Walmart Inc. (WMT) Q3 2011 Earnings Report, Transcript and Summary

Good morning, this is Carol Schumacher, Vice President of Investor Relations for Wal-Mart Stores, Inc. Thanks for joining us today for our third 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 www.walmartstores.com/investors. A full transcript of this call will be available on the website as well after 7 a.m. Central Time on November 16, 2010. Our executive team is ready to report on our third 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, our incoming CFO, but still Executive Vice President of Finance and Treasurer, has the details behind our consolidated financials. Then we’ll go to the operating segments. First up will be Bill Simon, President and CEO of Wal-Mart U.S., our largest segment. Second will be Doug McMillon, President and CEO of Wal-Mart International. And then, rounding out our operating segment discussion will be Brian Cornell, President and CEO of Sam’s Club, who will discuss the results for our membership warehouse segment. Finally, in his last earnings call as CFO, Tom Schoewe will cover our corporate financial report card and our Q4 earnings guidance, as well as some insights into our updated full-year guidance. Before we start to discuss our performance for the quarter, let me cover some important financial information. First, I’d like to remind you of the inventory accounting change that we made in the second quarter. Due to the retrospective application of that accounting change, financial comparisons for this third quarter and going forward until the first quarter of FY12 will be compared against the financials as adjusted for this change. For example, last year in Q3, we originally reported…

Thank you, Carol, and thank you, everyone, for joining our call. In the third quarter, Wal-Mart performed well, and we have solid results to report today. So, let’s get right into them. Third quarter earnings per share were $0.95, compared to an adjusted $0.82 last year. Our results included a tax benefit of $191 million, or approximately $0.05 per share, which you will hear more about later. We are pleased with our EPS growth this quarter. Net sales for the third quarter increased 2.6% to $101.2 billion. The company leveraged expenses for the fourth consecutive quarter. As I’ve said consistently, the productivity loop is here to stay. We will drive everyday low cost to deliver on every day low price. It’s ingrained in our business and it’s how we operate around the world. Consolidated operating income was $5.6 billion, up 3.1% from last year. We also added almost 10 million square feet of selling space through 117 new units this quarter. International remains a key to our future growth. And, I continue to be impressed with their performance. Sales of Wal-Mart International were up 9.3% and operating income grew faster than sales. We continued to deliver stable return on investment. And, we have an important takeaway for the fourth quarter. We are increasing our full year earnings per share guidance to reflect the tax benefit from the third quarter and the ongoing underlying strength of our business. Tom will cover it in more detail at the end of the call. Now for the highlights of the individual operating segments. Our Wal-Mart U.S. business is on the right track. Comp sales were within guidance for the third quarter. Operating income grew faster than sales, and Bill and his team delivered expense leverage. The U.S. team is taking the right steps to…

Thanks Mike. For the third quarter of fiscal 2011, the company delivered earnings from continuing operations of $3.4 billion, an increase of 9% from last year. Earnings per share for the third quarter were $0.95, compared to last year’s adjusted earnings per share of $0.82. Earnings per share included a tax benefit of $191 million, which is approximately $0.05 per share, due to the favorable adjustments from negotiation of transfer pricing policies with a foreign tax jurisdiction during the third quarter. Currency exchange rate fluctuations were not a significant factor for earnings this quarter. Excluding the aforementioned tax benefit, earnings per share for our underlying business were within our guidance for the quarter of $0.87 to $0.91 per share. Consolidated net sales increased 2.6% to $101.2 billion for the quarter. Wal-Mart International was the main driver of the sales growth and was helped by a currency exchange rate benefit of $349 million, compared to a negative impact of $2.6 billion last year. On a constant currency basis, consolidated net sales increased 2.3%. The 13-week total U.S. comparable store sales, without fuel, decreased 0.7%. You will hear more details on the Wal-Mart U.S. and Sam’s Club comp sales from Bill and Brian. Expense management is once again a positive story. The company leveraged expenses for the fourth consecutive quarter, with expenses growing only 2.1% on a sales growth of 2.6%. The CEOs for the three operating segments will give additional details on their expense performance. Unallocated corporate overhead, which includes corporate expenses, grew to $378 million. That’s an increase of 8.3% from last year. While core corporate overhead expenses actually decreased 0.5% for the quarter, we did experience volatility in some unallocated foreign currency derivative mark-to-market positions quarter over quarter that is the primary driver of the increase. Although unallocated corporate…

Thank you, Charles. Wal-Mart U.S. made very good progress during the third quarter on assortment, and we consistently drove promotional intensity. We had strong support throughout the quarter from our suppliers in adding to our assortment and in bringing innovation to our shelves. Our progress is not only reflected in improving sales trends, but also in customer experience scores. Our methodical approach to Wal-Mart’s current initiatives is moving us in the right direction. What’s most important now is that we are in a position of strength for the busiest and most critical season of the year, and we’re expecting a positive comp in the fourth quarter. We will lead on price as we continue to save our customers’ money every day. We’re stepping up our strategic initiatives to help our core customers, as they struggle in the current economy. Remember 68% of our business comes from customers with household incomes under $70,000 per year. These customers deliver to us about 22% of their share of wallet, so there remains a lot of opportunity to deliver even more on Wal-Mart’s core promise. Comp store sales for the 13-week period, which ended October 29, declined 1.3%, which was within our guidance. Our comp sales performance is somewhat suppressed by reporting requirements that I’ll get into shortly. For the third quarter, net sales were $62.2 billion, flat to last year. While we would have liked Q3 sales to have been higher, we’re encouraged by the quarterly sequential improvement in comp sales and customer traffic. However, compared to last year, traffic decreased and the average ticket was down slightly. Inventory in Wal-Mart U.S. was up 6.5% compared to this time last year, driven primarily by the planned seasonal build-up in the distribution centers. We’ve also been staging merchandise for the holidays at our import…

