Walmart Inc. (WMT) Q1 2012 Earnings Report, Transcript and Summary

Welcome to the Wal-Mart Earnings Call for the First Quarter of Fiscal Year 2012. The date of this call is May 17, 2011. 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. [Operator Instructions] This call will contain statements that Wal-Mart 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, are committing, continue, expect, expectation, goal, intend, is scheduled to begin, may impact, may require, plan, will be, will carry, will continue, will enable, will grow, will include, will influence, will not, will not be, will not repeat, will open, will return, will see and would expect 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 Wal-Mart'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 Wal-Mart's diluted earnings per share from continuing operations attributable to Wal-Mart for the quarter ending July 31, 2011, and the assumption underlying that forecast that currency exchange rates will remain at current levels as well as management's forecast for the comparable store sales of Wal-Mart's Wal-Mart U.S. operating segment and the comparable club sales without fuel of Wal-Mart's Sam's Club operating segment for the 13-week period from April 30, 2011, through July 29, 2011. The forward-looking statements also include statements that discuss management's expectations regarding Wal-Mart's effective tax rate for fiscal 2012, quarterly fluctuations…

Hi. 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 first quarter of fiscal year 2012. Key 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 the call will be available on the website after 7 a.m. Central Time today on May 17, 2011. Historical data can also be found on the site as well. We have a full agenda for today's first quarter recap. Mike Duke, President and CEO of Wal-Mart Stores Inc., will start off with the key results and commentary on our business strategies. As you can see from our press release this morning, we do have some discrete items that are accounted for in our results. So Jeff Davis, SVP of Finance and Treasurer, will cover the consolidated financial results, including more analysis on the noise. Then we'll go to the operating segments. First up will be Brian Cornell, President and CEO of Sam's Club. Doug McMillon, President and CEO of Wal-Mart International, will cover the overall results for International as well as our 6 largest countries. We will close the segment discussion with Bill Simon, President and CEO of Wal-Mart U.S. Finally, our CFO, Charles Holley, will present our financial report card and our guidance for the second quarter. Recall that we do not provide a full year guidance update this quarter. In our fourth quarter call from February, we said that we would no longer provide details on the membership and other income line except for Sam's Club because it's only relevant and material for Sam's. In this quarter, we include a discussion of a gain from the sale of an investment in Chile that is included in other income. Also, as we do from time to time, we will make reclassifications for consistency. Let me remind you as you listen today that our fiscal calendar for Wal-Mart International is different from the corporate fiscal calendar. All of our International countries, with the exception of Canada, end their fiscal quarter on March 31, while our consolidated financials end on April 30. This is particularly important given the shift in the Easter timing this year. International sales from Easter in all but Canada will be included in the second quarter results. And finally, our Annual Meeting of Shareholders is Friday, June 3, at the Bud Walton Arena in Fayetteville, Arkansas. We'll start promptly at 7 a.m. Central Time. If you can't join us in person, the meeting will be available via webcast on the corporate website. That's walmartstores.com. Now Mike, let's get started with our first quarter results. Mike?

Thank you, Carol. Good morning, everyone. Wal-Mart is reporting EPS of $0.98 from continuing operations, exceeding our guidance range for the first quarter. This reflects the stability and strength of our global operations. Let me dive into some of the key numbers for the quarter. Net sales were up 4.4% to $103.4 billion with strong contributions from Wal-Mart International and Sam's Club. Wal-Mart U.S. comps were negative 1.1%, which was roughly the mid-point of our guidance. Sam's Club comp of 4.2% was 120 basis points above guidance. Consolidated operating income was up 2.8% to $5.9 billion. The company leveraged operating expenses. The really great thing is that we have many more opportunities to leverage our scale, technology and innovative processes across the entire business. Return on investment was down due primarily to currency translation and cash accumulations. Jeff will provide additional details. For the quarter, the company returned $3.4 billion to shareholders through dividends and share repurchases. Now let me move on to the highlights of the individual operating segments. The Wal-Mart U.S. comp sales decline of 1.1% was within our guidance range. We recognize we still have work to do, and comp sales growth remains the greatest priority for me and the entire Wal-Mart U.S. team. The good news is that the plan Bill Simon and his team are executing is gaining traction. Bill will elaborate more on our progress. We're focused on delivering EDLP in a wide assortment, and customers are responding favorably where we've made the most progress on executing the plan. I'm encouraged with what I hear from customers when I visit our U.S. stores. In grocery, we are further along with the transition, but the work on general merchandise will not be completed until the second half of the year. Our business model positions us…

