Walmart Inc.
Q3 2012 Earnings Call Transcript

Published: 15 Nov 2011

[Operator:]

Welcome to the Walmart earnings call for the third quarter of fiscal year 2012. The date of this call is November 15, 2011. This call is the property for Wal-Mart Stores Inc. and is intended for the use of Walmart shareholders and the investment community. It should not be reproduced in any way. [Operator Instructions]. This call will contain 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 statements provided by that Act. These forward-looking statements generally are identified by the use of the words or phrases anticipate, are forecasting, assumed, continue to see, continuing, expect, goal, guidance, is not expected, may be impacted, plan, planned, plans, will allow, will be, will continue, will ensure, will expand, will fall, will feature, will have, will help, will improve, will keep, will have leveraged, will lead, will leave, will make, will recruit and develop, will reduce, will remain, will see and hear and will take or a variation of one of those words or phrases in those statements or by the use of words and phrases of similar import. Similarly, descriptions of Walmart's objectives, plans, goals, targets or expectations are forward-looking statements. The forward-looking statements made in this call discuss, among other matters, management's forecasts of

[Carol Schumacher:]

Hello, this is Carol Schumacher, Vice President of Investor Relations for Wal-Mart Stores, Inc. Thanks for joining us today for our earnings call to review the third quarter of fiscal year 2012. All information for this quarter, including our unit count, square footage and financial metrics is available on our website at www.walmartstores.com/investors. A full transcript of this call will be available on the website after 7

[Mike Duke:]

Thanks, Carol. Good morning, everyone. Let me start with 3 key takeaways for the third quarter. First, Walmart reported earnings per share from continuing operations of $0.97 within our guidance. Second, both Wal-Mart U.S. and Sam's Club exceeded comp guidance for the third quarter, with Wal-Mart U.S. increasing comp sales 1.3% and Sam's Club posting a comp, without fuel, of 5.7%. Third, the company leveraged operating expenses with each of the 3 operating segments achieving this goal as well. We remain committed to leveraging expenses again this year. Here are some additional third quarter highlights. Net sales increased 8.2% to $109.5 billion. International reported net sales of more than $32 billion, approximately a 20% increase over last year's third quarter. This includes our acquisitions and currency impact. Consolidated operating income grew 4.8%. Walmart ended the quarter with free cash flow of $3.4 billion. The company returned $2.7 billion to shareholders through dividends and share repurchases for the quarter. These results continue to reinforce our strong financial position. Every business segment is stronger than it was a year ago and we delivered solid earnings growth. I'm really pleased with our top line performance and our momentum going into the fourth quarter. Our overall performance reflects the Walmart strategy of driving the productivity loop, leveraging expenses and investing in price leadership. Now let's review our individual segments. Wal-Mart U.S. has said consistently that its goal was positive comps by year end, and the team delivered on this goal in the third quarter. Operating income also grew faster than sales. The Wal-Mart U.S. team has aggressively executed its plan to broaden assortment, improve merchandising and reaffirm Walmart's price leadership. The plan is working, customers are responding favorably and it's good to see that reflected in our comp store sales improvement. While we feel good about the progress in our stores, our customers remain concerned about jobs, and only 1 in 10 Walmart moms that we surveyed view the state of the U.S. economy as good. They want to save money. They're juggling credit cards, using coupons and skipping restaurants and vacations. There is a real sense that the economic strain is taking its toll. To help ease that strain, the entire Wal-Mart U.S. team is very focused on saving our customers' money during the holidays by continuing its price investment strategy. Beyond EDLP, we have a number of additional programs in place for the fourth quarter, including the Christmas price guarantee, holiday layaway and free online shipping options. The integration of our stores and online is a point of differentiation for customers, especially during the busy holiday season. With more than 3,800 stores and 120 distribution centers serving those U.S. stores, Walmart can offer multichannel access in a way that no other retailer can. From our stores to online and mobile apps, customers can shop on their own terms. Wal-Mart International delivered strong sales in the third quarter. Operating income was up 14.2%. Like the U.S., our international markets are ready for the upcoming holidays. We continue to see strong consumer demand in emerging markets, and our mission is relevant across all formats around the world. EDLP is becoming an even stronger competitive advantage for us as we integrate that positioning into more markets. Profitable growth is the top priority for the team. We have plans in place to improve operating profit and returns in International and support a vibrant growth engine for our company. Sam's Club posted impressive results, with another quarter of strong comp sales growth and greater momentum in membership. I continue to be really pleased with the merchandising and the operations improvements. Sam's is also very well positioned for the holiday season, both for Advantage and Business members. We fully expect Sam's to surpass the $50 billion mark in net sales by year end and this will be a milestone for our clubs. In the third quarter, we were also pleased with the response to our new global women's empowerment initiative. The program will expand economic operative for more women and help us attract and develop great talent. Walmart will keep doing what's right and what's good for business. As I've said at the Investor Meeting in October, there is no doubt that Walmart is the best positioned global retailer. We have the right plans in place to deliver for the fourth quarter and the long term. We will continue our U.S. comp sales momentum and we will improve the profitability of our international markets. We will reduce SG&A expenses further and use those savings to drive prices down for our customers. We will make visible progress in building our eCommerce business and we will recruit and develop even stronger talent throughout the organization. Looking ahead, we will be an even stronger company a year from now. These plans also will lead to greater shareholder value. Now before I hand the microphone over to Jeff, on behalf of everyone at Walmart, our best wishes to you for a happy and healthy holiday season and a prosperous new year. Now Jeff will cover the details on our consolidated results. Jeff?

