Walmart Inc.
Q4 2008 Earnings Call Transcript

Published: 19 Feb 2008

[Carol Schumacher:]

Welcome to the Wal-Mart Stores Fourth Quarter Earnings Call for Fiscal Year 2008. This is Carol Schumacher, Vice President of Investor Relations. The replay of this call and related materials about the quarter are available on our website. Here’s the agenda for today’s call. Lee Scott our President and CEO will analyze our business results and will comment about fiscal year 2009. Tom Schoewe, CFO will cover a lot of detail on the financial results for the company. Wal-Mart US President and CEO Eduardo Castro-Wright will recap the results for that business and will address the strategic initiatives underway in this current fiscal year. Mike Duke, Vice Chairman who runs our International Business will lay out the strategy for Wal-Mart International as well as the details on results for each of our countries. Charley Holley, EVP and Treasurer will wrap up the operating segments with SAM’s Club and Tom will close the call with guidance for the first quarter and FY09. Before we begin we have two things to share. First our redesigned and enhanced website for Investor Relations on www.WalmartStores.com goes live this Saturday, February 23rd and we appreciate any feedback you have for us on the site. Second, thanks for your patience during the past quarter while the IR team was short a director. [Mike Beckstead] will join our team next week as Director of Investor Relations. He brings to Wal-Mart a background in accounting and investor relations as well as experience in the grocery area of retail. This call is a bit longer than what we normally do so get ready. There’s just a lot more detail. With that let’s begin.

[H. Lee Scott:]

Welcome everyone, thank you for joining us and for your interest in our company. Before I get started let me apologize a little for my voice. I am suffering from the flu I believe it is. I am taking my $4 antibiotics from Wal-Mart so I feel like I’m going to be on the mend. Let me get started. I am happy to report that Wal-Mart Stores Incorporated had another record quarter and fiscal year. Let me begin with our record sales. Total net sales for fiscal 2008 reach $375 billion an 8.6% increase for our company. We added approximately $30 billion in sales which is more than many retailers generate in total sales over the course of an entire year. Said another way, $30 billion would be the equivalent of a fortune 75 business. For the fourth quarter we topped $100 billion in sales. The first time in history that a global retailer has reached this milestone in sales in a single quarter. Earnings also were strong. Earnings per share from continuing operations for the fourth quarter were $1.02 per share up from $0.95 per share last year. In addition, we delivered a record return to our shareholders this year through more than $11 billion in share repurchases and dividends. These record results came about because all of our operations around the world were ready for the holiday. In fact, the plans that our teams put in place earlier this year delivered for our customers and for our shareholders. Tom Schoewe will share more details on the numbers but clearly our underlying operational performance exceeded the expectations we had at the beginning of the quarter. I want to say how proud I am of the more than two million Wal-Mart associates around the world who executed our plan in such a way that allowed our company to make significant progress in an economy that got more difficult as the year progressed. We knew our customers would be stretched during the holidays and we made sure that they knew they could count on Wal-Mart for low prices. The combination of price leadership with improved store operations made the difference for Wal-Mart US this year. We had excellent results in grocery, health and wellness and electronics. The focus on key items early in the season and throughout the holidays was strategically planned. Big investments on items like digital photo frames paid off in important categories. Our associates delivered on the plan called Operational Excellence. Across the country Wal-Mart customers experienced stores that were cleaner, better in stock and had quicker and friendlier check out experiences. Wal-Mart US truly executed on its “Save Money Live Better” message. Wal-Mart International continues to optimize its assets and leverage opportunities across the countries. You are going to hear from Mike Duke today that we can enhance our global leverages within the total Wal-Mart business. The collaboration among the operating segments will make Wal-Mart even stronger as we move forward. SAM’s Club closed the year well with profits growing faster than sales for the year. The team continues to drive operating income through comp sales, expense management and in club operational execution. In the Wal-Mart US business we have moderated our capital expenditure for the next three years and slowed down our square footage growth. We are investing more in existing stores through remodels and resets. This strategy changed how we operate our company. I can assure you that the discussions in our real estate meetings are very detailed and thorough to make sure that we generate the best possible returns. The savings in capital along with our strong financial position should enable us to continue to provide superior returns to our shareholders. Wal-Mart also continued to take on tough challenges that can make a difference in the world. Last month I built on my 21st century leadership speech and we spoke to our US managers about creating the Wal-Mart of the future. In addition to the work we already have underway we are focusing on three fronts

