Fiscal 2014 ended on a disappointing note for Walmart, as the world’s largest retailer recorded a 6.2% decrease in net income from continuing operations to $15.92 billion for the year.

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Walmart earnings down, outlook disappoints

February 20th, 2014

BENTONVILLE, Ark. – Fiscal 2014 ended on a disappointing note for Walmart, as the world’s largest retailer recorded a 6.2% decrease in net income from continuing operations to $15.92 billion for the year.

The bottom line for the fourth quarter plunged 22.2% to $4.35 billion, while net earnings from continuing operations slid 19.8% to $1.34 per diluted share.

A host of special items, most of which were related to the International Division, combined to hammer results. Charges related to store closures in China and Brazil, income tax and employment claim contingencies in Brazil, and Walmart’s termination of its joint venture in India trimmed 25 cents per share from earnings, while charges for restructuring and a club closure in the Sam’s Club Division shaved another penny from earnings.

Excluding those items, underlying earnings per share for the final quarter came in at $1.60 per diluted share, a penny ahead of the average estimate among analysts surveyed by Thomson Reuters. Underlying earnings for the year were $5.11 per share.

Net sales for the year rose 1.6% to $473.08 billion, while the fourth quarter’s top line improved 1.4% to $128.79 billion. The growth was driven primarily by the Walmart U.S. division, which recorded a 1.8% full-year rise to $279.41 billion, while fourth quarter sales gained 2.4% to $76.43 billion. Comparable-store sales for the unit dipped 0.6% on the year and 0.4% in the fourth quarter, however.

In a prerecorded call, new president and chief executive officer Doug McMillon promised changes — and improvement. "We have a compelling customer proposition, but we can get better at running some of our core operations, and we will," he said. "Walmart has a long history of embracing change. And this year we’ll certainly make some changes to improve our business. These changes will be made with a filter on increasing customer relevance. Customers’ shopping habits are changing more rapidly than ever before. We must be more nimble and flexible as we operate our businesses to adapt to these changes."

A 14.4% decrease in operating income to $7.35 billion is a good indicator of just how tough the fourth quarter was. Most of that decline came from the International segment, where operating profit plunged 45.8% to $1.31 billion.

But the real surprise came from Sam’s Club, where operating profit fell 15.3% to $425 million, and comparable-store sales (both with and without fuel) slipped 0.1%. Fourth quarter sales for the membership warehouse club division rose 1.3% to $14.68 billion.

"The warehouse club business has consistently outperformed Walmart U.S. for some time," observed Stephen Springham, senior retail analyst at Planet Retail. "But it too saw comp sales decline in quarter four, against previous guidance of growth. Adverse weather is only a partial mitigating factor. Rival Costco’s comp growth of 5% in both December and January suggests the issues at Sam’s Club run somewhat deeper."

In addition to its financial results, Walmart announced that it is boosting capital investment to accelerate the opening of small stores in the current 2015 fiscal year. Its smaller formats currently include 346 Neighborhood Markets and 20 Walmart Express locations. In October 2013, management projected 120 to 150 openings of these banners. That target has now been raised to a range of 270 to 300 outlets. The company still plans to open about 115 Supercenters.

"Customers’ needs and expectations are changing," Bill Simon, president and CEO of Walmart U.S., said in a statement. "They want to shop when they want and how they want, and we are transforming our business to meet their expectations. By unlocking this growth opportunity and further combining our Supercenters and small-store formats with an unlimited selection available through e-commerce, we provide our customers with anytime, anywhere access to our brand."

Management pointed out that the smaller formats have continued to generate comparable-store sales increases and greater customer traffic every quarter. For example, comp-store sales for the Neighborhood Markets rose approximately 4% in fiscal 2014, driven mainly by fresh categories and pharmacy.

"Neighborhood Market is performing comparable or favorable to leading grocers," Simon added. "Our small store expansion, in addition to providing customers access to a wide variety of products, including fresh, pharmacy and fuel, will help us usher in the next generation of retail. This will combine thousands of points of physical access with digital retail experiences that include such initiatives as Site to Store and Pay with Cash."

Simon noted that the focus in Walmart U.S. will be on reviving comp-store sales growth. But he added that severe weather in the first two weeks of February had driven sales down in comp stores. "At the height of the storm, we had more than 200 stores closed," he said. "We’re optimistic about the balance of the quarter and believe we will have a positive sales comp for the rest of the period."

For the first quarter, the company expects comp-store sales to be flat, which will mark an improvement over the 1.4% decrease in the first quarter of fiscal 2014. Sam’s Club also expects first quarter comp-club sales (excluding fuel) to be relatively flat, compared to a 0.2% increase a year ago.

Looking ahead, Walmart projected that sales growth this year will be close to the low end of its prior projection of 3% to 5%. Earnings per share are forecast to range between $5.10 and $5.45 per diluted share, well below the average of $5.54 per share among analysts.