The most upsetting thing in Walmart’s quarterly results this week was the confirmation that Walmart Puerto Rico has been moved out of the International division and into the US organisation. Great news for Walmart, I’m sure, but a monumental pain in the backside as far as my giant Walmart spreadsheet is concerned. The spreadsheet, which already resembles a mix of a metre-long Sudoku designed by chimps on meth and an explosion in a dartboard factory, is set to become even less enjoyable than in years gone by. So, my own endearing version of workplace Tourette’s will be worse than usual: apologies to my colleagues in advance.
On the Q1 numbers, which were something of a mixed bag: some great performances from certain parts of international; a faintly underwhelming showing from the US division and a confirmation of a some disappointing trading from the usually upbeat Asda.
Total net sales for the first quarter of fiscal year 2011 were $99.1 billion, an increase of 6.0% from $93.5 billion in the first quarter last year. Net sales for the first quarter included a currency exchange rate benefit of $2.5 billion. Income from continuing operations attributable to Walmart for the quarter increased to $3.3 billion from $3.0 billion in the first quarter last year. “Walmart kicked off the fiscal year with record first quarter net sales and earnings, and I’m pleased that earnings exceeded guidance,” said Mike Duke, president and CEO. “Our teams around the world delivered on our commitment to the productivity loop. We leveraged operating expenses for the second consecutive quarter and improved the profitability of our business. Our customers, particularly in the United States, are still concerned about their personal finances and unemployment, as well as higher fuel prices,” Duke added. “Our commitment to reducing prices and managing expenses positions us well across the retail landscape.”
Shopper traffic declines in Q1 at Walmart US
Walmart US saw sales increase 1.1% to $62.3 billion, while operating profits climbed 5.6% to $6.3 billion. Walmart US comparable store sales declined 1.4% due to soft customer traffic, partially offset by an increase in average ticket, compared to the first quarter of fiscal year 2010.
Eduardo Castro-Wright, the head of Walmart US, noted that the entire comp decline this quarter was due to traffic, as average ticket was positive. He stated that there are a number of factors that he believed affected sales and traffic - the economy, deflation, competitive environment, and merchandise assortment: “Rising gas prices and high unemployment levels continue to be the most pressing issues for our core customer. Gas prices are up 41% over this time last year. Our in-depth analysis reinforced the fact that there is a strong correlation between store comps and unemployment. Stores in areas with the highest increase in unemployment are running approximately 200 basis points lower comps than those with the lowest.”
According to Mike Duke, Walmart US is making some progress on reaffirming its credentials as a price leader and also correcting mistakes that occurred as part of the retailer’s range rationalisation programme: “It is important to strengthen Walmart’s position as the everyday price leader and to separate ourselves even more from competitors. We are in the process of adding back some merchandise that has been deleted from our assortment. These changes are on a fast track, and the impact will become even more noticeable as we progress through this fiscal year.”
Castro-Wright added some colour on Walmart’s renewed vigour on pricing: “We selected 12 iconic branded products that consumers recognize. With regular pricing, the items are $44. The lowest advertised price across the market during the last 52 weeks was $34. Now at Walmart, those same items are $29, saving the Walmart customer as much as $15.”
Deflation begins to moderate in grocery
Looking at the quarter in a more granular, category-specific way, Walmart had the following observations to make.
In grocery, food deflation began to moderate during the quarter in areas like dairy, meat, and produce. Comp store sales results were solid compared to the market and Walmart claims that it maintained a double-digit price gap versus its competition across multiple categories. Snacks, beverages, produce, seafood and dairy all had comp increases, while dry grocery and consumables were soft.
Comps in health and wellness were solid. Walmart’s pharmacy business is said to remain strong. Maintenance and wellness categories, such as vitamins and adult nutrition, are generating consistently strong comps.
Entertainment comp sales were negative, as Walmart experienced mixed results by category. The retailer continued to see strong performance in large panel TVs (particularly with new LED technology), in laptops, and in wireless. The company also noted that it benefited from a favourable DVD release schedule compared to last year. In toys, sales of bicycles and ride-on vehicles continue to do very well and exceeded plans. On the other hand, video games and gaming hardware were below expectations across all the gaming brands, due to fewer new releases and the lack of innovation in gaming systems.
In hardlines, Walmart noted that it was disappointed with the performance of its seasonal categories and stationery. Do-it-yourself automotive continued to thrive as consumers work to extend the useful life of their vehicles rather than purchase new vehicles. The stationery business, which includes books and magazines, was impacted by the anniversary of the Twilight series launch. In home, results were mixed overall, with momentum in categories like outdoor living, bedding, home management, and food preparation.
