Walmart in 1Q16: Investments Affect Short-Term Comparisons

Cross-Cutting Factors Color Walmart's Results in 1Q16

(Continued from Prior Part)

Walmart’s (WMT) shareholder payouts in 1Q16

Walmart repurchased 3.5 million shares worth $280 million in 1Q16. It also paid out $1.6 billion in dividends, 2.1% more than it did in 1Q15. At 38.5%, its dividend payout ratio for the trailing twelve months is one of the largest in its peer group.

Free cash flow

Walmart’s free cash flow declined by $1.6 billion to $2.2 billion in 1Q16. Growth investments in new stores and e-commerce, coupled with the stronger dollar and increasing wage costs, took their toll on free cash flow. Higher investments in new stores and infrastructure also reduced WMT’s return on investment marginally, from 16.7% in 1Q15 to 16.6% in 1Q16.

In comparison, Target’s (TGT) free cash flow increased by $1.2 billion in 1Q16. Target’s (TGT) relatively better results are overshadowed by the retailer’s failure to thrive in the Canadian market. It shut down in Canada after only two years. Several retailers, including Walmart and Lowe’s (LOW), have taken over some of its properties in Canada.

In contrast, Walmart is thriving in Canada, as we learned in Part 3 of this series. Walmart and peer Costco have growth strategies for Canada that are more measured, and they’re reaping the benefits as a result.

Walmart’s earnings outlook

Walmart (WMT) projects EPS (earnings per share) of $1.06 to $1.18 in 2Q16. In the next quarter, Walmart US expects to see a 1% rise in store comps. Comps for Sam’s Club are expected to range between 0% and 2% in 2Q. It expects to continue seeing higher traffic. But lower gasoline prices are a major factor. And while energy prices are showing upward traction in April and May, they’re still almost half of what they were a year ago.

Markets give the thumbs down to Walmart’s (WMT) 1Q16 results

Walmart (WMT) stock tanked by 4.6% on May 19, the day the company reported 1Q16 results. As mentioned in previous articles, WMT missed earnings and revenue estimates. Target (TGT), which reported 1Q16 results the next day, saw shares rise by 0.3% on May 20, when it delivered better-than-expected store comps and results that were in line with estimates, as we saw in Part 1.

Dollar Tree (DLTR) gained 3.1% on May 21, despite delivering a sales and earnings miss on 1Q16 results. DLTR is awaiting approval from the Federal Trade Commission to complete its acquisition of Family Dollar Stores (FDO). FDO and dollar store rival Dollar General (DG) were also up by 0.6% each on May 21.

Stock results were lifted by the S&P 500 Index (SPY) (IVV) (VOO), which reached historic highs on May 21, following the release of the FOMC (Federal Open Market Committee) minutes the previous day. The Dow Jones Industrial Average (DIA) reached a new record on May 19. Markets rose on the expectation that the timeline for a rate hike is further off than previously thought.

For a detailed analysis of Walmart, read our business overview series, Interested in Walmart? What investors need to know.

For more sector updates and analysis, visit our Consumer and Retail page.

Browse this series on Market Realist:

• Part 1 - Walmart’s 1Q16 Same-Store Sales Trail Costco Results

• Part 2 - Walmart in 1Q16: Which Products Sold and Which Didn’t

• Part 3 - Walmart Is Optimistic about International Performance after 1Q16