[Jeffery Davis:]

Thank you, Mike. For the third quarter of fiscal 2012, Walmart reported diluted earnings per share from continuing operations of $0.97, which was within our guidance of $0.95 to $1. This compares to $0.95 for the third quarter of last year, which included a $191 million tax benefit related to a favorable adjustment to transfer pricing policies after negotiations with a foreign tax jurisdiction. This benefit represented approximately $0.05 per share. Consolidated net sales increased 8.2%, or $8.3 billion, to $109.5 billion for the quarter. The increase included $2.1 billion in sales from the acquisitions of Netto stores in the U.K. and the Massmart operations in sub-Saharan Africa, and a currency exchange benefit of $1.3 billion. Excluding the effects of acquisitions and currency, consolidated net sales increased 4.8% over last year's third quarter sales of $101.2 billion. Total U.S. comp sales, without fuel, for the 13-week period ended October 28 were 1.9%. This was driven by both Wal-Mart U.S. and Sam's Club exceeding guidance for the reporting period. Bill and Brian will provide more details on Wal-Mart U.S. and Sam's Club later in the call. For the third quarter, gross profit margin on net sales was 24.6%, a 52-basis point reduction compared to the same time last year. All 3 operating segments realized a decline in gross profit margin from the impact of price investment and cost inflation. You will hear more from our segment CEOs later in the call. Now let's move our attention to leverage. We remain focused on growing operating expenses at a rate less than net sales growth and growing operating income at a rate greater than net sales growth. The company leveraged operating expenses as a percentage of sales by 40 basis points for the quarter. All 3 operating segments contributed to the leverage. Operating expenses were 19.9% of sales compared to 20.3% last year. Unallocated corporate overhead and other, which includes our Global eCommerce area, increased approximately 40.7% to $536 million for the third quarter. Our Global eCommerce initiatives contributed the majority of the increase as we continue to invest in our eCommerce platforms, including @WalmartLabs. Depreciation expense increased year-over-year based on our financial system investments, with the remainder of the increase driven by multiple items, none of which is individually significant. As Mike stated, we continue to drive productivity and reduce costs. We expect to carry the leverage momentum into the fourth quarter. Consolidated operating income was $5.9 billion, a 4.8% increase versus last year. Operating income included a $48 million currency translation benefit. Net interest expense for the quarter increased 3.7% to $535 million, which included a reduction in tax-related interest accruals. For the fourth quarter, we are forecasting high-single digit growth in net interest. Debt-to-capitalization ratio at the end of the third quarter was 46.9% compared to 46.4% last year. The effective tax rate for the quarter was 34.5% versus 29.5% last year. Recall that last year's rate included a $191 million benefit from certain tax adjustments mentioned earlier. This year's effective tax rate was in line with our previous guidance and we expect the effective tax rate for fiscal 2012 to be at the lower end of our range of 33.5% to 34.5%. However, our tax rate may be impacted by a number of factors, including changes in our assessment of certain tax contingencies, the impact of discrete items and the mix of earnings among our U.S. and international operations. This leads us to income from continuing operations attributable to Walmart, which was $3.3 billion. Now moving to returns. During the third quarter, the company repurchased approximately 27 million shares representing $1.4 billion. This brings the year-to-date repurchase to $5 billion, or 92.4 million shares. As of October 31, Walmart had $12.7 billion remaining under the current $15 billion share repurchase authorization. In addition to share repurchases, the company returned $1.3 billion and $3.8 billion to shareholders through dividends for the quarter and year-to-date, respectively. Combining share repurchases and dividends, Walmart returned $2.7 billion to shareholders in the quarter and $8.8 billion so far this year. Consolidated inventory grew 7.5%, driven primarily by Wal-Mart International's growth through acquisitions, new stores and currency impact. Payables as a percentage of inventories were 85%, in line with the prior year. Capital expenditures were approximately $3.9 billion for the third quarter compared to $3.8 billion last year. In October, we updated our fiscal 2012 capital expenditure guidance to be between $13 billion and $14 billion, which includes approximately $500 million for acquisition-related capital expenditures for ASDA and Massmart. We continue to identify great opportunities to open new stores globally. We added 159 net new retail units in the third quarter, with 130 delivered by Wal-Mart International. Wal-Mart U.S. added nearly 5 million square feet. A large portion of the increase was a result of our increased emphasis on Supercenters as we converted more discount stores and opened more new Supercenters than in the past several years. Total company square footage expanded approximately 8.7 million square feet during the quarter. Free cash flow was $3.4 billion at the end of the quarter, ahead of $2.9 billion last year. Year-to-date, our strong operating cash flows more than offset the additional $225 million spent on capital expenditures versus last year. Return on investment, or ROI, for the trailing 12 months ended October 31, 2011, was 18.2% compared to 18.6% for the previous year. As we had anticipated, the majority of the decline was attributable to the impact from acquisitions. Now let's turn over to our operating segments. We'll start with Wal-Mart U.S., Bill?

[William S. Simon:]

