Drink a little drink, smoke a little smoke

Walmart has reported second quarter sales and earnings. Net sales for the second quarter of fiscal year 2011 were USD103 billion, an increase of 2.8% from USD100 billion in the second quarter last year. Net sales for the second quarter included a currency exchange rate benefit of USD857 million. On a constant currency basis, consolidated net sales increased 2.0%. Income from continuing operations attributable to Walmart for the quarter increased to USD3.6 billion from USD3.5 billion in the second quarter last year. “We continue to focus on our priorities of growth, leverage and returns. Despite the ongoing challenges of the global economy, we continue to grow our earnings,” said Mike Duke, president and CEO. “The slow economic recovery will continue to affect our customers, and we expect they will remain cautious about spending. Walmart is committed to our mission of saving people money so they can live better.” Walmart continues to grow around the world, and the company added almost five million square feet of retail space this quarter, with more than 60% of the square footage growth in Walmart International. “Our international business continues to be an impressive growth engine, and Walmart International grew operating income faster than sales,” Duke said.

 

Another disappointing quarter for Walmart US

 

Walmart US net sales of USD64.7 billion were flat in the second quarter, with operating earnings down by 0.2% at USD4.879 billion. Comparable store sales figures for Walmart US improved by the end of the 13-week period, with traffic trends showing sequential improvement during the period. For the quarter as a whole, they were down by 1.8%. The Walmart US operating segment, now led by President and CEO Bill Simon, remains focused on improving sales and customer traffic. Walmart stated that its leadership team is working to ensure that the merchandise assortment is relevant for their customers, that Walmart will lead the market on price, and that they will strengthen their relationships with suppliers.

 

Mike Duke acknowledged that Walmart US had a challenging second quarter and said that the top priority for the business remains improving top line sales and customer traffic, adding that “I’m fully aligned with Bill’s focus on assortment and pricing, and with strengthening our supplier relationships. I’m also impressed with the urgency and the speed that he and his team are demonstrating in executing changes in strategy that are making sense for our customers and shareholders. They’re moving rapidly to build on the initiatives that worked and adjusting those that have not worked.”

 

 

Much of what Bill Simon had to say was very much an open admission that some key aspects of Project Impact would be diluted, or even reversed, with Simon noting that: “We’ve set out a clear direction for change in our business and believe this will put us on a track to see improvement by the fourth quarter.” Some of his key points included:

 

• In the second quarter, for the first two months of the quarter, Action Alleys were clear of merchandise and our featured many deep rollbacks on price. The deep rollbacks featured in May and June did improve price impression, but they did not generate the level of top line sales hoped for by Walmart.

 

• In July, Walmart put the emphasis back on its core EDLP model.

 

• Walmart also engaged with suppliers to review its assortment to make sure that it has the breadth of inventory that Walmart customers have come to expect. In the coming weeks and months, Walmart’s assortment will be more relevant to its customers. Walmart will be leveraging its suppliers’ capabilities to help it drive impactful features.

 

• Walmart is restoring thousands of products to its assortment and adding new items. Simon stated: “We plan to win in every category and let customers decide through their purchase decisions what to include in our assortment.”

 

• Since the start of July 2010, Walmart has returned merchandise to Action Alley. Store managers now have more autonomy to make decisions on what is right for their store’s customers.

 

Investments in rollbacks in the first two months of the quarter caused a decrease in operating income of 22 basis points, as Walmart’s gross margin rate was down year over year. Walmart US inventory is up 4.4% compared to last year, represented by increased inventory now placed in Action Alley and increased assortment as Walmart solidifies its focus on solid in-stock levels. Inventory is still low when compared to historical levels - well below the July 2007 and the July 2008 levels of inventory.

 

One component of Project Impact is still going strong – store remodels. The final group of 550 store remodels, scheduled for this year, are currently underway. One of the problems that early remodels encountered was excessive disruption for shoppers, and Simon noted that the retailer has improved its remodelling process by reducing the level of disruption for customers and associates as merchandise is moved around the store.

