Wal-Mart's Sales Decline Doesn't Matter

| About: Walmart Inc. (WMT)
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Global retailing goliath Wal-Mart (NYSE:WMT) posted lackluster results for its fiscal 2014 first quarter. Total sales increased just 1% year-over-year to $114 billion, below consensus expectations, as US same-store sales dipped 1.4%. Earnings per share increased 5% year-over-year to $1.14, which was a penny below consensus estimates. Free cash flow for the quarter totaled $1.9 billion, lower than that of the prior-year period, which benefited from a substantial amount of accrued income taxes.

Wal-Mart's management team provided several reasons for the decline in same-store sales, including the delay in the payroll tax, the negative impact of one less selling day and adverse weather. All factors are likely valid for a company as broad and encompassing as Wal-Mart, but we think the weather excuse will be beaten to death for retailers this reporting season. Not only was weather fairly terrible across the US during the first quarter, but it was also better than average during the first quarter of 2012, making comparisons even more difficult. Ultimately, we doubt this modest decline is meaningful for the long-term business prospects of Wal-Mart. In fact, management noted that the firm is gaining share in the grocery business likely at the expense of smaller companies like Roundy's (NYSE:RNDY), which has seen its core business decline as Wal-Mart pushed into Wisconsin.

Internationally, sales were a bit stronger, with reported sales up 2.9% year-over-year to $33 billion while constant currency sales were up 5.4%. Management pointed to strong sales from the UK, Mexico, Chile, Argentina and Brazil. The company continues to transition to everyday low prices in both China and Brazil, which we think will ultimately drive robust sales growth in both emerging powers. In the near term, operating income growth will likely remain constrained as these growing countries require substantial capital investment in the near term. Management also pointed out that the company has less flexibility with its international workforce relative to its domestic employees, which we believe could require the company to pursue a slightly different overall strategy.

When it comes down to a mature firm like Wal-Mart, we simply do not have much concern over one weak quarter. We believe the retailer will continue to generate strong free cash flow for the foreseeable future, and we think the firm will remain committed to repurchasing stock and raising its dividend. Wal-Mart's earnings per share guidance of 3%-8% year-over-year growth isn't spectacular, but it will likely be enough to drive returns to shareholders. All things considered, we do not believe now is a fantastic time to establish a position in the portfolio of our Dividend Growth Newsletter. We will wait for a more attractive entry point before giving the name further consideration.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.