In what might be considered one of few areas of ongoing concern for Walmart, its performance in apparel remained below expectations and is described as continuing to be a “work in progress” for the clothing team. However, some of the bright spots within apparel were said to be active wear, licensed apparel and team sports. The gloomy mood for Walmart’s apparel business contrasts sharply with the more positive sentiments from arch competitor Target, who posted Q1 comp growth of 2.8% and stated that “sales of higher margin discretionary items were particularly strong, especially in apparel.”
Walmart.com had another “outstanding” quarter, delivering growth of more than 50%, which “outpaced the industry averages by a wide margin.” Traffic, orders, average order size, and conversion were all up.
Fresh continues strong showing at Sam’s
Sam’s Club posted operating earnings ahead by 4.9% at $429 million on sales 4.6% higher at $11.7 billion. Sam’s Club delivered 0.7% comparable club sales without fuel for the first quarter. The clubs had strong sales from fresh foods and health and wellness categories, as well as home and apparel. Providing some personal insight into the performance at Sam’s, Brian Cornell noted that “In addition to the sales strength in many of our fresh and health and wellness categories, we continue to see healthy margin mix and profit performance in other categories, such as apparel, home, seasonal and automotive. During my weekly club visits, I am seeing more and more of our members shopping our seasonal categories, including grills, patio and outdoor plants. We are seeing abatement in broad-based deflation, and, in fact have experienced some inflation in a few categories, like dairy and meat. On a positive note, we see strength in comp unit sales for items with price points greater than $150, such as jewellery and mattresses.”
Cornell added that, while Sam’s continued to see good market demand for home electronics, the chain’s performance was not ideal as it was not positioned optimally from an inventory standpoint due to some industry-wide shortages on flat panels, as well as due to inventory transition to newer technology like LED TVs. Cornell added that “we are now in a better position, having the latest technology from LG, Samsung and Vizio and we’re experiencing improved performance at the start of the second quarter.”
Global sourcing drive producing cost reductions
With regards to Walmart’s ongoing global sourcing initiatives, Castro-Wright reported that “We are pleased with the progress we are making and the savings goals we have set for this year are tracking well. Our Global Merchandising Centres have already started to produce reductions in our cost of goods. All of the centres are now in place and are quickly building resources and addressing business needs. As expected, we are leveraging our global footprint to reduce costs. We also expect to see improvements in product timelines as the year progresses.”
The international division saw sales increase by 21.4% to $25.0 billion, with operating profits up by 27.8% at $1.0 billion. On a constant currency basis, Walmart International net sales were up 8.9% to $22.5 billion. Mexico, Canada, Brazil and China drove the strong sales performance. Mike Duke noted that: “International continues to be our fastest-growing division, and an increasingly important contributor to our business. This performance shows the strength of our EDLC-EDLP model around the world. International leveraged operating expenses for the fifth consecutive quarter and most countries continued to improve their inventory management. As we look to the future, we’re pleased with the long-term opportunities in the emerging markets, especially as economies in those regions improve. We particularly see substantial growth ahead in Mexico, China, and Brazil, and a large part of our capital expenditure budget is committed to those markets. We continue to grow. More than 60 % of the additional square footage of retail selling space this quarter was within Walmart International. We expect to have even more store openings throughout the company in the second and third quarters.”
On the call alongside the Q1 results, international chief Doug McMillon provided a nice reminder of the three key strategic pillars for the international division:
1) Growth by winning locally. The leaders in each market have the freedom to ensure relevance for customers and to move with speed.
2) Leverage costs by enabling the productivity loop. The retailer aims to operate for less, buy for less, and sell for less. Walmart states that it also attempts to leverage the knowledge and expertise of its talent, by sharing and implementing best practices across the entire organisation.
3) Balancing returns with growth by managing its portfolio, including thoughtful capital allocation between emerging and mature markets.
Asda sees first comp decline for 4 years
In the UK, Asda has announced that comp sales, without fuel, were down 0.3% in the first quarter, while total sales grew in the low single digits. Profits for the same period grew ahead of sales, beating internal targets. What is noteworthy is that neither Walmart nor Asda provided much context to the reasons why Asda was underperforming its major rivals. Recent comps from Sainsbury’s (+4.8%), Tesco (+2.7%) and Morrisons (+0.8%) suggest that, despite the progress Asda has made in areas such as its Price Guarantee, product quality and customer service, it still has some work to do to attract – and retain – shoppers from competing supermarkets.