 

Simon reiterated that the strategic changes that he has implemented will improve top line sales by the fourth quarter. He concluded that: “We’re focused on the right assortment, price leadership, driving traffic and delivering an unbeatable customer experience in our stores. We recognise that it will take time to see significant changes in our comps and that the US economy remains challenging. Gas prices and unemployment continue to influence how our core customers shop.”

 

In a mostly deflationary food environment, grocery sales generated slightly positive comp sales. Simon noted that more aggressive rollbacks did not generate the overall sales lift the retailer hoped for, but did deliver a sequential improvement in grocery traffic during the quarter. Fresh categories continued to perform well in Q2. Fresh categories, including dairy and meat, for example, had modest inflation, that was offset by deflation in other areas. Walmart noted that it gained significant share in Q2 in the soft drinks and snack categories, both during and after its rollbacks.

 

 

Health and wellness comp sales were slightly negative, due to higher demand for generics and a shift to 90-day prescriptions. Wellness categories continued to show positive results. Recalls in over-the-counter areas impacted the business negatively.

 

Initial back-to-school sales indicate that customers are shopping more closely to the event. Walmart has been strongly marketing price messages for school supplies, electronics, apparel and home or dorm items. More than 1,000 stores have merchandise specific to college areas, and all stores carry merchandise with logos from local high schools. Simon stated that Walmart is very focused on delivering basics in back-to-school apparel, such as socks, underwear, tees, and school uniforms.

 

Overall apparel comps remained negative. The company stated that it is focused on improvement in its apparel business and believes that it will generate better comps by the fourth quarter. Walmart’s apparel team is reemphasising offerings for its core shopper and including more relevant size offerings in its core Faded Glory, Danskin Now and Just My Size brands.

 

In home, comps were negative. Sales of grills, lawnmowers and patio sets were soft. Indoor categories were mixed, with strength in floor care, appliances and bedding. Sales in baking and decorating were strong, reflecting the ongoing trend of customers cooking and baking at home.

 

Hardlines were yet another category with a negative quarterly comp, although Walmart highlighted some positivity in categories like automotive and hardware as shoppers seek to complete basic maintenance tasks themselves.

 

Entertainment comp sales were negative (challenged by a decline in average unit retail prices), but Walmart was consoled by the improvement it’s seeing in back-to-school related areas and some decent momentum in its wireless business.

 

But a solid quarter for Sam’s

 

Net sales for Sam’s Club, excluding fuel, increased to USD11.4 billion, an increase of 0.6% over last year’s second quarter. Sam’s Club saw operating earnings up by 2.4% at USD428 million. The chain delivered 1.0% comparable club sales without fuel, with average ticket, excluding fuel, for this 13-week period increased for both Business and Advantage members.

 

Brian Cornell stated that the Sam’s Club strategy remains focused on taking care of its members and staying true to the brand promise of ‘Savings Made Simple’. Sam’s is improving its shopping experience with innovation and technology, recently announcing that it is to upgrade all clubs to WiFi by the end of the year. Members will benefit by having the use of their smart phones while shopping and  associates will be able to demo new IPTVs and other networked devices on a real time basis. In addition, Sam’s announced last week that it will carry the iPhone 4 in its clubs. Cornell added that Sam’s is relying on member insights to make the most relevant merchandising choices for members – insights that might well have been absent from Walmart US when it made certain merchandise decisions over the last couple of years.

 

Sales in some of the largest fresh and health and wellness categories continued to be positive, including produce, meat, snacks, baby care and pharmacy. Cornell stated that Sam’s is seeing an uptick in discretionary spending via positive performance in categories such as mattresses, jewellery, domestics and housewares. Sales in apparel continue to improve, the result of adding several key brands that are “resonating with our members.” Seasonal categories such as grills, patio, seasonal décor were also successful during the quarter. Additionally, tobacco sales continue to be very positive.

