Walmart Inc. (WMT) Q2 2011 Earnings Report, Transcript and Summary

Welcome to the Wal-Mart earnings call for the second quarter of fiscal year 2011. The date of this call is August 17th, 2010. This call is the property of Wal-Mart Stores, Inc., and intended solely for the use of Wal-Mart shareholders. It should not be reproduced in any way. You may navigate through this call as follows. (Operator instructions) 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 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, assumes, expect, forecasting, goal, look forward, may impact, plan, on track, should drive, should moderate, will be, will be able, will benefit, will bring, will broaden and accelerate, will continue, will improve, will not stray, will open, will provide, will put, will reduce, will see, 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 our objectives, plans, goals, targets, or expectations are forward-looking statements. The forward-looking statements made in this call discuss, among other things, management’s forecasts of our diluted earnings per share from continuing operations attributable to Wal-Mart for the third quarter of fiscal year 2011 and for all of fiscal year 2011, the assumption underlying those forecasts that currency exchange rates will remain at current levels, management’s forecasts for the comparable store sales for our Walmart U.S. segment and comparable club sales without fuel for our Sam’s Club segment, in each case, for the current 13-week period, management’s expectations as to our anticipated tax rate for fiscal year 2011, quarterly fluctuations in that tax rate…

Good morning, this is Carol Schumacher, Vice President of Investor Relations for Wal-Mart Stores, Inc. Thanks for joining us today for our second quarter earnings call for fiscal year 2011. All information for this quarter, including updated unit counts, square footage, and financial metrics is available on our Website at walmartstores.com/investors. A full transcript of this call will be available on the Website after 7 AM Central Time on August 17th, 2010. Our executive team is ready to report on our second quarter results of fiscal 2011. Mike Duke, President and CEO of Wal-Mart Stores, Inc., will cover the key highlights of our quarterly results. Charles Holley, Executive Vice President of Finance and Treasurer, has the details behind our consolidated financials. Then we will go to the operating segments. Bill Simon, our new President and CEO of Walmart U.S., will be followed by Doug McMillon, President and CEO of Walmart International, and then we will have Brian Cornell, President and CEO of Sam’s Club. Tom Schoewe, our Executive Vice President and CFO, will round out the call with an update on our SAP implementation, our company’s financial report card, and earnings guidance. But first, let me cover some important changes we have made that affect our financials. During the second quarter, we had two changes. As you know, we have been implementing SAP through a staged timetable across our businesses. The implementation’s first stage was ASDA, our U.K. subsidiary. The second stage was in the United States, Puerto Rico and Canada, and implementation started May 1, 2010. In connection with the second stage of that implementation, and coinciding with the improvements available in our new financial systems, the SAP implementation gave us the ability to improve our methodology for valuing inventory under the retail method of inventory accounting. We have…

Thank you, Carol. Welcome everyone. I am pleased with our second quarter EPS. Despite a tough sales environment, we managed the business well, delivering on expense leverage through our commitment to the productivity loop. Today, we are reporting EPS of $0.97, within our guidance of $0.93 to $0.98. We consistently grow earnings and this quarter’s EPS grew 9%. More important, we are raising our EPS guidance for the full year to $3.95 to $4.05. Net sales for the quarter were up almost 3% to more than $103 billion. Operating income for the company was more than $6 billion, up more than 4%. The company leveraged expenses for the third consecutive quarter. This remains a priority throughout the company. We surpassed 8,500 worldwide units in July, representing various formats. During the quarter, the company added almost 5 million square feet of retail space in our 15 countries. We had significant square footage growth in Mexico and China, and I am pleased that China is on track to reach the 300-store mark in September. Our balance sheet remains world-class and reflects the underlying strength of our business. Now let me move on to the highlights of the individual operating segments. In Walmart U.S., I am pleased with the speedy leadership transition, with Bill Simon taking the reins of our largest operating segment. Bill is a strong leader who transformed the customer experience in our stores and has continued to drive innovation and improvement throughout the business. As expected, Walmart U.S. had a challenging second quarter. Total sales and operating income were flat to the prior year, with comps declining 1.8%. The top priority for the business remains improving top line sales and customer traffic. I am fully aligned with Bill’s focus on assortment and pricing, and with strengthening our supplier relationships. I…

Thanks Mike. For the second quarter of fiscal 2011, the company delivered earnings from continuing operations of $3.6 billion, an increase of 3.4% from last year. Walmart reported earnings of $0.97 per share, a 9% increase over last year’s earnings per share of $0.89. Earnings per share included a benefit of approximately $0.01 from currency exchange rate fluctuations and was within our guidance for the quarter of $0.93 to $0.98 per share. In addition, we are pleased that we delivered earnings per share for the second quarter above First Call consensus of $0.96. Consolidated net sales increased 2.8% to $103 billion for the quarter. Walmart International was the main driver of growth and was helped by a currency benefit of $857 million. On a constant currency basis, consolidated net sales increased 2%. The 13-week total U.S. comparable store sales without fuel declined 1.4%. You will hear more details on the Walmart U.S. and Sam’s Club comp sales from Bill and Brian. Expense management continues to be a positive story. Walmart leveraged expenses for the third consecutive quarter, with expenses growing only 0.6% on a sales growth of 2.8%. The CEOs for the three operating segments will give additional details on their leverage performance. Unallocated corporate overhead, which includes corporate expenses, decreased to $416 million. That’s a decline of 15.3% from last year. Although unallocated corporate overhead can have some volatility from quarter to quarter, we continue to manage our core corporate overhead expenses well. The key takeaway is that we were able to leverage those expenses in the second quarter. Consolidated gross margin decreased 32 basis points to 24.7%. The decrease was driven by Walmart U.S., which Bill will elaborate on, later in the call. With a gross margin decrease more than offset by expense leverage, the company was able…