[Tom Schoewe:]

Let’s get right into the details of our fourth quarter and the full fiscal year for 2008. Total net sales for the company for the fourth quarter of fiscal 2008 were up 8.3% to $106.3 billion. Included in these results is a total US comp of 1.7%, that’s without fuel. That’s within the range we provided you for the quarter. Operating income was up 7% with income from continuing operations for the fourth quarter increasing 4.0%. Diluted earnings per share from continuing operations in this quarter were $1.02 a share that’s an increase of 7.4% over the same quarter last year. Our diluted earnings per share results included net charges of approximately $0.02 per share for certain items. Let’s get behind those numbers. Diluted EPS for the fourth quarter was impacted negatively by a total of $0.03 per share which included two items; first approximately $70 million in after tax expenses related to dropped US real estate projects. As Lee shared with you and as we discussed at our October Analyst and Investor Meeting we are committed to capital efficiency. This $70 million in after tax expenses represents the amount by which we exceeded the dropped project expense in Q4 and the full fiscal year in 2007. Second, an approximately $32 million after tax restructuring charge for the head count reduction at Seiyu. You’ll recall that we gave you a heads up on this item at the end of our last quarter. On the positive side these charges were offset partially by a $0.01 per share credit due to the recognition of $38 million in after tax gains from the sale of certain real estate projects. Finally recall that last fiscal year, that would be Q4 of fiscal 2007, we had a benefit of $0.02 related to the resolution of certain tax items and the renewal of the work opportunity tax credit. What does all this mean? In summary, we had a net after tax charge for the three items in the fourth quarter of this year of $0.02 per share and an after tax gain of $0.02 per share in the quarter last year. Taking into account these items I think you’ll agree, we had a strong underlying operating performance for the quarter. Now for the details of full fiscal year 2008. Net sales were $374.5 billion that’s an 8.6% increase over last fiscal year. Operating income was up 7.3% with income from continuing operations up 5.8%. Diluted earnings per share, once again from continuing operations for the full fiscal year, were $3.16 which is an 8.2% increase over last fiscal year. Let me remind you that this is within our original guidance that we provided last year at this time. It’s near the top of the range we provided at the end of the third quarter. Total US comp store sales for the fiscal year were 1.4% without fuel and 1.6% with fuel. Wal-Mart US reported a 1.0% increase and SAM’s Club a 4.2% increase. Again, both of these comps are without fuel. Let’s move on to the rest of the details. Consolidate gross margin was up 51 basis points for the fourth quarter with increases reported by each operating segment. Consolidated inventories were up approximately 4.4% against a fiscal year sales increase of 8.6% year over year for fiscal 2008. We are really pleased that total US inventory increased less than 1% on the sales increase of approximately 6%. Kudos especially to the significant progress that Wal-Mart Stores US made this fiscal year and the continued strong inventory focus of our SAM’s Club team. Payables as a percentage of inventories for the company were 86.3% at the end of fiscal year 2008 which is up slightly from the 84.6% we reported last fiscal year. This improvement continues as a result of our inventory management progress primarily in our US operations. Other income was up 17.3% for the fourth quarter and up 16.8% for the year. Good news continues in financial services here in the United States. Eduardo will provide a little more perspective on financial services here in just a moment. Recall that other income also includes club membership fees, tenant lease income and recycling income. Other income for the fourth quarter and for the full year also includes gains of $57 million and $188 million respectively related to the sale of certain real estate properties. Consolidated operating expenses as a percentage of sales for the fourth quarter were up 68 basis points over the same period last year. As expected, we did see increases in maintenance and repair expense due to our accelerated efforts to update the US Wal-Mart stores through remodeling as well as higher advertising expense for Q4 versus Q3. On a fiscal year basis consolidated operating expenses as a percentage of sales were up 22 basis points. Corporate overhead expenses were up approximately 9% for the fourth quarter. As we noted at our October Analyst meeting in fiscal 2008 we began investing in three long term transformation projects designed to enhance our information systems. These cover

