14 January 2009

WMT: Earnings Warning for the January 2009 Quarter

The fourth quarter of Wal-Mart's fiscal 2009 (yes, 2009) will end on 31 January.

We earlier provided a look-ahead model for the quarterly Income Statement.  GCFR estimates are derived from trends in the historical results and guidance provided by company management. 

A significant input to our model for Wal-Mart's fourth quarter was the guidance excerpted below from the company's announcement on 13 November 2008 of its third quarter results. 

For the fourth quarter of fiscal year 2009, the Company estimates the comparable store sales increase in the United States to be between one and three percent, according to Tom Schoewe, Wal-Mart Stores, Inc. executive vice president and chief financial officer.

“We estimate diluted earnings per share from continuing operations for the fourth quarter will be between $1.03 and $1.07,” Schoewe said. “The rapid changes in currency exchange rates during the last few weeks are projected to negatively affect this year’s fourth-quarter results by approximately six cents per share. In U.S. dollar terms, strong operating performance in International may be overshadowed by these currency fluctuations.

“For the full year, ending January 31, we have tightened and modestly reduced our guidance and now forecast diluted earnings per share from continuing operations to be within a range of $3.42 to $3.46,” he said.

This guidance was revised on 8 January 2009 when Wal-Mart issued a report on the five weeks ending 2 January 2009 ("December sales").

 “We expect comparable store sales for the January four-week period to be between flat and two percent.”

“Our previous fourth quarter guidance for earnings per share from continuing operations was a range of $1.03 to $1.07, which we provided Nov. 13. This range reflected our expectation that changes in currency exchange rates would negatively affect this year’s fourth quarter results by approximately six cents per share,” Schoewe said.  “The company announced on Dec. 23 that earnings per share from continuing operations also would be negatively impacted by approximately six cents, stemming from the after-tax charge for the settlement of 63 class action wage and hour lawsuits.

“Our fourth quarter sales for Sam’s Club and Wal-Mart International are trending below our expectations and our expenses are higher than anticipated. Therefore, we now expect fourth quarter earnings per share from continuing operations to be between $0.91 and $0.94,” Schoewe added. “Considering the impact of currency and litigation charges, we continue to expect our underlying operating performance for the fourth quarter of fiscal 2009 to be at or above the prior year’s quarter.”

The target we had established for Revenue in the fourth quarter was $108.0 billion.  However, actual sales for December and weaker guidance for January has led us to lower the target, as explained below.

In November (the first month of the current quarter), Net Sales for the entire company amounted to $32.213 billion, up 1.6 percent (up 3.0 to 3.4 percent on a comparable stores basis) from the year-earlier period.  In December, total company Net Sales were $46.509 billion, down 0.1 percent  (up 2.4 to 2.7 percent on a comparable stores basis).  The stronger U.S. dollar in both months had the effect of lowering international sales very significantly.

Given the new guidance, we now expect monthly Sales for January 2009 to be $27.0 billion, down about 1 percent from the $27.28 billion figure announced for January 2008.  This would result in total Net Sales for the fourth quarter of $105.7 billion.

We still believe that Wal-Mart's Gross Margin for the current quarter will be about 23.5 percent.  Therefore, our estimate for Cost of Goods Sold (CGS) is (1 - 0.235) * $105.7 billion = $80.9 billion.

We expect Sales, General, and Administrative (SG&A) expenses will be about 18 percent of Revenue in the fourth quarter.  Therefore, we expect this expense to be 0.18 * $105.7 billion = $19.0 billion.

Until more specific accounting guidance is offered, we will assume the settlement charge will be recorded as a special operating expense.  Given typical tax rates, the pre-tax amount will be about $385 million to result in an after-tax value of approximately $250 million.

These expense estimates would lead to an Operating Income of $5.43 billion, which would be down 5 percent from the January 2008 quarter.

Historical data are the basis for our $575 million estimate for Net Interest and other income.  These non-operating values set our estimate for pre-tax income to $6.0 billion.

If we project an income tax rate of 34.5 percent, the tax provision will be $2.1 billion. We will assume, based on the recent history, an after-tax deduction for Minority interests of $125 million.  These assumptions would result in Net Income of $3.8 billion ($0.96 per share).  If these figures are true, Net Income will be 7.1 percent below that in year-earlier quarter. 

Please note that the tabular format in the embedded spreadsheet, which we use for all analyses, can and often does differ in material respects from company-used formats.  A common difference is the classification of income and expenses as Operating and Non-Operating.  The standardization is simply for convenience and to facilitate cross-company comparisons.


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