Walmart Q1 Profits Up but U.S. Division Remains Sluggish

Walmart on a smaller scale?

Bentonville, AR—Walmart reported today that its international operations helped the world’s largest retailer post a 3% increase in its first quarter profits. However, sales at its U.S. division continue to be sluggish, posting its eighth consecutive quarter of falling comparable store sales.

For the quarter ended April 30, profit was $3.4 billion, or 97 cents a share, up from $3.3 billion, or 87 cents a share, a year earlier. Walmart had forecast a profit of 91 to 96 cents a share, and analysts’ average estimate expected 95 cents.

Walmart U.S. Same Store Sales Decline Again

Helped by to sales strength in international stores and at Sam’s Club, net revenue rose 4.4% to $104.2 billion from $99.9 billion in the prior year period. International sales, which account for about 20% of its total, were up 11.5% to almost $28 billion and operating income from Walmart’s overseas operations was up 1.2% at $1.09 billion.

On its international side, all countries, except Japan, showed growth. Mike Duke, president and ceo, said that Mexico, China and Chile had the highest percentage sales increases compared to last year.

Last week, Walmart took a minority stake in Chinese online retailer Yihaodian, a move that Duke said would provide tremendous opportunities to grow the channel. “We expect ongoing activity in the e-commerce area around the world,” he said.

But a decline in foot traffic appeared to have hurt the U.S. division’s recovery. Sales at the U.S. division edged up 0.6% over the quarter to $62.7 billion. Operating income rose 0.8% to $4.6 billion.

However, Walmart’s U.S. comparable-store sales fell 1.1%.

“We recognize we still have work to do and . . . sales growth [at stores open at least a year] remains the greatest priority for me and the entire Walmart U.S. team,” Duke said.

Duke has previously acknowledged missteps in narrowing Walmart’s product range and losing its focus on low prices, which the company is now seeking to correct.

Nonetheless, those effort may have been hindered by rising gas prices and continued inflation worries among its customers.

“It’s pretty much what we’ve been saying for the last few quarters — our core customer’s still very concerned about gas prices, the cost of living and unemployment,” Charles M. Holley Jr., chief financial officer, said on in a conference call with analysts.

Although the U.S. division’s grocery sales have improved, “we’re simply not converting enough of our grocery customers to shop apparel,” added William S. Simon, the U.S division’s president and ceo.

Walmart US’ move away from fashion fashion looks to concentrate on basics, so far hasn’t been successful. Holley guessed that Walmart lost business to competitors, including dollar stores, over its clothing.

“It’s something that we’ve stumbled with over the last several quarters and we’re not happy with,” Holley said. “It does start with basics, and for us to be able to sell anything that’s fashionable at all, we really have to get basics down first.”

Smaller Scale Stores the Future?

While “we had a fairly good quarter” in basics such as T-shirts and underwear, he said, “where we’re still not executing is in the kids’ and the women’s business.”

Walmart forecast its US comparable store sales could range from a fall of 1% to an increase of 1% in the second quarter.

The U.S. decline “tells us other players continue to steal market share,” said Brian Sozzi of Wall Street Strategies. “At a time of increased wallet strain on Walmart’s core low-income consumer, we should be seeing share gain, not share loss.”

One of the ways Walmart U.S. is addressing a changing retail is to open smaller stores and expand its online presence to attract shoppers. In January, Simon said “there are hundreds, if not thousands of opportunities in the U.S.” for stores smaller than the retailer’s supercenters, which account for about 76% of Walmart’s U.S. locations.

“Smaller urban and rural store formats provide potential sales and share drivers in U.S. markets,” said analysts at Morningstar. “The company plans to test 15 to 20 stores before any meaningful rollout is undertaken.”

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