Thank you, Jeff. Let's get right to the good news. As Mike mentioned earlier, Wal-Mart U.S. achieved a 1.3% comp in the third quarter, a full quarter ahead of our goal. We continue to diligently execute on our core initiatives and we see clear signs that our strategy is working. We're encouraged by the continued response we're receiving from our customers. Following a positive comp in July, we continue to gain momentum, achieving positive comps for each successive month, with the strongest results in October. Comp sales for the 13-week period ending October 28 were above our guidance, and this comp increase represents more than $750 million in additional same-store sales for the third quarter over last year. Net sales rose 2.7% to $63.8 billion in the third quarter versus the prior year's comparable period. Clearly, upward momentum. The comp was driven by growth in average ticket. While overall comp traffic was negative for the third quarter, our Supercenters and discount stores had more than 125-basis point consecutive improvement in comp traffic from Q2. Neighborhood Markets continued to post strong positive comp traffic for the quarter. In fact, our overall Walmart comp traffic improved 160 basis points sequentially over the second quarter, with October traffic relatively flat. Traffic also benefited from the extension of our gas rollback program, as well as our holiday layaway service, which launched on October 17. Three key elements drove the third quarter improvement. First, merchandise initiatives focused on expanded assortments, product innovation and local relevance that are recapturing trips to the store. Customers are responding to our SKU add-back program, which is now almost complete. As you know, we're always working on our assortment so you'll continue to see ongoing improvement in our merchandise. Second, our integration of technology with associate productivity programs has improved in-stock. On-shelf availability continues to improve and is above the 93% we shared at the October Analyst Meeting. We're very well positioned with inventory in both store and online for the fourth quarter. Third, Walmart's mission is Every Day Low Prices and we're communicating price throughout the store and with every kind of media from print to digital. Our price investment strategy makes a difference for our customers. Economic conditions in the third quarter remained largely unchanged. Our core customer was still impacted by high unemployment and continued uncertainty over the economy, leading to declining consumer confidence. Although they remained higher than a year ago, gas prices, which positively affect customer trips, moderated during the quarter. Among our business units, grocery, health and wellness and Hardlines all delivered positive comps in the third quarter. Our food business had positive traffic trends throughout the quarter and posted mid-single digit comp. Rising food costs continue to be a major concern for customers. We hear from some shoppers that they believe it will be more difficult than ever to afford holiday meals for their families. We understand their concern and we see it every month in our customers' purchasing behavior. Some customers make difficult decisions to trade down to lower price points or trade out of certain categories completely. As others in the industry reported, customers continue to see food prices rise in key categories, such as produce, dairy and meat. Walmart continues to invest in absorbing some of these increases to ensure price leadership in our markets. During the quarter, grocery inflation was approximately 4%, in line with what's been seen throughout the industry. But given our price investment, the impact to our customers was substantially less. With deflation and other categories, trade down and other initiatives we have in place, inflation for the total box was approximately 70 basis points. Sales of consumables continue to improve, increasing approximately 100 basis points sequentially from the second quarter. The improvements in on-shelf availability contributed to higher conversion in traffic. Consumables are also another area where our assortment initiatives in such categories as cosmetics and pets are making a large impact. Within pets, the dog food