[Eduardo Castro-Wright:]

With a strong fourth quarter Wal-Mart Stores US closed fiscal year 2008 on a high note. Let me start with an overview and then we will get more into the details. We had solid performance for the quarter driven by seasonal events including Thanksgiving, the holidays and game time. Wal-Mart outperformed key competitors in the mass merchant grocery and many specialty channels. Our inventory was clean throughout the quarter and we are very well positioned for the first quarter of fiscal 2009. We follow through aggressively on our save money live better promise and we greatly improved customer experience. Now let’s look at some of the specific numbers for Wal-Mart Stores in the United States. Total sales for the fourth quarter were $67.4 billion up 5% over the same period last year. For a total year net sales were up 5.8% at Wal-Mart Stores US driven by strength in grocery, health and wellness and electronics. Operating profit grew faster than sales for the quarter and was up 5.3% over the same period last year and up 5.4% year over year for the full fiscal year. As Tom pointed out earlier the Wal-Mart US operating profit for the fourth quarter and the fiscal year was negatively impacted by charges related to a greater than expected number of real estate projects that have been cancelled or postponed. These projects were dropped as a result of our emphasis on capital efficiency and its requirement for projects to meet more stringent return on investment criteria. Let me provide a little more context on this before I continue with our results. Throughout the year we took opportunities to re-review our real estate projects using the new capital efficiency model. This was designed to take the numerous approved projects in our pipeline and prioritize them. Therefore, we postponed or cancelled many projects which resulted in increased operating expense. We feel these actions will go a long way to improve returns in the future. In other words, short term pain for long term gain. These actions enhance our ability to moderate our future capital growth. Gross margin dollars increased 7.6% for the fourth quarter and 6% for fiscal year 2008. Despite slightly higher strength gross margin as a percentage of sales was up 62 basis points for the fourth quarter year over year and up slightly for the full year versus last year. Initial margins across most businesses showed increasing strength throughout the year. We also saw pressure from increased transportation costs which impact our cost of sales and gross margin. In 2007 on highway diesel prices increased by $0.25 per gallon. This cost increase did negatively impact transportation costs by direct fuel costs and fuel surcharges. We do expect fuel costs to be a potential headwind for fiscal year 2009 if they continue to rise beyond our projections. That being said, our logistics team has instituted other expense saving projects to help keep overall projected costs more in line with the fiscal year just ended. We are proud of our year over year inventory performance which grew at 0.7% versus a sales increase of 5.8%. We certainly surpassed our goal of growing inventory at less than half the rate of sales growth. This achievement was due largely to a very strong performance during second half of the year as well as improvements made in merchandise flow processes and systems. A Wal-Mart Stores comp of 1.6% for the fourth quarter was within our quarterly guidance. Comp sales were driven by a 3.4% increase in average ticket. Customer traffic continued to decline but at a reduced rate during the fourth quarter compared to earlier in the fiscal year. In other words, our traffic trends are improving. We have more people going through our stores than any other retailer and this provides a significant growth opportunity for us. I would like to point out that while many of our competitors have negative comps for the January period if we convert Wal-Mart’s comp to many competitors calendar for the periods our comp would have been a solid 3%. Further, non-impacted comp stores sales improved each consecutive quarter during the fiscal year. Let me remind you that non-impacted stores are those not influenced by new store openings. Segment operating expenses as a percentage of sales were on plan for the quarter up 70 basis points year over year. Some of this increase in operating expenses was due to the dropped real estate projects and due to maintenance related to our remodel program. We also saw increases in advertising investment to support introduction of our new Save Money Live Better campaign. For fiscal year 2008 operating expenses as a percentage of sales were up 21 basis points over the prior year reflecting the same factors outlined for the fourth quarter. Our labor productivity rates continue to increase an in fact are up almost 12% over the previous quarter of fiscal 2008. We plan to complete the roll out of the scheduling system in all departments in all stores during the first half of fiscal year 2009. Where are we on our strategy moving forward? Our priority is to further establish our “Save Money Live Better” platform. We are very committed to this vision and we are engaged in ensuring that the clarity of our merchandise offerings back this price leadership message. With a more challenging economy and inflation still rising in some categories customers have the confidence they can count on Wal-Mart to save them money on great brands and on every day needs. We are confident that our customers see how relevant this message is in their lives we will capture more than our fair share of retail sales. During the quarter we saw continued inflation in core food categories including dairy, meat and bread and this is something we are monitoring on a