doing, the speed at which we’re doing them, and the work we still have to do. In the fourth quarter, we continued to make excellent progress on working capital, with $11.9 billion in operating cash flow and $8.7 billion in free cash flow. Working capital has been a focus for us all year. And I’m really pleased with our discipline, particularly in managing inventory and payables. For the year, we generated $31.5 billion in operating cash flow and $20.9 billion of free cash flow. This was an increase in free cash flow of nearly $5 billion, or more than 30%, versus last year. This is a great testament to Walmart’s financial strength. When you consider that we were able to reduce our net debt levels this year while also making strategic decisions to grow the business both organically and through M&A, including investments in stores, logistics, people and technology, it’s a fantastic achievement. We accomplished this while also returning a substantial amount of cash to shareholders. In fact, over the past year, we returned $14.5 billion to shareholders in the form of dividends and share repurchase. As of the end of the fiscal year, we had used approximately $10.8 billion of the current $20 billion share repurchase authorization. Additionally, today we announced an increase in our annual dividend from $2 per share to $2.04 per share in fiscal 2018. We’ve now increased our dividend for 44 consecutive years. We’re proud of our track record of returning significant cash to shareholders, while investing in future growth. Let’s now discuss the results for each operating segment in more detail, starting with Walmart U.S. We’re pleased with the continued momentum in Walmart U.S. with steady improvement in stores, strong growth from e-commerce and growing contributions from the rollout of Online Grocery. We’ve now seen nine consecutive quarters of traffic growth in our stores. Clearly, we’re gaining traction and it’s exciting to see how customers are responding to our focus on saving them time and money. For the quarter, strong comp sales growth of 1.8% was driven by a 1.4% increase in customer traffic. All store formats had positive comp sales and e-commerce contributed approximately 40 basis points to the segment. We were particularly pleased with the positive comp in Grocery despite ongoing market deflation in food, which negatively impacted the Food comp by approximately 90 basis points. Throughout the 6-week holiday season, customers responded well to consistent everyday low prices and a simplified integrated multi-channel experience that enabled last-minute shopping so they could find the perfect item. Gross margin decreased 8 basis points in the quarter. Savings from procuring merchandise as well as lower logistics costs benefitted the margin rate, but were more than offset by the continued execution of our price investment strategy and the timing of post-holiday markdowns. We’re entering the New Year in a very solid inventory position. For the year, Walmart U.S. gross margin increased 24 basis points. As a reminder, both fourth quarter and full-year comparisons included a $56 million impact last year related to store closures. Operating expenses increased 4.6% this quarter and 8.1% for the year, primarily due to the associate wage rate increases as well as investments in technology and e-commerce. As I mentioned previously, in both this year and last year we adjusted for discrete items. This year’s fourth quarter included a $249 million charge related to discontinued real estate projects. Last year’s fourth quarter included $670 million in charges related to the impact of store closures. Excluding these adjustments, operating expenses would have increased 7.3% in the fourth quarter and 8.8% for the year. Walmart U.S. operating income declined 2.5% in the fourth quarter and 7% for the year. Excluding the discrete items discussed earlier, Walmart U.S. operating income declined 10.4% in the fourth quarter and 9.2% for the year. The Walmart U.S. team continues to do a great job with inventory while maintaining high in-stock levels. Inventory declined 3.1%, with comp store inventory down 7.2%, despite strong sales growth. To wrap up Walmart U.S., we made a lot of progress this year in providing customers value and convenience. While sales have been slower than expected to start the year, which we believe is due in part to the delay in tax refunds versus last year, we expect comp sales for the 13-week period ending April 28, 2017 to increase between 1% and 1.5%. Now, let’s move to Walmart International. Walmart International continued its solid sales performance this quarter. While Walmex results were the strongest with comp sales growth of 7%, the solid international performance was fairly broad based. 10 of our 11 markets posted positive comp sales and six of those markets grew comps by more than 4%. For the fourth quarter, net sales grew 3% on a constant currency basis, while reported net sales declined 5.1%, impacted by a $2.6 billion currency headwind. For the year, net sales grew 3% on a constant currency basis, while reported net sales declined 5.9%, impacted by an $11 billion currency headwind. From a profitability standpoint, fourth quarter operating income increased 3.8% on a constant currency basis. I’d like to point out that there were a few items in the quarter that collectively had a negative impact to operating profit of approximately $100 million, primarily because of adjustments to useful lives of certain assets and impairments in certain markets, which were partially offset by the gain from the sale of the remaining shopping malls in Chile as mentioned last quarter. Operating income for the year increased 19.7% on a constant currency basis and increased 7.7% on a reported basis. As a reminder, these results include the gain associated with the sale of Yihaodian and the items mentioned above. Let’s now turn to some brief highlights of the key markets. Please note that the accompanying financial presentation includes detailed information on our five major markets. The results discussed below are on a constant currency basis. Let’s begin with Walmex. Strong sales momentum continued across all formats, divisions, and countries with total sales growing nearly 9% in the quarter. In Mexico specifically, comp sales increased approximately 8% and outpaced all divisions of ANTAD, including