5 Things to Know About Wal-Mart Stores Inc.'s Earnings Miss

By Markets Fool.com

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Turning around a big ship like Wal-Mart takes time, and it may take even longer than investors were expecting. Photo: Mike Mozart

There were two big takeaways from Wal-Mart's first quarter earnings report: that the U.S. economy is improving and that investing in its employees is wreaking havoc on Wal-Mart's financial performance.

The world's biggest retailer wants to reconnect with consumers after two years of watching customers peel off to its competitors. While Wal-Mart has made progress in recapturing those shoppers, it still ran into some strong headwinds in the quarter. Employee wage increases and the negative impact of currency fluctuations caused it tocome up short on both revenue and earnings.

A one-two punch
In February, Walmart announced it would raise the minimum wage of its U.S. employees to at least $9 an hour this year and up to $10 next year. Raising pay and adding more department managers ended up taking away $0.02 per share from its reported earnings in the quarter. Similarly, the U.S. dollar is trading at historically high levels, which walloped revenue to the tune of $3.3 billion, leading to a 6.6% decline in sales at Walmart International.

And both those factors are going to weigh on the second quarter's results, too, with each swiping about $0.04 per share from total earnings.

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There's not much Wal-Mart can do about macroeconomic events. Furthermore, the pay increase, while certainly appreciated by the workers, won't do much to ameliorate any of the hate that's routinely directed toward Wal-Mart. Still it's something that was bound to happen sooner or later, and as the retailer works to get back on track, taking care of those who are responsible for the customer experience is important.

Management also wanted investors to know these three additional things.

1. Neighborhood Markets are the future
Wal-Mart is investing considerable capital in developing the smaller format Neighborhood Market stores that range in size from 42,000 square feet down to 12,000-16,000 square feet.

All of Wal-Mart's store formats had positive comps for the quarter, but the "traditional" ~42,000 square foot Neighborhood Market concept enjoyed an exceptionally robust 7.9% increase in comparable store sales. That explains why even though the retailer opened 20 supercenters in the quarter, it added 24 more Neighborhood Markets: 15 of the larger version and 9 of the smaller format, including one campus store.

As Walmart U.S. president and CEO Greg Foran noted, "Customers continue to see the benefit of Neighborhood Markets to meet their everyday needs, including convenient access to services such as drive-through pharmacies and fuel stations."

2. Sam's Club still needs a wider berth to turn around
Discount warehouse membership club Sam's Club recorded lower comparable sales and profit than expected this quarter. On the bright side, membership income was up more than 7% as the club converted over more members to Plus status -- which gives members extra benefits such as earlier shopping hours, extended warranties, and extra pharmacy and optical discounts.

But the transformation is occurring much more slowly than expected. Including fuel, the division suffered an 11% decline in operating income to $427 million. The Sam's Club fuel business itself ended up losing $9 million this quarter because of the pricing volatility.

Competition at the warehouse club level is more intense, meaning Sam's Club is still very much a work in progress, Photo: Mike Mozart

Excluding fuel, Sam's Club saw net sales grow 1.2% to $12.4 billion with comps just 0.4% higher, driven by a 60 basis point increase in ticket, offset by a 20 basis point decline in traffic.

Still, Sam's Club president and CEO Rosalind Brewer held out hope, saying, "This year is one of investment and testing, and we're very focused on strengthening our foundation for business improvement in the longer-term."

3. E-commerce is only going to become more important
Wal-Mart customers are gravitating to its new e-commerce platform, with mobile traffic doubling year over year in the first quarter, increasing worldwide e-commerce sales by 17%. The retailer also reported that it saw higher conversion rates: i.e. a higher number of customers who actually bought something once they visited the site. E-commerce sales contributed approximately 20 basis points to Wal-Mart's overall comp performance.

Yet due to the significant financial investmentsWal-Mart spent on the platform, domestic operating income declined 6.8% or $336 million for the quarter. This reduced EPS by $0.02.

President and CEO of Walmart International David Cheesewright said, "Accelerating e-commerce is one of our strategic objectives this year, and we're making significant strides in providing convenient access for shoppers as we continue to invest globally in e-commerce capabilities."

What it means for investors
The bottom line is that the hoped-for recovery by Wal-Mart may not arrive till the holiday season. The retailer is investing billions of dollars in improving the shopping experience in its stores, including investments in its employees. Those things do cost money, and sap short-term financial performance, but should lead to a better business in the future.

Or, as Wal-Mart president and CEO Doug McMillon stated, "We know that we won't see it overnight, but we're confident these are the right things to do for our business and our team."

The article 5 Things to Know About Wal-Mart Stores Inc.'s Earnings Miss originally appeared on Fool.com.

Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.