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Wal-Mart Slides, Free Cash Flow Fails To Cover Dividends And Buybacks

Wal-Mart Slides, Free Cash Flow Fails To Cover Dividends And Buybacks

Despite reporting strong earnings which beat on both the top and bottom line in today’s most anticipated earnings report, Walmart stock is down 3%, sliding to the lowest level since late July after it provided full year EPS guidance whose midpoint was below Wall Street expectations.

First, here are WMT’s otherwise respectable historical results.

  • Q2 adj. EPS $1.08, beating est. $1.07, on the top end of the $1.00- $1.08 range
  • Q2 revenue $123.4BN, beating est. $123.05b
  • Total U.S. comps. ex-fuel up 1.7%, in line with consensus est. of 1.7%
  • Wal-Mart U.S. comps. up 1.8%, est. up 1.8%; forecast up 1.5%-2.0% in Feb.
  • Wal-Mart U.S. traffic up 1.3% y/y, avg ticket up 0.5%
  • Wal-Mart U.S. E- commerce sales up 70 bps y/y, GMV up 67%

Sam’s Club results were a little weaker, with comps of 1.2% missing expectations of 1.4% increase, as a result of the average ticket down 0.9% despite a 2.1% increase in traffic.

  • Sam’s Club comps. ex- fuel up 1.2%, est. up 1.4% (Consensus Metrix); co. saw up 1%-1.5%
  • Sam’s Club traffic up 2.1%, avg ticket down 0.9%

Meanwhile, as Bloomberg notes, Costco, Sam’s Club main competitor, reported monthly comp. sales ahead of estimates in each of May, June, and July

And while WMT’s historical data was solid across the board, traders were concerned with the company’s guidance:

  • Sees 3Q EPS 90c-98c vs est. 98c (range 90c-$1.05)
  • Sees 3Q Wal- Mart U.S. comp. sales ex-fuel up +1.5%-2%
  • Sees 3Q Sam’s Club ex- fuel comps. up 1%-1.5%

But the biggest red flag was the full year adjusted EPS forecast, which at $4.30-$4.40 (vs the previous $4.20-$4.40), the midpoint of which trailed the consensus estimate of $4.39.

Finally, in terms of cash flow, Wal-Mart reported a sharp drop in YTD operating cash flow, which declined by $3.6 billion, and with CapEx largely unchanged, YTD Free Cash Flow of $6.9 billion was $3.4 billion worse than the year ago period. This is troubling because as the table below shows, WMT used up more than 100% of its YTD free cash flow to fund dividends of $3.1 billion and stock buybacks $4.4 billion for the first 6 months of the year. Should the FCF decline acceleate, how long until WMT’s sacrosanct dividend (or buyback) is in jeopardy?

As a result, the stock was down as much as 3.0% in the pre-market, sliding to three week lows.

Full earnings presentation here.

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