Thanks Bill. Wal-Mart International continues to deliver on our financial priorities of growth, leverage, and returns. Our growth this quarter has come from comparable store sales and our new store program, and we’re meeting our goal of leveraging operating expenses. I’m pleased that our merchants’ focus is on serving customers with quality merchandise, compelling assortments, and price leadership. We’re driving local customer relevance as we grow sales, and it’s great to see the arrival of seasonal items heading into the holidays in many countries. As Mike mentioned, we recently completed a visit to China, India and Japan. We visited customers in their homes, talked with them in stores, met with our associates and discussed things like merchandising, EDLP and the opportunity to build a career in the company. We left even more enthusiastic about Asia. Scott Price, Ed Chan, Raj Jain and Toru Nada are building a strong business in the region. Our business in China has a lot of momentum. This market is developing at a rapid pace and we’re well positioned. India’s potential is also enormous. Bharti Wal-Mart is growing and learning how to better serve customers in India every day. Our results in the BestPrice cash and carry units are promising. It was great to see Wal-Mart spirit and culture in New Delhi and Chandigarh. Wal-Mart Japan is making meaningful progress. Our items and prices, plus the in-store experience, are tangibly different since my last visit. The team is driving growth, building momentum and leveraging Wal-Mart’s global ability in sourcing. After returning from Asia, we left again to visit Johannesburg, South Africa. We continue to view Sub-Saharan Africa as an important market and are pleased with how the process is going so far. We can help add value for customers, future associates and all of the various…

Thank you, Doug. During our recent investor meeting, we outlined how Sam’s Club will continue to drive growth, leverage and returns through our Savings Made Simple framework. We are focused on listening to our members and effectively serving their needs. Before we get into the financial details for the third quarter, I want to share some key highlights. Comp sales, excluding fuel, for the 13-week period ended October 29, increased by 2.4%. I am excited to say Sam’s exceeded our original guidance of flat to 2%. We also were solidly within our updated guidance of 1% to 3%, which we provided on October 13 at our investor meeting. We maintained a strong margin rate, but due to expense pressures, couldn’t translate that performance to operating margin. Our sales momentum is evidence that our members are responding well to our improved merchandising offering. Sales during the quarter were particularly strong in fresh, jewelry, home and certain technology and entertainment categories. We also introduced more than 100 new items in fresh this fall, a historic high for Sam’s Club. Recently, an independent third party annual survey ranked Sam’s Club Pharmacy second of all U.S. pharmacies. This was our highest rating ever. To build on this success, we’re expanding health and wellness offerings. As of yesterday, our members can take advantage of the lowest Medicare Part D plan offered in the marketplace at Sam’s Club’s pharmacies. And let me remind you that our Sam’s Club pharmacy is open to members and non-members. Innovation and service drive success in technology and entertainment. So, it’s important to our members that we have the most up-to-date technology and top brands. We introduced LG, and the Apple iPhone and iPad. We’ve also stepped up our associate training to provide more technology assistance to our members. We’re also…

Thanks Brian. Before I get into our financial report card to discuss growth, leverage and returns, let me provide an SAP update. North America continues to get better with each monthly close. Mexico has now started the SAP conversion and Argentina is next in line. With each country that goes live, we get more efficient. Now, time for the financial report card. First, let’s discuss growth. For the third quarter of fiscal 2011, we grew our square footage, net sales and operating income. Sales grew almost 3% for the quarter, mainly driven by International. Net retail square footage grew by approximately 10 million square feet to 971 million square feet at the end of the third quarter. So far this year, we have added 18.6 million square feet, as we introduce the Wal-Mart promise to more and more customers globally. We are still bullish on our growth prospects, both here in the United States and in our International markets. And, we continue to grow operating income, as mentioned earlier, up more than 3% in the quarter. Now let’s move on to leverage. We’ve now produced four consecutive quarters of expense leverage as we maintain our focus on the productivity loop and resulting everyday low costs. Like last quarter, expense leverage was a significant factor in achieving our bottom line results. And, as Mike indicated, we remain committed to expenses growing slower than sales. Finally, let’s talk about returns. As I mentioned in the second quarter, inventories at the end of last fiscal year were relatively low for Wal-Mart. This “starting point” continues to impact free cash flow. Accounts payable, as Charles indicated, benefitted free cash flow. That said, our free cash flow through the previous nine months of the fiscal year was a healthy $2.9 billion, but below the $3.6…