daily basis. We believe however the rate of inflation passed along in our stores is less than our competitors in the grocery category saving customers money and building loyalty. We can do this because of our operating efficiencies. The entertainment category continues to see inflation especially in flat panel TV’s. We have dedicated additional square footage to our entertainment selling space this past year. Our entertainment area is clearly the destination for our customers. We will continue to drive new brands and new technology in this area. Health and wellness continues to grow in importance. We have redesigned many of our pharmacies to be more customer friendly. The ability of our pharmacy assistance and the commitments our associates enable us to drive top line sales and control costs as we continue to fill more and more prescriptions. Customers appreciate the access and affordability of our over the counter offerings. With our size and presence we have the ability to be first to market on drugs and move from prescription to over the counter. Additionally our private label Equate is well respected and offers higher margins. Our apparel business is improving; the expansion of our New York based operations is already proving successful. Performance of our private brands is getting better as we offer key items for $10 or less in very label. Early spring sales are very promising as a leading indicator of this core part of our business for the first half of the year. To bring our customers top brands we are adding known brands to our offerings. These include Garanimals already available in baby and kids. Ocean Pacific or OP coming in the spring across all of our apparel and LEI the denim brand for back to school in juniors and girls. We are experiencing significant growth over last year in locations where we have clarified our offering. On project example is our Express for Less program where we expanded the amount of space devoted to the Hannah Montana Collection. Wal-Mart is selling the majority of all Hannah Montana merchandise in the marketplace. Last, in apparel we are investing in growth businesses which include athletic wear, athletic shoes and licensed merchandise. In the Home area we are working hard on improvements, you will hear more from us on this category later in the first quarter. We continue to see strength in financial services including money transfers, check cashing and bill payment. We saved our customers almost $330 million this fiscal year which is well above the $250 million savings in fiscal year ’07. Our Wal-Mart money centers were expanded to more than 430 stores this past year. They continue to achieve better comps and create a great experience for our customers who depend on our basic money services to help them live better lives. We saw in the second half of the year much better integration of our operations, merchandising and marketing programs and communicating with our customers. Wal-Mart’s advertising in the fourth quarter kicked into high gear with our central message “Save Money Live Better”. Effort also was allocated to our site to store service and we are very pleased with the customer response to this offering. Let me remind you that this was the first holiday period with site to store availability in all Wal-Mart US stores. You saw the same theme process work for us with theme time around Super Bowl and Valentine’s Day. You will see much more of this integrated communication process come to life during the year. Internally we continue to drive operational efficiency; we are undertaking the second phase of our operational excellence initiative in the stores. As I told you in the third quarter call this is a cycle of continued improvement and the operators from the divisional precedence to the market teams work on these improvements every day. Since the roll out of the front end programs customer check out gradings continue to improve quarter over quarter all year. We survey almost two million customers each quarter and they are noticing improvement. All five of our measured in store customer service metrics hit new highs in the fourth quarter. Including those on faster, friendlier and cleaner stores. With increased capital for remodeling projects we are increasing the number of stores on this program during the next three years. There will be various levels of remodels from the light touch to a full remodel to ensure that we deliver a relevant customer experience for each market. For example, the home pad remodel completed during the third quarter has shown great promise and we will roll this out to additional stores this coming year. Our goal is to see improved sales in the home category by the second half of fiscal 2009. We also have seen our associate engagement scores at their highest level in years. It is due to many of the operational initiatives underway in our stores. Remember that engaged associates take better care of customers. The groundwork in all these areas that we have laid during the past two years enabled us to have a strong fourth quarter and put us in a solid position for the start of fiscal 2009. More importantly we feel we are ready for an economic environment that we believe will be challenging and volatile at times. We are the advocate for the customer and we are confident that our message “Save Money Live Better” is reinforcing the trust of our broad customer base and also inviting new customers to shop at Wal-Mart. We feel good about the start of the fiscal year, we are well positioned with our “Save Money Live Better” platform, we have assembled a very capable and committed team and we are executing the strategies to deliver solid results for the first quarter and for the year. Now I will turn the microphone over to Mike Duke.