Thank you, Mike. For the first quarter of fiscal 2012, Wal-Mart's income from continuing operations was $3.4 billion, an increase of 3.8% over last year. Earnings per share from continuing operations attributable to Wal-Mart were $0.98, an increase of 12.6% compared to $0.87 for the first quarter last year. First quarter EPS from continuing operations included the benefit of approximately $0.01 per share related to currency translation. In the first quarter last year, earnings per share benefited from currency translation by $0.02. In addition to the impact of currency translation, we have several other discrete items that impacted the first quarter. All the following numbers are pretax. We realized approximately $117 million from the mark-to-market gains on foreign currency derivative positions. ASDA recorded an approximate $67 million charge related to the removal of future benefit accruals and the effect of future pay increases from its defined benefit plan. Wal-Mart Japan incurred approximately $51 million casualty loss related to the March earthquake and tsunami. And finally, Wal-Mart Chile recorded approximately $51 million gain from the sale of an investment. All of these items are included in operating expenses with the exception of the gain from the sale in Chile, which is recorded in membership and other income. The net summary of these items accounted for approximately $0.01 of our EPS for the first quarter. As Mike mentioned, consolidated net sales increased by 4.4% or $4.3 billion to $103.4 billion for the quarter. The increase in sales was driven by Wal-Mart International and Sam's Club and included a currency exchange rate benefit of $1.3 billion. On a constant currency basis, sales grew 3% to $102.1 billion. The 13-week U.S. comp sales, without fuel, decreased 0.3%. You will hear more details on the Wal-Mart U.S. and Sam's comp sales from Bill and Brian.…

Thank you, Jeff. I am very excited to share that Sam's Club momentum has continued into the new fiscal year. We sequentially increased our comp sales in each quarter of last year, and that momentum continued into the first quarter. Comp club sales, excluding fuel, increased 4.2% for the 13-week period ending April 29, 2011, exceeding our guidance of 1% to 3%. This is our fifth quarter of sequential quarterly comp improvement. We combined solid unit sales growth and increased traffic with excellent margin management. We leveraged operating expenses this quarter. Our membership acquisition performance was wrong. In fact, it was our best quarterly performance since I joined Sam's Club in March of 2009. This strength was driven by key membership events and excellent execution in the clubs. These strong results across all key areas of our business flow through to operating income, which, excluding fuel, increase faster than the rate of sales. Before I get in the detailed financial results, let me address the current dynamic around fuel, an important part of our value proposition. Our fuel stations establish the initial price perception and drive traffic to the clubs. We also know that great prices on gasoline drive member loyalty in terms of renewal rates and ticket. We're pumping more gallons of fuel and generating more sales dollars per gallon this year versus last year. Fuel prices in the first quarter this year are approximately 35% higher than a year ago, and gallons sold are up 22%. Including fuel, first quarter sales were $12.8 billion, a 9.4% increase over last year, and operating income increased 7% to $459 million. While top line fuel sales have increased, fuel profit on a dollar basis was basically flat to last year for the quarter. We see a large impact on gross margin…

