Walmart Inc.
Q2 2008 Earnings Call Transcript

Published: 14 Aug 2007

[Carol Schumacher:]

Welcome to the Wal-Mart Stores second quarter earnings call for fiscal year 2008. This is Carol Schumacher in the Investor Relations department. The replays of this call and rebated materials about the quarter are available on our website. Here’s the agenda for today’s call. Lee Scott will kick it off with a look at the overall company and thoughts for the second half of the year, Tom Schoewe has the details on consolidated financial results. Eduardo Castro-Wright will update you on the progress and plans for our U.S. business; and Charles Holley has the international and SAM’s CLUB review for the quarter. Tom will come back and close with our guidance for third quarter comps, as well as an update on our earnings per share guidance for the third quarter and the year. As a reminder, the store counts and square footage updates through the second quarter are available on our website, walmartstores.com/investors. We also have posted on the site an update to the return on investment and return on assets schedule which reflects our performance through the second quarter. And, there is a new investment community communications policy which details how we handle discussions about everything from guidance to details on our business. One key point I’d like to reiterate, we provide an update to earnings guidance after the second month of the quarter when we’re doing our sales releases. Thanks and let’s move onto the results.

[Lee Scott:]

Welcome to the Wal-Mart Stores Incorporated report on the second quarter of fiscal year 2008. Although there are always some successes to talk about in our business, overall this quarter was challenging. Earnings per share from continuing operations for the quarter were $0.76 per share up from $0.72 per share for last year’s second quarter. Tom Schoewe will discuss the non-recurring benefit we received from adjustments recorded in Q2. We generated approximately $92 billion in total company sales in the second quarter. Although some people will report that we’ve had record sales and earnings, our underlying operating performance, excluding those one-time items, was not what we expected of ourselves. In the Wal-Mart US segment, we certainly have made improvements in some areas of the store, most notably grocery, pharmacy and entertainment. Having said that, merchandising overall is still not where it needs to be. The US team is working hard to improve this. At the same time, US consumers continue to be under difficult pressure economically. The top concerns among our customers are economic -- money and finances, the increase in the cost of living and gas prices. It is no secret that many customers are running out of money towards the end of the month. The pay check cycle is in fact more pronounced now then it ever has been. In the midst of these challenges, our customers are seeing the value and low prices that they would expect from Wal-Mart. I assured you earlier this year that Wal-Mart would be the undisputed price leader. We have increased the amount of rollbacks more than 20% this year in our US stores. We have also continued to strengthen our product offering with more name brands on our shelves. At SAM’S CLUB, we are pleased with the ongoing improvement in serving our members, particularly the small business owner. SAM’S once again grew profits faster than sales. Among our international operations, Argentina, Brazil and China turned in the strongest performances for the quarter and just last week we announced our joint venture with Bharti in India. We also are seeing in other countries in which we operate, trends similar to those being seen in the United States as consumers are pushed by higher fuel prices, higher interest rates including those on mortgages, utility costs and generally more financial pressure. All of this is resulting in softness in sales in countries like Mexico and Canada. As a company, we’ve been through challenging times before. We understand the dynamics of our customer and what is necessary to give us greater momentum going into the second half of the year. Our management teams are focused on three primary areas

[Thomas Schoewe:]

Lee, thank you very much, and thank you for your interest in Wal-Mart and for joining us here today. As Lee stated, the second quarter of fiscal 2008 was challenging. That being said, let’s look at some of the highlights. First, total net sales for the company were up 8.8%. In addition, US comp store sales were 1.9% in the second quarter. That’s above the 0.6% we reported in the first quarter of this fiscal year and above the 1.7% we reported last year in the second quarter. Income from continuing operations increased 4.1%. Earnings per share from continuing operations were $0.76 per share for the second quarter. Earnings per share from continuing operations for the second quarter were impacted by three items, providing a net benefit of $171 million after tax, or $0.04 per share. These included

[Eduardo Castro-Wright:]

