Walmart Reports Q2 2016
Walmart reported its Q2 2016 results showing second quarter 2016 EPS of $1.08, and updated its guidance for the remainder of 2016. Walmart U.S. delivered 1.5 percent comps and improved customer experience scores.
Here are the highlights:
• Q2 diluted EPS from continuing operations was $1.08. Currency exchange rates negatively impacted EPS by approximately $0.04.
• Comp sales at Walmart U.S. increased 1.5 percent, driven by traffic of 1.3 percent. Neighborhood Market comps increased approximately 7.3 percent, with strong growth from new stores. Customer experience scores improved over last year.
• Total revenue was $120.2 billion. On a constant currency basis, total revenue was $124.5 billion.
• E-commerce sales globally increased approximately 16 percent on a constant currency basis. Gross merchandise value increased approximately 18 percent on a constant currency basis.
• Q2 earnings were pressured by currency fluctuations, lower Walmart U.S. margins, and investments in customer experience. Consolidated operating income declined 10 percent.
• Walmart updated full year EPS guidance to a range of $4.40 to $4.70, from a previous range of $4.70 to $5.05. This range includes Q3 EPS guidance of $0.93 to $1.05.
“We’re pleased that the investments we’ve made are helping to improve our business,” said Doug McMillon, president and CEO of Walmart. “Even if it’s not as fast as we would like, the fundamentals of serving our customers are consistently improving, and it’s reflected in our comps and revenue growth. In this case, our desired changes require investments, which are pressuring earnings this year. We’re confident that our strategic plan will create robust sustainable growth for shareholder returns over time.”
The company paid $1.6 billion in dividends and repurchased approximately 14 million shares for $1 billion. Return on investment (ROI) for the trailing 12-months ended July 31, 2015, was 16.2 percent, compared to 16.7 percent for the prior comparable period. The decline in ROI was primarily due to continued capital investments, as well as to a decrease in operating income. Free cash flow was $5.1 billion for the six months ended July 31, 2015, compared to $6.8 billion in the prior year. The decrease in free cash flow was due to lower income from continuing operations and the timing of payments.
Consolidated membership and other income increased 13.9 percent, to $899 million during the second quarter. Other income primarily benefited from the gain on the sale of bank operations in Mexico.
Assumptions for fiscal 2016 earnings per share guidance
• The impact from investments in wages, training, and additional hours in stores and clubs will be approximately $0.24, including approximately $0.08 in the third quarter. Walmart’s decision to add associate store hours beyond the February plan is the primary driver.
• The incremental investment in global eCommerce is expected to range between $0.06 and $0.09.
• Headwinds in Walmart’s U.S. businesses from reduced pharmacy reimbursements rates, which are negatively impacting gross margins, and shifts in the mix of cash versus insurance transactions. Along with pharmacy headwinds, higher-than-expected ongoing shrink in Walmart U.S. will impact full year EPS by approximately $0.11, including approximately $0.03 in the third quarter.
• Full year currency exchange rate impact is expected to be approximately $0.15, up $0.02 from last quarter’s revised guidance of $0.13.
• The range for Walmart’s effective tax rate of 32 to 34 percent remains unchanged from previous guidance.
Target Reports Q2 2015
Target Corporation reported second quarter 2015 adjusted earnings per share from continuing operations of $1.22, up 20.6 percent from $1.01 in 2014.
“We’re very pleased with our second quarter financial results, as traffic growth, strong sales in our signature categories, and continued expense discipline drove better-than-expected profitability,” said Brian Cornell, chairman and CEO of Target. “While the momentum in our financial results is encouraging, we have much more to accomplish. Looking ahead, we are focused on making further progress against our strategic priorities and are committed to improving operations as we move through the important back-to-school, back-to-college, and holiday seasons.”
Fiscal 2015 Earnings Guidance
In third quarter 2015, Target expects adjusted EPS of $0.79 to $0.89 compared with $0.79 in third quarter 2014. The company now expects full-year 2015 adjusted EPS of $4.60 to $4.75, compared with prior guidance of $4.50 to $4.65.
