Walmart Retreats From Record as Investors Poke Holes in Earnings

(Bloomberg) -- Investors in the retail industry are a tough crowd. Just ask Walmart Inc., which matched sales growth estimates, raised its forecast -- and watched its shares drift lower in midday trading as analysts picked over the numbers.

The shares fell as much as 1.2% on Thursday afternoon after earlier hitting a record high. What changed? After all, the key gauge of same-store sales was in line with expectations -- the 21st consecutive gain. Both the number of customers and the size of their average orders were up, fueling the growth.

But concerns remain, including persistent weakness at Sam’s Club, which lacks a leader, the high cost of new initiatives and slow progress in diversifying sales beyond groceries. Walmart also kept its sales guidance intact, disappointing some analysts.

“Overall we view the result as disappointing,” Mark Astrachan, an analyst at Stifel, said in a note.

Even with Thursday’s decline, the shares have had a great 2019. They’re up 29% for the year, compared with a 23% gain for the S&P 500. The reaction to earnings reflects the broader anxiety on Wall Street about whether stocks at record highs have much more room to run.

More Non-Food

Chief Financial Officer Brett Biggs said in prepared remarks that the company’s online unit needs to sell more general merchandise, which delivers better margins than bread and bananas. This sentiment was echoed by experts.

“Walmart needs to improve its position in non-food,” Neil Saunders, an analyst at GlobalData Retail, said in a note. “Progress is slower than Walmart would like.”

On a call with reporters, e-commerce chief Marc Lore said the company is trying to improve sales of home decor and apparel, like its recent re-launch of the Scoop fashion brand.

Sam’s Troubles

Sam’s Club, the company’s warehouse division that accounts for about 11% of its revenue, is still a sore spot. Comparable sales there rose only 0.6%, just one-third the pace analysts surveyed by Consensus Metrix had been expecting, due largely to reduced sales of tobacco. Profit also declined due to price cuts and technology investments, the company said.

Performance at Sam’s was “surprisingly weak,” RBC Capital Markets analyst Scot Ciccarelli said.

The warehouse chain is also still without a leader a month after Sam’s CEO John Furner was tapped to replace Greg Foran as head of Walmart’s U.S. stores division. The executive shuffle and a re-organization of the company’s web operations over the summer have created unwelcome uncertainty entering the holiday season. The key period will be compressed this year by six days, putting pressure on Walmart, Target Corp. and others to reach shoppers early.

No Guidance Overhaul

Walmart now sees full-year adjusted earnings per share increasing slightly compared to last year, after saying in August either a slight decrease or slight increase was possible. This is the second time this year Walmart has upgraded its outlook.

Also, comparable sales excluding gas for Walmart stores in the U.S. rose 3.2% in the period, beating analysts’ 3.1% growth estimate and marking the 21st straight gain.

Still, the muted share reaction shows that Walmart can’t help but get roped into the underlying gloom enveloping the sector. Earlier this month, Moody’s cut its expectations for the entire U.S. retail industry, citing “intense competition in the fight for market share.”

--With assistance from Janet Freund.

To contact the reporter on this story: Matthew Boyle in New York at mboyle20@bloomberg.net

To contact the editors responsible for this story: Crayton Harrison at tharrison5@bloomberg.net, Jonathan Roeder

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