Thanks, Tom. As Lee mentioned earlier, the operating performance of Wal-Mart US was not up to our expectations. Operating income at the Wal-Mart Stores division increased 3.8% on a sales increase of 6.5% for the second quarter. Wal-Mart US comparable sales figures for the second quarter was 1.2%, driven by sales in grocery, pharmacy and entertainment. While we’re not happy with this quarter’s results, the running rate of our comps has improved and in fact, more than doubled in the second quarter when compared to the first quarter of this year. Pricing leadership is paying off nicely with market share gains in grocery, pharmacy and electronics. Supercenter food sales grew by more than 14% in the second quarter of this year and food comp sales were in the mid single-digits. Our pharmacy area continued to be above plan in sales with strength in all geographic areas. Electronics overall continued to perform above plan and above last year. In fact, we’ve noticed a number of analysts who have cited Wal-Mart’s gain in market share. We have seen the investment made in remodels of the Electronics department and our focus on great brands by Hewlett-Packard , Apple, Sony pay off as the consumer views Wal-Mart as a destination for electronics. Wal-Mart’s focus on providing top brands is yielding results. For example, we’re very pleased with the response we’re seeing to the sale of Dell personal computers in our stores. We started carrying a Dell laptop in Wal-Mart stores last week. Consumers today are pressed by a number of factors. Higher energy, higher gas prices and higher interest rates are all stretching their paychecks. Families with school-aged children are expected to spend more than $500 this year on back-to-school products. Our price campaign is designed to make a difference for families by saving them money where it counts most

[Charles Holley:]

Thanks, Eduardo. Before we get to international second quarter results, let’s briefly discuss India. Many of you heard our announcement last week of a joint venture with Bharti Enterprises. Under the joint venture we will operate business-to-business wholesale, cash and carry stores and operate a back-end supply chain management business. The first wholesale cash and carry facility is targeted to open by the end of next year with ten to 15 facilities expected to open during the next seven years. This is the first country Wal-Mart has entered organically in ten years. We will initially target tier 2 and 3 cities in Northern India where our business to business customers, retailers like Bharti and others, as well as restaurants, hotels and other businesses are currently served by a fragmented and inefficient distribution system. We expect this business customer to respond well to our product offerings. Now let’s discuss international second quarter performance. International net sales from continuing operations for the second quarter were $21.6 billion. That’s a 15.7% increase over the prior year. Our strongest sales performances in the quarter came from Brazil, China and Argentina. In a continuation of its first quarter performance ASDA in the United Kingdom delivered very positive sales results for the second quarter. The second quarter impact of currency valuation on sales generated a benefit of $1 billion, driven primarily by strengthening in the British pound, Canadian dollar and Mexican peso, partially offset by a weakening Japanese yen. Segment operating income from continuing operations for the second quarter was $1 billion. Gross margin for the segment was up slightly versus the second quarter of last year, largely as a result of improvements in the United Kingdom and Brazil. Operating expenses as a percentage of segment sales were up for the second quarter of fiscal 2007, largely due to the impact of the Trust- Mart acquisition and an increase in Brazil partially offset by savings in Mexico. Operating income grew slower than segment sales for the second quarter primarily because of sales pressures in Mexico, the Trust-Mart acquisition and India development activity. The second quarter impact of currency valuation on operating income was a benefit of $45 million. Now let’s discuss highlights by country. In the United Kingdom, ASDA has consistently outperformed the market this year. In an increasingly competitive environment the ASDA price leadership strategy has resulted in steady market share gain. Financially, this was a solid quarter with ASDA outperforming sales plans. Growth continues to be driven by strong traffic increases through comp stores and new openings. According to the T&S industry data, market share increased 0.2 percentage points year-on-year to 11.7% in the 12 weeks to July 15. Comp sales were up in the mid single-digits despite much tougher prior year comparables in very poor seasonal weather. Consumer spending recently has been impacted by rising interest rates, leading to more challenging market conditions and slowing growth, but despite this, ASDA is gaining market share. The progress on customer numbers and market share gain has been steady over the last 18 months and demonstrates the success of the ASDA strategy, which is even more relevant given the more value-oriented consumer. Customer reaction has been most positive in the following areas

[Thomas Schoewe:]

Thanks, Charles. For the third quarter we expect a comp store sales increase for our US operations of between 1% and 3%. We expect earnings per share from continuing operations for the third quarter to come in between $0.62 and $0.65 per share. Now let’s chat about full year earnings guidance. At the beginning of the fiscal year, our guidance for the year was $3.15 to $3.23 a share. Our current forecast for fiscal 2008 is $3.05 per share to $3.13 per share. This revision reflects our need to improve underlying operating performance coupled with the macro economic pressure we feel in many of our major markets including the United States, Mexico and Canada. We’d like to thank you for your interest in Wal-Mart and have just a great day.