category improved approximately 300 basis points, benefitting from continued add-backs and strength in our value brands. Grocery, which includes food and consumables, continued its positive trend, and overall, delivered a low-single digit positive comp for the quarter. Health and wellness continued to perform well, delivering a low-single digit positive comp. Like many other areas, our over-the-counter business also benefited from improved on-shelf availability during the quarter. The partnership with Humana for the Medicare Part D program continues to drive traffic in our pharmacies. Looking ahead, we expect to see an increase in conversion from branded prescriptions to generics, as strong brands, such as Lipitor, become available in a generic form. General merchandise has always been important to our sales growth, and our renewed focus on improving assortment, presentation and price across GM categories is delivering sales improvement. It has been a matter of our merchants having the right assortment, delivering merchandising density and simplicity. We brought back brands and items that our customers want, especially in our heritage categories like sporting goods and crafts. We improved our utilization of space, brands and presentation to ensure customers can find what they're looking for. And simply, we made Walmart easier to shop. Our comp for Hardlines improved 300 basis points sequentially from the second quarter to a low-single digit positive comp for the third quarter. This improvement was primarily driven by our heritage categories, including sporting goods, stationery and crafts. We've continued to add back space and assortment across these important areas. Hunting continued to significantly outperform our sporting goods business, with strong double-digit comps in the quarter for categories such as hunting apparel and related merchandising accessories. Tire sales, helped by special events, also remained strong. As we've expanded assortment and updated modulars, sales increased in stationery and crafts. Customer feedback on the return of layaway has been overwhelmingly positive and layaway transaction volume continues to exceed plan. Our customers tell us that they appreciate that we've brought back this service, and it's a great way to help families on a tight budget shop for Christmas. As a reminder, we've added service fees to reduce layaway cancellations in the fourth quarter. During the third quarter, we had a major modular reset for our toy business, and this helped drive sales at the end of the period just as layaway began. It's not surprising that our top toy on layaway is the LeapPad learning system, along with bikes and ride-on vehicles. In electronics, top layaway products are tablets, TVs and laptops. As you know, electronics and toys make up our entertainment business and are critically important sales drivers for the fourth quarter. Entertainment was 160 basis points better than last quarter, and with layaway, we expect ongoing improvement for Q4. Our comp for Q3 was mid-single digit negative, reflecting the ongoing impact from electronics deflation. A strong release schedule during the quarter, with titles such as Captain America, Transformers, and the Lion King drove favorable sales performance. Shoppers are clearly aware of the pricing environment and more of them are turning to Walmart for unbeatable prices, leading to an overall increase in our units for the quarter. Straight Talk continues to sell well, and the release of the Straight Talk Android phone in September drove sales even further. Customers are drawn to our value price offerings and catalog movie and music bins. Apparel sales improved approximately 170 basis points over the previous quarter, leading to a low-single digit negative comp. Men's and ladies apparel had the strongest sales, where our focus on core basics and assortment initiatives is paying off. We expanded both space and assortment in our shoe department, which was timely for back-to-school, as that area achieved the first positive quarterly comp in more than 2 years. Colder than average temperatures in October drove cold weather apparel sales. As we announced in October, we're relocating the apparel functions that have been based in New York back to