Walmart Inc. (WMT) Q2 2012 Earnings Report, Transcript and Summary

Jeffery Davis - Senior Vice President and Treasurer Mike Duke - Chief Executive Officer, President, Director, Chairman of Global Compensation Committee and Chairman of Executive Committee Carol Schumacher - Vice President of Investor Relations Charles Holley - Chief Financial Officer and Executive Vice President William Simon - Executive Vice President, Chief Executive Officer of Walmart U S and President of Walmart U S Brian Cornell - Chief Executive Officer of Sam's Club and President of Sam's Club Doug McMillon - Executive Vice President, Chief Executive Officer of International Operations and President of International Operations

Welcome to the Walmart Earnings Call for the Second Quarter of Fiscal Year 2012. The date of this call is August 16, 2011. This call is the property of Wal-Mart Stores, Inc. and intended solely for the use of Walmart shareholders. 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 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, assume, based on, expect, goal, may be impacted, may see, plan, plans, should be, will see, will also be, will be, will begin, will better equip, will continue, will cover, will create, will drive, will enable, will go, will keep, will lend, will provide, will, will see, and will use 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 Walmart's diluted earnings per share from continuing operations attributable to Walmart for the 3 months ending October 31, 2011 and the year ending January 31, 2012 and the assumptions underlying the forecast for such earnings per share including the assumption that currency exchange rates will remain at current levels, as well as management's forecast for the comparable store sales of Walmart to Walmart U.S. operating segment and the comparable club sales without fuel of Walmart Sam's Club operating segment for the 13-week period from July 30, 2011 through October 28, 2011.…

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 second quarter of fiscal year 2012. All information for this quarter, including our unit count, square feet 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 7:00 a.m. Central Time today on August 16, 2011. Mike Duke, President and CEO of Wal-Mart Stores, Inc. will open the call with his thoughts and key highlights of the quarter. Jeff Davis, SVP of Finance and Treasurer, will cover the consolidated financial details, including information on certain items affecting our EPS. Then we'll go to the operating segments. Bill Simon, President and CEO of Walmart U.S. will begin our segment discussions. Doug McMillon, President and CEO of Walmart International, will follow Bill. Please note in his call, the clarifications on the impact of our acquisitions. We'll close the segment discussion with Brian Cornell, President and CEO of Sam's Club. And our CFO, Charles Holley, will wrap up with our financial report card and guidance. Before we discuss our second quarter performance, we do have a couple of reminders. You'll note in our press release that we have certain items affecting EPS this quarter, and Jeff will cover these shortly. As you know, we closed on the acquisitions of the 147 Netto stores in the U.K. and our majority interest in Massmart during this quarter. The Netto stores are fully consolidated into our financials but do not include any results from Massmart. The balance sheet from Massmart is consolidated using their fiscal year-end balance. Massmart continues to operate as a public company and closed their fiscal year on June 26. Massmart will report its year-end results on Thursday, August 25. Many of you often ask about what's included in the non-controlling or as we used to call minority interest line. This line primarily relates to non-controlling ownership interests in Mexico, which includes Central America, as well as Chile, Trust-Mart in China, India and now Massmart. Beginning in the third quarter, we will consolidate Massmart's operations in our consolidated financials on a 1-month lag, consistent with most of our international operations. Finally, let me remind you that our fiscal calendars for international differ from that of our corporate time line. All of our international countries, with the exception of Canada, end their fiscal year on December 31, while our U.S. and Canada operations end on January 31. Now Mike, let's get started with our Q2 results. Mike?