Thank you, Charles. I am honored to lead the Walmart U.S. business and pleased to have the chance to talk to you for a minute about the many challenges and opportunities that we have. We have set out a clear direction for change in our business and believe this will put us on a track to see improvement by the fourth quarter. In the second quarter, for the first two months of the quarter, Action Alleys were clear of merchandise and our stores featured many deep rollbacks on price. The deep rollbacks we featured in May and June did improve price impression, but they did not generate the level of top line sales we had hoped for. In July, we put the emphasis back on our core EDLP model. Our associates are helping our customers realize that we are the price leader. We also engaged with suppliers to review our assortment to make sure that we had the breadth of inventory that Walmart customers have come to expect. In the coming weeks and months, our assortment will be more relevant to our customers, with the right mix of new and innovative products. We are leveraging our suppliers’ capabilities to help us drive impactful features. And we are restoring thousands of products to our assortment and adding new items. We plan to win in every category and let customers decide through their purchase decisions what to include in our assortment. During the past six weeks, we have returned merchandise to Action Alley. Our store managers now have more autonomy to make decisions on what’s right for their customers. We believe it will take some time to see significant changes in comp sales, but we are beginning to see more encouraging traffic trends. Now, I would like to get to the details…

Thanks Bill and congratulations on your new role. At our annual shareholders meeting in June, Mike talked about how Walmart’s culture appeals to every country, sets us apart from the competition, and builds trust with our customers. This culture allows our associates to continue driving growth and achieve great results through customer service. I see this first hand in every country I visit, and he couldn’t be more right. Thanks to our associates for another strong quarter. I am very pleased with our double-digit sales growth and operating income growth this quarter. International net sales for the second quarter were $25.9 billion, an increase of 11% from last year. This sales increase includes $857 million from the relative strengthening of many currencies against the U.S. dollar. Sales on a constant currency basis were $25 billion, a 7.3% increase over the second quarter of last year. On a constant currency basis, sales increased for the second quarter primarily due to a strong underlying performance in Mexico, as well as new store growth in Brazil and China. International’s operating income for the second quarter was $1.3 billion, up 16.8% from last year, and an increase of 12.7% on a constant currency basis. We are very pleased that in a tough environment, we grew operating income faster than sales. Excluding the impact of acquisitions, for six consecutive quarters now, we have leveraged our constant currency expenses. With tight expense management, our teams leveraged expenses in almost all of our operating countries, with the exception of slight headwinds in Mexico and Canada. On a constant currency basis, gross margin as a percentage of sales increased slightly in the second quarter, while membership and other income declined as a percentage of sales. As for inventory, we continue to make good progress reducing days on hand…

Thank you Doug. At Sam’s Club, our strategy remains focused on taking care of our members and staying true to our brand promise of ‘Savings Made Simple’. To fulfill that brand promise, we focus every day on making the right merchandise choices, enhancing the shopping experience and engaging our members in different ways. Before getting into all of the financial details, I want to share some of the key highlights about our business. First, we are reporting a comp sales increase of 1%, excluding fuel, for the 13-week period, which I am pleased to say, was at the top of our guidance. We are proud to recognize the accomplishments of our dedicated managers and associates who lead our efforts in improving club productivity and expense control on a daily basis. Excluding the impact of the interchange fee related to the Sam’s rewards credit program, which we detailed in last quarter’s call, we leveraged expenses for the third straight quarter. We are improving our shopping experience with innovation and technology. Early last week, we announced plans to upgrade all clubs to WiFi by the end of the year. Our members will benefit by having the use of their smart phones while shopping. And our associates will be able to demo new IPTVs and other networked devices on a real-time basis. In addition, last week, we announced that we will carry the iPhone 4 in our clubs. We have stepped up our efforts to bring the most sought after brands into our clubs sooner and more often, relying on member insights to make the most relevant merchandising choices for Sam’s members. Growth continues to be a priority, and our team welcomed a new club that opened last month in Barceloneta, Puerto Rico, marking our tenth club on the island. We also have…

Thanks Brian. Like last quarter, before I get into our financial report card and discuss growth, leverage and returns, I would like to give you a quick update on our SAP implementation. We shared with you previously that on May 1st, we began implementing SAP throughout North America, that would exclude Mexico and its Central America subsidiary. This implementation has now been up and running for three months. As you would expect with any major system initiative, we have experienced some challenges along the way, but I am proud to say that nothing prevented us from successfully completing our monthly close processes during the quarter, so we really feel good about the numbers, the integrity of the numbers. Most of our challenges have been in the area of change management, which are being addressed, since the new system is performing as designed. We will continue to leverage what we have learned as implementation in other countries continues. We plan to go live in Japan later this year and have also started work in Mexico. Now let’s move on to our financial report card to see how well we have done with growth, leverage and returns. First, let’s discuss growth. For the second quarter of fiscal 2011, we grew both our square footage and sales. Sales grew almost 3% for the quarter, mainly driven by Walmart International, which you heard about earlier in this call. Net square footage of retail space increased by approximately 5 million square feet to 961 million square feet at the end of the second quarter. So far this year, we have added 8.6 million square feet, in an effort to reach more people, so that they can save money and live better. We continue to feel good about our growth prospects across the company. As always,…