Bentonville. Our customers expect high-quality basics and fashion basics at great prices. Roughly 40% of our apparel associates had remained in Bentonville and we will unite our apparel efforts in one location. We expect a smooth transition and plan to complete the move by February 2012. Home comp for the quarter was a low-single digit negative. Outdoor living, including patio furniture, was the strongest performer. But economic pressure and slow housing sales continue to affect discretionary categories. We're seeing solid improvement in functional kitchen categories, such as single-serve coffee systems, microwaves and other food prep appliances. We're encouraged by the early results and seeing an increased momentum from expansion in home basics and opening price point items, as well as modular updates. The sales trends I've outlined here are also reflected at our dotcom sales, with stronger performance in electronics, home and toy categories. As I mentioned earlier, our customers are still feeling pressure to reduce expenses wherever they can. Banking fees are a topic that's received a lot of attention recently, and our core customers continue to see alternatives to paying account fees. Walmart MoneyCenter provides those customers a low-cost alternative to access and control their money. Our customers see a clear benefit in this access to "everyday life" financial services and we're excited about the opportunity to continue to innovate in this area. Currently, we have MoneyCenters and service desks in all of our stores, and we have additional self-service kiosks in many other locations throughout the store. Now let's move on to more of the specifics on financial results. As discussed at our October Investment Community Conference, we began our price investment during the third quarter. Additionally, cost increases in numerous categories were not passed on to our customers in the form of increased prices. Gross profit dollars were up 1.9% over last year's third quarter to $17.9 billion, growing slower than the rate of sales. Gross margin rate is down approximately 22 basis points from last year's third quarter. We leveraged expenses for the quarter. As a percentage of sales, operating expenses decreased 41 basis points. On a dollar basis, SG&A was up approximately 70 basis points compared to last year, on a 2.7% increase in sales. Operating income grew faster than sales for the quarter. Operating income rose to $4.6 billion versus $4.4 billion last year. As a percentage of sales, operating income increased to 5.1%, driven by expense leverage and the increase in gross profit dollars. Inventory was up 5.1% compared to this time last year, principally due to our continued focus on product add-backs, inflation and the implementation of our new layaway program. We're well positioned with inventory as we head into the holiday period. We're focused on growing through new stores and our priority remains Supercenter growth. During the third quarter, we added 63 supercenters, including new stores, expansions and conversions. We expect gross profit rate for the fourth quarter to be down as we continue to execute our price investment strategy and see the mix change in the fourth quarter. Our focus on the productivity loop is paramount, and we will continue to drive operating expense leverage. We've worked diligently throughout the year on our assortment and availability initiatives. In addition, we've worked hard on our communication to customers. We've also stepped up our marketing campaign across multiple media platforms this holiday. Customers will see and hear Walmart everywhere this holiday season. We have bought a strong share of voice nationally and in individual key markets. But we're also proud of our creative. We have some commercials that are funny and some that will just make you feel good. Programs like layaway and our special 0% financing offer on the Walmart credit card will make holiday shopping easier and more attractive. Our ad match and holiday price guarantee will leave no doubt that Walmart is the clear price leader this holiday season. And we're aggressively going after the business this season, starting even before Black Friday. We've been open on Thanksgiving Day for several years now. This year, at 10

