Third-quarter results from low-cost big box retailer Wal-Mart (NYSE:WMT) demonstrated that it continues to benefit from tepid consumer spending trends. A fanatical focus on expense controls is also working out well for customers and shareholders alike.
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Third-Quarter Results
Net sales improved a modest 1.1% to $98.7 billion. Excluding currency fluctuations, on an organic basis sales rose 3.8% as management cited increased foot traffic throughout each of the three key divisions. By division, reported U.S. namesake store sales grew 1.2% to account for 62.6% of quarterly sales, international increased by 1.6% to account for 25.7% of sales and continued to hold title as the fastest growing segment. Sam's Club fell 0.7% to account for 11.7% of the total top line. Wal-Mart provides same-store sales stats for its U.S. and Sam's Club stores, which experienced -0.5% and 0.1% comps, respectively, and excluded volatile gasoline sales. This was below the company's internal expectations.
Competitor Comparison
For comparison purposes, archrival Target (NYSE:TGT) posted negative comps as it saw them fall -0.1% in October after low single-digit declines in the previous two months. Investors will know more when Target releases its most recent quarterly results this week. In the membership-warehouse space, Costco (Nasdaq:COST) recently closed out its year with a fourth-quarter domestic comp decline of 1%, which excludes fuel sales. BJ's Wholesale Club (NYSE:BJ) saw comps rise 3.9% during its most recent quarter. Overall, all players are seeing a moderation in falling sales while Wal-Mart and BJ's continue to benefit the most with a focus on core necessities such as food and other basic household goods.
Profit trends were more mixed, but consisted of solid mid single-digit growth at the U.S. stores and Sam's Club. International logged a mid single-digit operating profit decline. The U.S. segment continues to be the cash cow, posting $4.5 billion in profits that accounted for 75% of operating income. Sam's Club eked out a $395 million profit and international brought in just over a billion dollars in profit. Total company operating income grew 6.9%, which management attributed to "productivity initiatives and efficient inventory management". Lower interest income and a higher tax rate tempered earnings growth, which came in at 5% to 84 cents per diluted share. This came in ahead of analyst projections.
Outlook
Wal-Mart expects flat domestic comps for the fourth quarter and diluted earnings between $1.08 and $1.12 during the important holiday season. For the full year, the company said to expect diluted earnings between $3.57 and $3.61, which is up from previous guidance.
Bottom Line
Wal-Mart boasted year-to-date free cash flow of almost $3.6 billion and should generate free cash flow of more than $10 billion, or close to $2.70 per diluted share, once the fourth quarter comes to a close. That puts the forward price-to-free-cash-flow multiple to over 20, which is high but not excessive as Wal-Mart has appealing opportunities to reinvest capital into growing its store base across the world. The forward P/E multiple is much more reasonable at under 15. Overall, the stock continues to offer modest appreciation potential as Wal-Mart should log high single-digit sales and profit growth over the long haul.
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