[Mike Duke:]

It has been another very good year for Wal-Mart International performance. I’m pleased with our results and even more enthusiastic about the future prospects for our business. Let me start today with an update on our International strategy and then I’ll cover a summary of our financial results for the fourth quarter and the year. Our strategic direction has remained consistent during the past two years in terms of optimizing our assets and using the leverage we have as a part of the Wal-Mart family. This year we have further enhanced our strategic direction with a third initiative, winning in each market. Our strategy is now based on

[Charles Holley:]

Sales for SAM’s Club grew by 6.3% for the fourth quarter and by 6.7% for the fiscal year. The US Clubs ended the year with a record $44.4 billion in sales. Excluding fuel comp sales at SAM’s Club increased by 2.5% during the quarter and 4.2% for the fiscal 2008. As others in the industry are reporting SAM’s did see fuel inflation during the year. For the quarter ended January 31, 2008, fuel sales positively impacted SAM’s Club comparable sales figures by 248 basis points. During the fourth quarter the average price per gallon was $2.90 versus $2.07 a year ago. For the full year fuel sales had a positive impact of 67 basis points on comp sales at SAM’s Club. Approximately 72% of the 591 US SAM’s Clubs now have fuel stations. Strong categories during the quarter included fresh and dry grocery as well as video games and electronics. Home furnishing related items were soft across the quarter. Operating income increased 2.5% for the fourth quarter over last year. This increase was impacted negatively by a year over year increase in real estate expenses. This was due to certain credits to SAM’s Club share of total US real estate expenses in the prior year quarter. Operating income increased 9.3% for the fiscal year. As a reminder SAM’s Club reported a benefit for a federal excise tax refund in the first quarter of this fiscal year. Operating income for both the quarter and the year benefited from expanded gross margins. Fourth quarter membership income continued to be below plan. From an expense perspective SAM’s Club leveraged operating expenses for the full year but fell short of that target in the fourth quarter. Inventory for the quarter and the year was a success story for SAM’s Club as were in stock levels. Inventory was nearly flat at the end of the quarter allowing the Club to finish the fiscal year with clean inventories in positioning SAM’s Club wealth for fiscal 2009. SAM’s Club celebrates its 25th anniversary this year. Back in 1983 when Sam Walton opened the first Club in Midwest City, Oklahoma, he had a vision of helping lower costs for small businesses. A vision that has carried forward to this day. Already this fiscal year SAM’s Club has a strong focus on driving membership acquisition and retention by demonstrating the value of a SAM’s Club membership to both prospective and existing members. As we enter what appears likely to be a period of economic uncertainty we believe the substantial savings and value that SAM’s Club offers to its business and advantage members for both products and services is a very compelling story. Tom will close with our guidance for fiscal 2009.

[Tom Schoewe:]

In today’s call we shared a lot of news about the company and our strategic priorities for this fiscal year. I certainly agree with Lee’s excitement about fiscal 2009. A couple of take away’s, there’s no doubt that we are focused on price leadership, inventory management and operational excellence. These will continue to help drive our results this fiscal year. For the first quarter we expect US comp store sales to increase in the range of flat to 2%. This is based on the current trends we are seeing in the business as well as the challenging economic environment we are facing right now. We expect diluted earnings per share from continuing operations for the first quarter to be between $0.70 and $0.74 per share. For fiscal year 2009 we forecast diluted earnings per share from continuing operations to be between $3.30 and $3.43 per share. Thank you for your interest in Wal-Mart, have a great day.