[Doug McMillon:]

Thanks, Bill. We have good third quarter results to report. But before I get into the numbers, let me begin with our plans for growing the business. Over the long term, we will drive aggressive, disciplined growth while reducing costs in the business to improve profitability. To help our markets achieve these goals, we have a 4-pronged approach. First, is growing comp sales. Our strategies across markets are delivering EDLP and developing strong merchants. We're rolling out merchant academies throughout International to further develop their skills. The second pillar is new store growth, and we have a strong new store development program. We've added 12.7 million square feet of organic growth since the beginning of this year and we're on track to meet our forecast of 24 million to 27 million square feet. The third pillar is eCommerce and multichannel, and we're developing our skills in this area. We will leverage our brand and customer loyalty further in developed markets like Canada and U.K., as well as our emerging markets. In Brazil, eCommerce is growing at twice the pace of the market, and we have an award-winning website for customer friendliness. The fourth pillar is strategic acquisitions. We're encouraged by the successful integration work in Chile and now in South Africa, and I'm very excited about the management teams in each of these markets. We continue to evaluate expansion opportunities around the world and within existing markets. Now let's get to the numbers. Wal-Mart International reported third quarter net sales of $32.4 billion, an increase of 20.3% over last year. Changes in currency translation increased our reported net sales by $1.3 billion. On a constant currency basis, net sales were $31 billion, an increase of 15.3% over last year's third quarter and 7.5% excluding acquisitions. All of our markets had constant currency sales growth, with China, Mexico, and Argentina providing the strongest net sales growth in the third quarter. As a percentage of sales, Wal-Mart International's third quarter gross profit declined 57 basis points on a reported basis and on a constant currency basis. After excluding acquisitions, constant currency gross profit margin was flat to last year. Third quarter reported operating expenses were $6.4 billion, which includes an increase of $273 million due to changes in currency exchange rates. Wal-Mart International leveraged constant currency operating expenses, growing them slower than sales at 12.4%. When you exclude our recent acquisitions, constant currency operating expenses grew only 5.5% on expense leverage from the U.K., Japan, Chile and Brazil. Our third quarter reported operating income grew 14.2% from last year to $1.4 billion, and includes a benefit of $48 million from changes in currency exchange rates. On a constant currency basis, operating income grew 10.3%. Excluding acquisitions, constant currency operating income grew faster than sales at 8.5%. On a reported basis, Wal-Mart International's inventory grew at 18.7%. On a constant currency basis, and excluding acquisitions, inventory grew at 11.9%, which is faster than our target. In many cases, our days payable exceeds our days on hand. In addition, it's a challenge to properly time our purchase commitments with new store growth and merchandising imports in international markets. We recognize that we have ample opportunity to reduce inventory. Our goal remains to grow inventory at or less than half the rate of sales growth. Now let's get into the results for several of our larger markets. Country management teams are held accountable for their results on a constant currency basis. The following discussion of country results excludes the impact of currency, and unless otherwise stated, sales and comp sales are presented on a nominal basis. Comp sales are reported on a calendar basis. In the U.K., ASDA had a solid third quarter, growing sales and growing operating income faster than sales, excluding fuel. In the third quarter of this year, comparable sales, excluding fuel, increased 1.3%. Traffic declined by 1.3% and average ticket increased 2.6% as customers continue to consolidate their trips in the face of high prices. The U.K. grocery market is entering into what is traditionally a heavy promotional period in time for Christmas. ASDA, however, continues with a very simple promise to customers