Thanks, Carol. Good morning, everyone. Today, Walmart is reporting second quarter earnings per share of $1.09 from continuing operations, which is a 12.4% increase over last year and near the top of our guidance. Let's get right to the key results. Net sales increased 5.5% to $108.6 billion. Total U.S. comp sales, without fuel, were flat for the 13-week period. Sam's Club comps, without fuel, were up 5%, right at the top of the guidance for the period, and Walmart U.S. delivered comp sales within guidance at negative 0.9%. International reported net sales of $30 billion, a strong 16.2% increase. We also grew internationally through 2 significant acquisitions. Consolidated operating income increased 3.1%. Walmart ended the quarter with free cash flow of $4 billion. For the quarter, the company returned $2.7 billion to shareholders through dividends and share repurchases. Operating expenses in the second quarter grew at the same rate as sales. We remain committed to the productivity loop and to strong expense management throughout the Walmart organization. We have the right initiatives in place to leverage for the full year. Let's move to the highlights of the individual segments. I'm encouraged by the sales improvements in our Walmart U.S. stores. Comps have improved sequentially month-to-month within the quarter. In fact, this was the best quarterly performance since the third quarter of fiscal 2010. The goal of the Walmart U.S. team remains positive comps by year end. In the second quarter, Bill Simon and the Walmart U.S. team completed the assortment add back in grocery for food and consumables, resulting in better customer traffic on this side of the store. We're making progress in expanding our general merchandise assortment and seeing positive comps in some categories such as sporting goods, but we still have work to do, and the team…

Thank you, Mike. For the second quarter of fiscal 2012, Walmart reported diluted earnings per share from continuing operations of $1.09, which was within our guidance of $1.05 to $1.10. The $1.09 compares to $0.97 for the second quarter of last year. Income from continuing operations included certain pretax items as follows: We recorded an approximate $49 million mark-to-market loss on certain foreign currency derivative positions related to the Massmart acquisition. We realized costs of approximately $36 million related to the acquisitions of Netto and Massmart. We recognized expenses of approximately $30 million related to the damages from tornadoes and floods in our United States operations. These items totaled $115 million and are included in our operating expenses. In addition, Walmart Mexico recorded an approximate $17 million revaluation charge from the implementation of the SAP financial system, which Doug will provide additional details later. The combination of these expense and gross margin items on EPS from continuing operations was approximately $0.03. Now let's move to the rest of the P&L. Consolidated net sales increased 5.5% or $5.6 billion to $108.6 billion for the quarter. The increase was driven primarily by Walmart International and Sam's Club and included a currency exchange benefit of $2.3 billion. Sales for Massmart were reported in our operating results starting in the third quarter. Total U.S. comp sales, without fuel, for the 13-week period ended July 29 were flat and negative 20 basis points for the 26-week period. You will hear more details on the Walmart U.S. and Sam's Club comp sales from Bill and Brian. For the quarter, gross margin on sales was 24.7%, a 10-basis point reduction compared to last year. Sam's Club fuel sales were the primary contributor to the margin decline. Unallocated corporate overhead and other, which includes our ongoing investment in…

Thank you, Jeff. The goal at Walmart U.S. remains clear. Deliver positive comps by year end, and our plan is straightforward, and it's also working. We're expanding our assortment of merchandise backed with Walmart's Every Day Low Price promise. Our customer response is reflected in the improved results we saw in the second quarter. Walmart U.S. gained sales momentum throughout the quarter after a difficult May, which was impacted by high prices at the gas pump and severe spring weather. Our sales trend improved in June and again in July. In fact, our July $454 million comp was positive, and we improved in both customer traffic and ticket as the quarter progressed. Our net sales rose approximately 40 basis points to $64.9 billion for the second quarter. Comp sales for the 13-week period ending July 29 was inside our guidance at negative 0.9% and the best quarterly comp performance in almost 2 years. Ticket was positive every month of the quarter. Traffic, which drove more than half of the comp, improved sequentially each month. Better traffic was driven in part by the 90-day rollback program at the gas pump. This program, which is available in 18 states saves customers $0.10 a gallon on gas and diesel when using a reloadable Walmart gift card or credit card. Grocery and health and wellness, which represent 2/3 of our sales revenue, continue to deliver positive comps. We also saw trend improvements in all other businesses except entertainment. This improvement is attributable to our focus on expanding merchandise assortment, price leadership and increased in-stock levels. Weather trends across the country later in the quarter also helped. The economy remains challenging for our core customers. Customers are still consolidating trips due to higher year-over-year gas prices. The swings in sales due to paycheck cycles remain…