Second quarter 2015 sales increased 2.8 percent to $17.4 billion from $17 billion last year, reflecting a 2.4 percent increase in comparable sales combined with sales from new stores. Digital channel sales grew 30 percent and contributed 0.6 percentage points to comparable sales growth. Segment earnings before interest expense and income taxes (EBIT) were $1.350 billion in second quarter 2015, an increase of 17.5 percent from $1.149 billion in 2014.
Second quarter EBITDA and EBIT margin rates were 10.9 percent and 7.7 percent, respectively, compared with 9.9 percent and 6.8 percent in 2014. Second quarter gross margin rate was 30.9 percent, compared with 30.4 percent in 2014, reflecting the benefit of annualizing heightened promotional markdowns in second quarter 2014, and a favorable merchandise mix in second quarter 2015. Second quarter SG&A expense rate was 19.9 percent in 2015, compared with 20.5 percent in 2014, reflecting ongoing cost savings initiatives and expense timing.
Interest Expense and Taxes from Continuing Operations
Target’s second quarter 2015 net interest expense was $148 million, compared with $433 million last year. Last year’s interest expense included a $285 million charge related to the early retirement of debt. Second quarter 2015 effective income tax rate from continuing operations was 34.6 percent, compared with 33.7 percent last year, driven primarily by the impact on the consolidated tax rate from higher pretax earnings.
In second quarter 2015, Target repurchased 8.2 million shares of common stock at an average price of $81.94, for a total investment of $675 million. The company also paid dividends of $331 million during second quarter 2015, an increase of 22 percent from $272 million last year. In total, the company returned $1.006 billion to shareholders in second quarter 2015, representing more than 133 percent of net income.
Year-to-date, the company has repurchased 15.2 million shares at an average price of $81.41, for a total investment of $1.2 billion. Under the current $10 billion share repurchase program, through second quarter 2015, Target has repurchased 65.1 million shares of common stock at an average price of $67.19, for a total investment of approximately $4.4 billion.
For the trailing 12 months through second quarter 2015, after-tax return on invested capital was 13.3 percent, compared with 11.3 percent for the 12 months through second quarter 2014.
Discontinued Operations Update
Target Canada Co. completed a court-approved real estate sales process during second quarter 2015. Consistent with expectations, after-tax losses from discontinued operations were $20 million in second quarter 2015, compared with $157 million last year. Second quarter losses from discontinued operations include an increase to the company’s accrual for estimated probable losses, primarily guarantees of leases, and adjustments to the tax benefit from Target’s investment loss in Canada.
Certain assets and liabilities of Target’s discontinued operations are based on estimates. The recorded assets include estimated receivables, and the remaining liabilities include accruals for estimated losses related to claims that may be asserted against Target Corporation, primarily under guarantees of certain leases. These estimates involve significant judgment and are based on currently available information, an assessment of the validity of certain claims and estimated payments by the Canada subsidiaries. These estimates are subject to change, and Target says it believes it is reasonably possible that adjustments to these amounts could be material to its results of operations in future periods. Any such adjustments would be recorded in discontinued operations.
Scooby-Doo Heads Back to the Big Screen
Warner Bros. Pictures announced earlier this week that Scooby-Doo will be in theaters in a new animated film on September 21, 2018. The film reunites Oscar-nominated producers Charles Roven and Richard Suckle (American Hustle), who previously produced the live-action features Scooby-Doo and Scooby-Doo 2: Monsters Unleashed. Joining them is BAFTA Award-winning producer Allison Abbate (The Iron Giant), who produced the Oscar-nominated features Fantastic Mr. Fox, Tim Burton’s Corpse Bride, and Frankenweenie.
It will be directed by multiple Emmy Award nominee Tony Cervone (Space Jam, Cartoon Network’s The Looney Tunes Show, and Scooby-Doo! Mystery Incorporated). Dan Povenmire (Phineas and Ferb, Family Guy) will also bring his creative sensibilities to the production as an executive producer. The screenplay is by Matt Lieberman (Dr. Dolittle: Tail to the Chief).
The new Scooby-Doo feature will be a Warner Bros. Pictures presentation under the Warner Animation Group (WAG) banner.