[Brian Cornell:]

Thanks, Doug. Consistent with the overall club channel, our top line performance this quarter was exceptional. Comp sales, excluding fuel, increased by 5.7%. This is our seventh quarter of sequentially increasing comps. Membership renewals and members joining at the Plus level continue to grow and we leveraged expenses again this quarter. We opened a new club, expanded a club and relocated 3 clubs during the period. This added over 190,000 square feet to our footprint. Similar to the first half of the year, our third quarter fuel business was strong. Fuel provides Sam's Club a great first price impression and is clearly a traffic driver for existing and potential members. We continue to pump more gallons of fuel and generate more sales dollars per gallon this year when compared to last year. Fuel prices in this year's third quarter were approximately 34% higher than a year ago and gallons sold were up 11%. Including fuel, third quarter net sales were $13.3 billion, a 9.5% increase over last year. Gross profit increased by 5%. SG&A expense as a percentage of sales decreased by 62 basis points and operating income increased 6.3% to $390 million for the quarter. Volatility in fuel prices can have a notable impact on our financial results. The remainder of our discussion today, therefore, is focused on our core business and excludes fuel for comparative purposes unless otherwise noted. Now let's look at the financial results and our performance for the quarter. Net sales for the third quarter were $11.8 billion, up 6.2% from last year. Comp club sales for the 13-week period increased 5.7% and were strong across all 3 geographic operating divisions, led by the west division. Comp traffic and ticket increased for the 13-week period by 2.3% and 3.4%, respectively. Comp traffic and ticket increased for both Advantage and Business members. We continue to see members visiting our clubs more frequently. During our Labor Day eValues Savings Celebration event, we had strong sales and solid membership performance. The quality of our comp sales growth in core categories remains very strong. Overall, we believe that inflation impacted our comp club sales by 325 to 375 basis points. We continue to see mid-single digit inflation in food categories. Despite the inflation, units sold increased year-over-year. We continue to face challenges in tobacco sales, an important category to our convenience store business member. Our tobacco business has been impacted by declining industry consumption and the change in our credit rewards program that went into effect at the beginning of this year. The decline in tobacco comp sales had an impact of approximately 100 basis points on our total comp sales results. We anticipate tobacco being a headwind for the rest of the year. Our focus on providing the best quality at a great value continues to drive strong performance in the fresh food categories. For the third quarter, we delivered double-digit comps in categories like bakery and bread and high-single digit comps in categories like produce. More and more of our members are skipping the restaurant trip and eating at home. This trend is driving significant sales increases in categories such as a home meal solutions and prepared meats. Our members expect the best prices on our product they buy every day and rewarded us in the third quarter with increased trips to the club. This led to double-digit comps in freezer/cooler and oil/rice/canned vegetable and fruit categories. Dry grocery and beverage categories delivered high-single digit comps, led by breakfast foods, coffee, and baking, while categories like snacks delivered mid-single digit comps. Our pet supply business was strong, turning in high-single digit comps. Impacted by deflation, laundry and home care comps were down. And in a tough competitive market, baby care was down. We remain focused on providing our members with the best quality, brands and value on home apparel and seasonal products. Home and apparel delivered a mid-single digit comp increase for the period. Driven by backyard recreation and family fun, our seasonal area recorded a high-single digit comp for the quarter. We recorded a mid-single digit comp in our apparel areas, led by strong sales in basic and men's, which offset weakness in ladies apparel. Comps for our health and wellness area were in the low-single digits, led by growth in our pharmacy and optical areas. Pharmacy growth was led by our focused effort on driving script increases and building awareness of the great value and superior service provided by our pharmacist. Our investment in hearing centers continues to pay dividends, as members have responded to this unique service in our clubs. Deflation continues to negatively impact technology and entertainment categories, which had a low-single digit comp. Earlier this year, we made a decision to transition our leased wireless centers to an owned model. This change had enabled us to provide a more comprehensive service solution for our members and has driven solid sales performance for this category. Also our exclusive club channel relationship with Apple has expanded our presence in tablets and smartphones and delivered strong sales in these categories. We also had great performance in our battery category and we focused on branded item placement and updated pack sizes and display fixtures. In televisions, we continue to see a challenging deflationary environment, driving high-single digit negative comps for the quarter. Technology is an important service for our members. Sam's Club just released a dividend update to our smartphone app. You can now purchase items available online or shop your club through click-and-pull directly from your smartphone. Our mobile app and upgraded website allow members the ability to review and shop our online and in-club inventory, build customized shopping lists and renew their membership straight from a smartphone. Also our iPad application is scheduled to be launched just in time for the key holiday season. We believe that these apps will be a tremendous benefit to our members and are very excited about making these channel-leading technology solutions available. We continue to deliver on our commitment to quality and value, especially with our proprietary brands. These initiatives are important in giving our members choices. Here are a few highlights. Since the beginning of the year, we've introduced 3 new brands