Andy Bond, chairman of the Asda executive committee said: “As we’ve already said, by our own high standards, our first quarter sales were disappointing. The market has slowed down significantly since the turn of the year, and I expect conditions to remain tough for some time. I’m pleased to say that we’re making good progress against the plans we outlined to analysts last month. Our four pronged strategy to build sales and broaden our appeal is beginning to take shape.”
“On Price our renewed focus on EDLP means we’ve successfully reduced the number of promotions in store. The launch of the Asda Price Guarantee also means both our price position, and price perception has never been stronger. On Quality we have extended the 100 Day Guarantee to the entire George range, and have innovative plans to extend this approach to other areas of the business. Our own label food also continues to win more awards than our major rivals. On Service we’re investing heavily to reduce queues and improve the customer experience. And on Range there are some exciting developments coming in the second half of the year.”
Andy Clarke, Asda’s recently appointed CEO and President added: “Listening to customers, it’s clearer than ever that the second half of this year will be challenging for them. High petrol prices, and the prospect of tax increases from the incoming government are weighing heavily on their minds. It is our responsibility to deliver the plan we’ve laid out, and by doing so help lower the cost of living for our customers.”
In Mexico, although consumer spending continues to be cautious, McMillon noted that its discretionary formats had a solid first quarter. Walmex saw first quarter sales growth of approximately 11% and comparable store sales growth of 4.4%. Customer count was up 17.2% in total, and 5.3% at comparable stores.
Canadian Supercentre onslaught to continue
Walmart Canada’s first quarter sales growth, excluding the impact of last year’s closure of Sam’s Club, was 4.9%. The company stated that the growth rate is twice that of the market and represents a record high in market share. Unsurprisingly, a sizeable proportion of the sales growth was attributed to the expansion of the supercentre chain. 32 more supercentres were in operation than in Q1 2009, and the retailer is on track to add between 35 and 40 Supercentres this fiscal year. Q1 comps in Canada grew 1.0%, with customer traffic up 0.4% and average ticket up 0.6%. Overall sales growth was led by hardlines, health and wellness, and food and consumables, partially offset by softer sales in entertainment items. Canada’s first quarter gross margin increased 101 basis points, despite the shift in sales to lower margin items. This was the result of improved private brand sales and improved supplier negotiations.
Brazil – earlier highlighted as a market that is set to be a recipient of “thoughtful allocation of capital” – has seen 95 new store come on-stream since March 2009. Brazil’s first quarter sales growth was 16.5% and comparable store sales grew 7.6%, both in real terms. Customer traffic at comparable stores declined 2.0% and average ticket increased 9.6% in real terms. The best performances came from the cash & carry, supermarket and soft discount formats.
Japan sees sales slip at Walmart readies for expansion?
In Japan, overall, sales and comparable store sales both declined by about 1.4% in the first quarter over last year. Comparable store sales in real terms were essentially flat to last year. Price investment and deflation had a negative effect on average ticket, but EDLP is said to have continued to increase customer traffic. Food and apparel sales were down, while general merchandise was up. Expenses as a %age of sales are down significantly from last year due to the continued execution of EDLC in support of the EDLP initiative. As recently reported by Planet Retail, it seems that Walmart Japan Holdings – now the parent company of Seiyu, might be gearing up for an acquisitive push in what retains a troublesome and hyper-competitive market. Walmart Japan Holdings has revealed that it will appoint four executives from subsidiary Seiyu to its leadership team. Walmart Japan Holdings currently has just three executives, including Seiyu Chief Executive Officer Toru Noda. Four Seiyu executives handling development, finance, legal and business strategy have now been transferred to Walmart Japan Holdings, with two of them to work exclusively for the parent. Walmart Japan Holdings is believed to be preparing for the addition of group companies through such moves as mergers and acquisitions.
In China, Walmart opened five more stores in Q1, for a total of 38 new stores in the last 12 months, bringing Walmart’s total China store count to 284. Total sales increased 19.6% over the first quarter of last year – with comparable store sales growth of 10.6% driven by what the retailer describes as its price leadership. Average ticket grew significantly, but traffic declined as Chinese customers consolidated their shopping trips. McMillon has reiterated that China remains a key focus of Walmart International’s organic growth and continues to deliver impressive growth and operating income.
With regards to Walmart’s foray into the Indian market, McMillon stated that “We continue to be very excited and optimistic about the future in India. We have an important business relationship supporting the 60-plus stores owned by Bharti Retail. We also have opened two Best Price Modern Wholesale cash and carry stores in India in the last year. Our associates are also making a difference in the community – educating farmers about improved agricultural prices and giving them incentives for producing a good quality farm product.”