Thanks, Brian. On March 30 and 31, we shared with you while we are so excited about the growth prospects for China and Asia at our Annual International Conference for the Investment Community in Shenzhen, China. We came with a full team, including Scott Price, Cathy Smith, Ed Chan, Ed Kolodzieski and others, and we provided additional insight into our business strategy, our Asian operations and answered many questions from the analyst community. One of the key takeaways from that meeting is that we have a strategic plan in place to move Wal-Mart International from a good business into a great business, and this will be underpinned by doing what we do best: providing our customers great value through Every Day Low Prices. Our management team is focused on delivering that plan through what I referred to as the 4 dimensions of growth: comp store sales; new stores; e-commerce and multichannel; and finally, acquisitions. Here is what our first fiscal quarter looked like in terms of these 4 dimensions. For the first quarter of fiscal 2012, all of our markets had encouraging comp store sales results with Mexico, China and Chile having the highest comps. By the way, as it relates to Chile, we've seen double-digit comp store sales for several quarters since we made this investment, and I'm really proud of the Wal-Mart Chile team and our integration team. They've done a great job. The Easter calendar change and Brazil's EDLP implementation negatively impacted our comp store sales, and I'll discuss the detail shortly. As it relates to new store growth, we increased our total store count 11.8% or 487 stores for the past 12 months. This translates into 7.9% more square feet than at the end of the first quarter of last year with most of the increase…

Thank you, Doug. Earlier in the call, Mike mentioned that we're gaining traction in our Wal-Mart U.S. business as we implement the 4-point plan that I laid out in the fourth quarter. Recall that this plan focuses on driving Every Day Low Price, delivering the broadest assortment possible, improving our remodeling efforts and integrating a multichannel experience for our customers. Now our best comp performance remains in the Grocery and Health and Wellness business, both of which had positive comps in the first quarter. As I mentioned in February, these businesses delivered positive comps in the fourth quarter as well. Our negative 1.1 comp sales were the midpoint of our guidance of negative 2% to flat for the quarter. Comp sales declined for the 13-week period was driven by lower traffic, which was partially offset by an increase in ticket. Inflation provided the small tailwind. The importance of delivering Every Day Low Price has never been greater, as our customers are consolidating trips due to higher gas prices. Our greatest priority remains to grow comp sales. We're focused on our EDLP strategy and moving away from the deep discounts that were in the headlines this time last year. We've launched our new ad match marketing campaign in early April, and the customer response has been terrific. Net sales rose 0.6% to $62.7 billion for the first quarter. Grocery, again, delivered low single-digit positive comps for the quarter. Our Food business is delivering positive sales growth that's on par with the top competitors, and we're seeing a recovery in our Consumables business. Customers are responding positively as we expand our merchandise assortment, adding back items across all categories. We began our SKU add back program in the third quarter with dry grocery. We're pleased with the comp sales improvement to date…

Thanks, Bill. Let's get right to our financial scorecard. First, growth. Jeff pointed out earlier that sales increased 4.4% in the first quarter with solid sales results from Wal-Mart International and Sam's Club. We continue to remain focused on growing comp sales and new stores throughout our markets. And let me add, comp sales improvement is our clear priority for Wal-Mart U.S. We will continue to invest in growth, and our capital plan of $12.5 billion to $13.5 billion remains in place for this year. We're still on track for sales growth of 4% to 6% and square footage growth of 3% to 4%. I remind you that these goals exclude acquisitions, such as Netto. We added 59 net units and approximately 3.7 million square feet of retail space since the end of fiscal 2011. International contributed almost 2.6 million square feet in the first quarter. Worldwide, we now have 9,029 units and approximately 989 million square feet of retail space. We have great opportunities for long-term growth in emerging markets, such as Brazil and China. Wal-Mart U.S. will continue to open supercenters in smaller formats. In addition, Sam's Club will open between 7 and 10 clubs this year. Turning to leverage. As Mike said earlier, the productivity loop remains a crucial priority for us. We continue to drive efficiencies throughout our business, which helps sustain our commitment to Every Day Low Price. For 6 consecutive quarters now, our company has leveraged operating expenses. And our third priority, returns. On a rolling 12-month basis ending April 30, 2011, return on investment ended at 18.5%. It is important to know that our underlying operations continue to maintain stable returns. In March, we were pleased to report that our Board declared an annual dividend of $1.46 per share for the fiscal year,…