[Charles M. Holley:]

Thanks, Brian. As Mike said, our business is stronger today than it was a year ago. We continue to be encouraged by the ongoing sales momentum at Sam's and by the Wal-Mart U.S. improvement in comps during the last 4 months. We still have a lot of work to do to increase traffic in many of our international markets, but we are confident in the plans that the country management teams have in place. We recognize that the global economy is still weak and consumers continue to behave conservatively. Looking back over the last 5 years, comp store sales were a relatively small contributor to our overall growth. It's important that comp sales growth is a priority for our company going forward. Investing in new stores is also important. Remember, these are future comp sales and profit generators, which in turn, add to future returns for shareholders. One of the most important keys to growing our sales is to have the lowest possible price. Keeping our expenses low will allow us to invest in prices going forward. I'm proud of the progress that we're making in expense leverage. At the end of this fiscal year, we will have levered SG&A expenses for 2 consecutive years. Throughout the company, we continue to be focused on improving processes and productivity, eliminating waste and reducing SG&A expenses. Not only will leveraging expenses allow us to invest in prices, but it will help improve returns in our emerging markets like Brazil and China. Emerging markets provide great opportunities for Walmart to serve customers with assortment and prices they have never had access to before. These markets will also provide some great returns down the road for our company. At our meeting for the investment community last month, I outlined our goal to reduce SG&A expenses as a percentage of sales by more than 100 basis points over the next 5 years. That goal may be affected with the start of our new fiscal year on February 1, but we are well on our way to having the right strategies and plans in place to reach it. Our earnings performance continues to translate into strong free cash flow, and I would expect that to continue in the future. Cash flow is the foundation of a company's balance sheet, and Walmart's balance sheet remains strong. That is a real advantage in today's economic environment. We continue to maintain access to extensive short- and long-term funding sources at historically low rates. Now let's move on to guidance. Based on our view of the business and the global economy, we expect fourth quarter fiscal 2012 diluted earnings per share from continuing operations to be between $1.42 and $1.48. Last year, we reported fourth quarter earnings per share of $1.41, which included $0.07 per share of tax benefit primarily due to the repatriation of certain non-U.S. earnings that increased U.S. foreign tax credits. Our full year earnings per share guidance is now between $4.45 and $4.51. All guidance estimates assumed that currency exchange rates remain at current levels. This compares to last year's results of $4.18, or an underlying $4.07 due to the $0.11 of tax benefits. Thank you for listening today. We really appreciate your continued interest in Walmart. We hope you all have a great holiday.