Thanks, Bill. During our briefing following our Shareholders Meeting on June 3, I laid out our key initiatives for leveraging our scale and expertise in the Walmart International markets. They included making progress on EDLP as a global pricing philosophy, enhancing the productivity loop to get costs down, further developing global talent and sharing ideas back-and-forth with the U.S. businesses, both Walmart and Sam's Club. It's only been a couple of months since then, and I'm happy to report that we have already made progress on each of these areas. I'm also proud to share some important milestones that Walmart International achieved in the second quarter. As you know, ASDA completed its acquisition of 147 Netto stores in the U.K. ASDA has already converted more than 60 of these stores, which now have more than 4x the number of products than previously offered. This means customers can find what they need for the entire week just as they do in ASDA superstores. In addition, we completed our 51% acquisition of Massmart. Massmart is a leading general merchandise retailer and basics foods wholesaler in sub-Saharan Africa and the second largest in consumer goods. As you heard, we will include the results from our countries in Africa in our third fiscal quarter. In terms of sharing ideas back and forth, South African suppliers offer an important opportunity for us to bring new and exciting merchandise to our other markets. Recently, we contracted with Ocean Fresh, a South African seafood supplier to export sustainably sourced wild hake, a fish, to our stores in the United States. This is helping to create 100 jobs in South Africa, and we believe this is the first indicator of even more opportunities on the continent. To recognize our new partnership with our customers in sub-Saharan Africa, we…

Thanks, Doug. I am very pleased to give the Sam's Club update today. We had an outstanding second quarter. Sam's Club posted its sixth quarter of sequential improvement as comp club sales, excluding fuel, increased 5%, at the top of our range. We have the best momentum in membership we've seen in years, driven by strong renewals and growth in members joining at the Plus level. Not only did we leverage expenses, but we also grew operating profit without fuel by 13.3%, much faster than the growth in sales. Similar to first quarter, our fuel business was strong during the quarter. We are pumping more gallons of fuel and generating more sales dollars per gallon this year versus last year. Fuel prices in this year's second quarter are approximately 43% higher than a year ago and gallons sold are up 16%. Fuel price is an important first price impression for our members, reminding them the value of their membership. Including fuel, second quarter net sales were $13.6 billion, a 9.5% increase over last year and operating income increased 15% to $492 million. Volatility and fuel prices can have a notable impact on our financial results. 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 achievements for the quarter. Net sales for the second quarter were $12 billion, up 4.9% from last year. Comp club sales for the 13-week period increased 5%, and we're strong across all 3 geographic operating divisions. We are particularly pleased with the sales strength of our Western division, which includes 22 states located in the Western U.S. Recall that we have 3 divisions in Sam's Club, each headed by a seasoned SVP. Comp traffic and ticket increased…

Thanks, Brian. As Mike said, we continue to be very focused on our financial priorities of growth, leverage and returns. I'm really proud of the way we continued to improve throughout the quarter despite the fragile global economy, which is obviously affecting consumers. I also want to note that Walmart's balance sheet and capacity continue to be an advantage, especially during the market volatility we have seen recently. Our ability to access short and long-term funding has never been better. This is a result of a strong Walmart business model. We still have many opportunities to improve around the world. In the second quarter, we had solid sales growth in international and Sam's, and we're progressing in Walmart U.S. We still have much work to do to drive top line growth, and we believe we are focused on the right initiatives. Despite the slowdown in the global economy, we continue to find very good growth opportunities for new stores across our global operations. We added 638 net units, with 315 units for Massmart, 147 units from Netto and 176 units through organic growth. Regarding acquisitions, we remain very thoughtful in acquiring new operations. Our focus will continue to be investing in companies that can deliver value to our customers and shareholders. Turning to leverage, our commitment to productivity and cost containment remains high. Although we were flat on this metric on a reported basis, I remain encouraged with our expense management. The underlying SG&A rose less than the rate of sales when you exclude FX losses and acquisition-related costs. Bear in mind that our efforts are not just simply focused on cutting expenses but on a blend of expense management and technology leverage to improve productivity. I want to point out that productivity improvements also help our associates serve our…