 

International buoyed by Mexico, Brazil and China

 

Walmart International net sales were USD25.9 billion, an increase of 11.0% from last year’s second quarter, with strong underlying sales in Mexico, and new store growth in Brazil and China. The increase in Walmart International net sales includes an USD857 million positive impact from currency exchange rate fluctuations. On a constant currency basis, Walmart International net sales were up 7.3% to USD25.0 billion from last year’s second quarter results. Operating profits improved strongly, up by 16.8% to USD1.299 billion.

 

Comps down again in the UK

 

Walmart reported that Asda continues to make good progress towards their strategic goals. In the second quarter, Asda’s sales grew in the low single digits, while comp sales without fuel declined 40 basis points. Asda’s gross margin as a percentage of sales increased in the second quarter on a mix shift towards higher-margin George and general merchandise. George had a particularly strong quarter, with strong sales of World Cup related merchandise. Customers continue to respond well to the guarantee, and Asda continues to see this as a unique competitive advantage in the market. Expenses as a percent of sales declined slightly as the Asda “we operate for less” programme continues to deliver efficiencies. As a result, operating income grew faster than sales.

 

 

Strong showing in Mexico

 

Walmex’s sales for this quarter were up 9.8%, and comparable store sales were up 2.7 %, outperforming the industry. So far this year, Walmex has opened 60 new stores and restaurants. For the second quarter, all of Mexico’s formats have positive comp growth. Customer count was up 3.7% at comparable stores.

 

Multi-banner strategy pays off in Brazil

 

Since the second quarter of last year, Walmart has opened 93 new stores in Brazil. According to Doug McMillon, Brazil has the greatest number of retail banners of all of Walmart’s countries, enabling the retailer have formats that meet the local and regional needs of customers. Brazil’s second quarter sales growth was 13.3% and comparable store sales grew 3.1%, both in real terms. Customer traffic at comparable stores declined 5.2% and average ticket increased 9.1% in real terms. Sales at cash & carry, supermarket and soft discount formats continue to perform well. A change in sales mix and soft sales in fresh resulted in a 1.1 percentage point decline in gross margin as a percentage of sales. Expenses as a percentage of sales improved even after adding a significant number of new stores at the end of last year.

 

Comps down in Japan. Again.

 

In Japan, second quarter overall sales and comparable store sales both declined by approximately 0.8%, the result of continued deflation in grocery and consumables. In real terms, comparable store sales in Japan increased by 1.6%, as traffic continues to increase because customers are responding well to EDLP. Food and consumables showed strong performance, while general merchandise and apparel sales were down. Expenses as a percentage of sales are down significantly from last year due to Walmart Japan’s continued focus on execution of EDLC in support of the EDLP initiative.

 

Robust expansion continues in China

 

China continues to be a growth market for Walmart. In the second quarter, Walmart opened seven stores, for a total of 36 new stores in the last 12 months. This brings the total China store count to 291. Sales increased 15.4% over the second quarter of last year, and comparable store sales growth remained strong at 6.1 percent. Average ticket grew significantly, but traffic declined as customers continue to buy more on fewer trips. Gross margin as a percentage of sales was down slightly from the second quarter of last year thanks to ongoing investment in price. Operating income grew faster than sales, due to the continued expense savings from labour productivity programmes and energy efficiency initiatives.

 

 

Canada sees flat comps

 

Walmart Canada’s second quarter sales growth was 4.2%. The growth was largely due to the Supercentre expansion programme and a strong category performance in existing stores. Comparable sales in Canada were flat to last year. Traffic was down 40 basis points and ticket up 40 basis points in the second quarter as customers continue to be cautious. Sales in Western Canada have been softer than both Ontario and Quebec. Growth was led by sales of food, consumables and health and wellness - partially offset by softer sales in entertainment and hardlines. Canada’s gross margin rate increased over last year, due to better inventory management, a reduction in shrinkage and improved purchasing. Canada’s expenses grew faster than sales primarily due to our bank start-up costs and an increase in utility rates. Despite the increase in expenses, Canada’s second quarter operating income grew faster than sales.