The day before Doug McMillon took the reins as chief executive officer at Walmart, the company highlighted some of the challenges he will face, by lowering its sales and earnings projections for the fourth quarter of its 2014 fiscal year.


Doug McMillon, Walmart, Samís Club, Walmart U.S., Charles Holley, SNAP, Supplemental Nutrition Assistance Program, William Blair & Co., Mark Miller,


















































































































































































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Walmart outlook cut

February 10th, 2014

NEW YORK – The day before Doug McMillon took the reins as chief executive officer at Walmart, the company highlighted some of the challenges he will face, by lowering its sales and earnings projections for the fourth quarter of its 2014 fiscal year.

The main issue: weaker-than-expected same-store sales at U.S. Walmart and Sam’s Club outlets, due in part to bad weather that hurt traffic, and cuts to food stamp benefits that left customers with less money to spend. Analysts have estimated that about 20% of Walmart’s customers are food stamp recipients. Food stamp benefits were cut by more than $5 billion last year, and they are expected to be cut further this year.

"Walmart U.S. guidance on November 14 was for comp sales to be relatively flat, and Sam’s expected comps, without fuel, to be between flat and 2%," chief financial officer Charles Holley said in a statement. "Despite a holiday season that delivered positive comps, two factors contributed to lower comp-sales performance for Walmart U.S. First, the sales impact from the reduction in SNAP [the U.S. government Supplemental Nutrition Assistance Program] benefits that went into effect November 1 is greater than we expected. And, second, eight named winter storms resulted in store closures that impacted traffic throughout the quarter."

Holley added that weather also negatively impacted sales at Sam’s Club.

In a research note, William Blair & Co. analyst Mark Miller noted that Walmart does not appear to have benefited significantly from the loss of customer traffic suffered by Target Corp. in the wake of its data breach, and found the sales weakness at Sam’s Club surprising.

"Additionally, we believe market share loss to competition remains a primary first-order concern," Miller wrote. "Walmart comp-store sales continue to lag well below U.S. retail sales, and this trend appears to have worsened further in the fourth
quarter."

Walmart, which will issue its fiscal 2014 financial results on February 20, had previously forecast GAAP, or reported, fourth quarter earnings from continuing operations of $1.50 to $1.60 per diluted share, with adjusted, or underlying, earnings projected at $1.60 to $1.70 per share. Full-year earnings were estimated at $5.01 to $5.11 per share, with adjusted earnings between $5.11 and $5.21 per diluted share.

'We now anticipate that our underlying EPS for the fourth quarter of fiscal 2014 will be at or slightly below the low end of our range of $1.60 to $1.70," Holley said. "For the full year, we expect underlying EPS to be at or slightly below the low end of our range of $5.11 to $5.21."

Walmart had notified investors in November that its fourth quarter earnings would be reduced by 10 cents per share because of charges related to 50 store closures in Brazil and China (6 cents per share) and to the termination of agreements with its India joint venture partner (4 cents per share). The company has bumped up the impact of the India transaction by a penny, but also revealed additional special items that will shave another 15 cents per share from earnings.

Those consisted of a 6-cents-per-share hit from non-income tax contingencies in Brazil, a charge of 5 cents per share for employment claim contingencies, also in Brazil, 3 cents per share for store lease expense charges in China, and a penny related to the previously announced staff cuts at Sam’s Club as well as the closure of one club.

Walmart’s revised earnings guidance shows that the company is not immune to the economic challenges that have confronted the discount retail sector over the past year, according to Fitch Ratings, which points out that, in addition to food stamp cuts, consumer spending has been crimped by the increase in the payroll tax at the start of 2013, and the still-weak job market.

Fitch points out that despite weak top-line results, with comp-store sales figures ranging from a 1.5% loss to 1.8% gain in the past four years, Walmart has been able to maintain a steady operating margin at or near 6% through expense leverage.

Walmart benefits from its dominant market position in North America, its strength in other countries, its low cyclicity and consistent free cash flow, according to Fitch.

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