Wal-Mart Stores Q1 2013 Earnings Preview: Sales Hurt By Payroll Tax Bite; Cold Weather Hits Spring Traffic, But Sales, Profit Should Edge Up

[May 16, 2013 UPDATE] Wal-Mart Stores Inc. (NYSE:WMT) missed analysts' expectations for its first quarter ended April 30. It reported on Thursday morning $3.78 billion in profit, or $1.14 a share, versus $3.74 billion in profit, or $1.09 a share in the same period last year.

Analysts polled by Thomson Reuters had predicted $3.82 billion in profit. Revenue rose 1 percent to $114.9 billion, below the $116.4 that Wall Street has expected. Same store sales (excluding gasoline purchases at on-site stations) declined 1.4 percent. The company predicted in February its sales would be flat.

As everyone expected, the reasons cited include the 2 percent rise in payroll tax that kicked in at the start of the year, which most affects low-income Americans who were forced to make cutbacks to offset for the bite taken from their paychecks. An unseasonably cool spring also hit home and garden purchases that typically bolster spring sales for the world's largest retailer.

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Wal-Mart Stores Inc. (NYSE:WMT), the world’s largest retailer with annual sales approaching a half-trillion dollars, is expected to report on Thursday morning a modest 2.1 percent rise in its fiscal first-quarter as a greater focus on individual store productivity somewhat offsets a slight dip in the growth of same-store sales.

The slight dip this past quarter in the growth of U.S. same-store sales stems from two external factors, the government and the weather.

First, the expiration of the 2 percent payroll tax break hits hardest at the typical Wal-Mart shopper: the low-income earner often living paycheck-to-paycheck. This might have caused some moderate belt tightening and fewer trips past the blue-vested in-store greeters. Further, the slow pace of federal tax returns is expected to have been a drag on consumer spending.

Second, the weather: An earlier-than-usual rollout of home and garden merchandise at the discount chain came during an unseasonably cool spring, which led consumers to delay planned buys of items like BBQ grills and potting soil.

Internationally, sales growth is expected to have continued but at a slower pace. "We believe that the slowdown in international store expansion will impact the retailer's revenue growth in the first fiscal quarter of 2014 as well," Trefis said in a note. However, the slow international expansion can work in Wal-Mart's favor in the long term. The productivity is improving."

Analysts polled by Thomson Reuters expect first quarter earnings per share (EPS) to come in at $1.15 on $116.39 billion in revenue, up from $1.09 and $113.02 billion in revenue in the first quarter of last year. The EPS estimate average is down from $1.18 in February. Net income is expected to be $3.82 billion, up from $3.74 billion last year.

The company, which operates about 4,000 stores in the U.S. that serve more than 100 million customers each week, invested in putting spring merchandise into stores earlier than usual this year, but the payroll tax issue and the weather hurt the company’s performance early in the quarter.

"Due to the slower sales rate in the first few weeks of this year's first quarter, we are forecasting [comparable-store] sales for the 13-week period from Jan. 26 to Apr. 26, 2013 to be around flat,” Bill Simon, the company’s head of U.S. operations, said to analysts in February. Some analysts expect a 0.2 percent decline in same-store sales, a key retail metric that excludes newer outlets and better reflects overall performance. Nevertheless, shares of the Bentonville, Ark., retail giant are generally viewed by Wall Street as a Hold even if analysts are divided on how the company fared in March and April. (February retail sales were hit by the delay in the tax refunds.)

“We are concerned that soft sales continued into March and April,” Citigroup analyst Deborah Weinswig, told MarketWatch. “We believe the impact of higher payroll taxes became a significant headwind.”

While Weinswig thinks March and April sales continued their soft streak from February, Jefferies analyst Daniel Binder wrote in a research note that he thinks the first-quarter performance will echo last year’s, with strengthening sales in the quarter ended April 30. Jeffries’ target price is $90.

Most sentiments, however, seem to point toward a modest quarter. Wal-Mart’s chief competitor, Target Corporation (NYSE:TGT), last month cut its first-quarter sales and profits forecast, perhaps the clearest indication that the headwinds slowing growth into the earlier weeks of the quarter continue to blow even if they aren’t as strong.

In February the company announced it was boosting its quarterly dividend by 18 percent to $1.88 per share, and it said the first quarter EPS would fall between $1.11 and $1.16. The analysts’ EPS average forecast stands at the higher end of that range.

The company also said in this past quarter that the investment in its ecommerce operations this year would knock about nine cents off EPS, which the company says will be between $5.20 and $5.40 for the year. Also this quarter Wal-Mart floated three-year, five-year, 10-year and 30-year bonds totaling $5 billion to fund to be used for “general corporate purposes.”

The number of analysts tracked by Thomson Reuters recommending a Strong Buy of the shares has declined from 90 days ago, but they are roughly split between buying and holding with only one Sell recommendation out of 27 polled analysts. Citigroup took Wal-Mart off its top stock picks list, but it also raised its target price (how much the bank thinks the stock is worth) for the company’s stock to $89 from $82. It’s currently trading above $78, up more than 15 percent from the start of the year, and this week it came close to its 52-week high.

In order to counter a larger downward trend in same store sales -- which declined gradually over the past year -- the company announced in the opening days of its second quarter last week a nationwide campaign called “The Real Walmart,” which is aimed at countering a public perception among some consumers that Wal-Mart is a soulless corporate privateer that crushes mom-and-pop stores and imposes cut-throat standards on suppliers. The campaign highlights some figures showing how many Americans shop there for products at the relatively low prices the company’s massive scalability is able to provide.

“There is a national campaign that is more broad in its claim, and then we will be expanding into 50 markets in the first quarter with direct market-specific basket claims,” Simon said at the Raymond James Institutional Investors Conference in Olrando, Fla., earlier on May 5.