self-service, specialty, and department stores. In Canada, net sales increased 2.7% and comp sales increased 0.2%. According to Nielsen, we continued to gain market share in traffic driving categories like food and consumables, and health and wellness. Turning to the UK, net sales declined 0.6% and comp sales declined 2.9% in the quarter. We have a lot of work to do in this market, but we’re encouraged by some of the early signs of traction with improvements in the customer value proposition. In China, net sales grew 5.4% and comp sales increased 2.3%. Sales were solid across hypermarkets and Sam’s Club. We’re excited about the future of e-commerce in China. The strategic alliance with JD.com will continue to expand our presence throughout the country, and offer customers new and exciting products through our flagship sites on JD’s platform. So overall, we’re pleased with the consistent performance from our international portfolio and excited about the new fiscal year. Now, let’s turn to Sam’s Club. At Sam’s Club, we’re pleased with the efforts underway to transform the business. We’re making progress in a number of areas, and we know we have to move faster to provide the value that members expect. During the quarter, top-line performance was driven by an increase in comp sales, excluding fuel, of 2.4%. Samsclub.com GMV was strong, increasing by 25%, and Club Pickup also performed well. Operating income, excluding fuel, declined 5.1% for the quarter. Investments in associate wages pressured expenses, along with charges related to the impairment of clubs. In addition, this year’s fourth quarter included a $10 million discrete charge for discontinued real estate projects, while last year’s fourth quarter included a $57 million discrete charge related to the impact of club closures. Excluding these discrete items, operating income would have declined 14.6% this quarter. For the year, net sales, excluding fuel, increased 1.8% to $53.3 billion. Operating income, excluding fuel, declined 7.3%. Looking ahead, for the 13-week period ending April 28, 2017, we expect a comp sales increase of around 1%. With that, let’s discuss guidance for the total company. At our October investor meeting, we guided that fiscal 2018 full-year EPS, based on currency rates at that time, would be relatively flat to adjusted full-year fiscal 2017 EPS, and we still expect that to generally be the case. However, since then, the U.S. Dollar has strengthened, in particular versus the Mexican Peso, which negatively impacts our Walmex projections on a U.S. Dollar basis. We also expect our tax rate next year to be higher than the rate for fiscal year 2017, which was positively impacted by transactions such as Yihaodian during the year. We expect fiscal 2018’s tax rate to be around 32%, assuming no major changes to the tax environment in our major markets. As always, there can be variability from quarter to quarter. Certainly, we are aware of and engaged in the discussions around tax reform in the U.S. As more information comes to light, we will continue to provide updates if any of our assumptions were to materially change. When taking all this into consideration, we expect fiscal 2018 EPS to be in a range of $4.20 to $4.40 compared to fiscal 2017 adjusted EPS of $4.32. This assumes an expected currency impact of about $0.05 per share. As stated in October, we expect operating income to decline slightly in fiscal 2018, driven in part by continued strategic price investments, partially offset by a more disciplined approach to expenses. We would anticipate that EPS in the first quarter will be in the range of $0.90 to $1, which includes an expected currency impact of about $0.02 per share. Net sales, on a constant currency basis, are anticipated to grow between 3% and 4%. We expect the underlying stores business, in most parts of the world, to continue to deliver solid top line results along with increased growth in our e-commerce business. We’re focused on driving strong efficient growth by opening fewer new stores overall, particularly in the U.S., while prioritizing comp sales and accelerating ecommerce growth, including the third-party marketplace. Based on current exchange rates, we would anticipate a currency impact on net sales of approximately $3 billion for the year. On a reported basis, we expect net sales growth of between 2% and 3%. There are a number of additional assumptions in this guidance today, including that economic conditions, and the tax and regulatory landscape in our largest markets remain generally consistent. Also, as indicated at our October investor meeting, we expect capital expenditures, excluding acquisitions to be approximately $11 billion for fiscal year 2018. So in closing, I want to thank all of our great associates around the world for the progress we made as a company this past year. As a team, we’ll win with customers by serving them in new and exciting ways, and deliver for our shareholders in this new fiscal year.

[Unidentified Company Representative:]

This call includes certain forward-looking statements intended to enjoy the safe harbor protections of the Private Securities Litigation Reform Act of 1995, as amended. Such forward-looking statements relate to management’s guidance and forecasts as to, and expectations for Walmart’s earnings per share for the three months ending April 30, 2018; Walmart’s earnings per share, operating income, net sales, levering of expenses and effective tax rate for the year ending January 31, 2018; the impact of currency on net sales and earnings per share for the year ending January 31, 2018; comparable store sales for the Walmart U.S. segment and the comparable club sales, excluding fuel, of the Sam’s Club segment for the 13 week period ending April 28, 2017; actions that will drive value for shareholders, future investments in e-commerce to drive traffic and improve the customer value proposition; the benefits of our investments in e-commerce, and the benefits of our alliance with JD.com. Assumptions on which any guidance or forecasts are based are considered forward-looking statements. Walmart’s actual results may differ materially from the guidance provided, or the goals, expectations or forecasts discussed in such forward-looking statements as a result of changes in facts, assumptions not being realized or other risks, uncertainties and factors, including