Highlights From WMT's Q2 Conference Call: Q2 Beats Estimates; Guidance In-line

Wal-Mart Stores, Inc. (NYSE: WMT) posted total sales of $108.6 billion, an increase of 5.5 percent from $103.0 billion in last year's second quarter. Total sales included a currency exchange rate benefit of $2.3 billion. Diluted EPS were $1.09, well above last year's EPS of $0.97.

Analysts on the Street had been looking for quarterly EPS of $1.08 on sales of $108.26 billion.

Highlights From WMT's Q2 Conference Call:

(Jeff Davis) Walmart reported diluted earnings per share from continuing operations of $1.09, which was within our guidance of $1.05 to $1.10. The $1.09 compares to $0.97 for the second quarter of last year. Income from continuing operations included certain pre-tax items as follows. We recorded an approximate $49 million mark-to-market loss on certain foreign currency derivative positions related to the mass-market acquisition.

• We realized cost of approximately $36 million related to the acquisitions of Netto and Massmart.
  
• We recognized expenses of approximately $30 million related to the damages from tornados and floods in our United States operations. These items totaled $115 million and are included in our operating expenses.
  
• In addition, Walmart Mexico recorded an approximate $17 million revaluation chare from the implementation of the SAP financial system.
  
• Now let's move to the rest of the P&L. Consolidated net sales increased 5.5% or $5.6 billion to $108.6 billion for the quarter. The increase was driven primarily by Walmart International and Sam's Club and included a currency exchange benefit of $2.3 billion.
  
• Total U.S. comp sales without fuel for the 13-week period ended July 2 were flat and negative 20 basis points for the 26-week period. You will hear more details on the Walmart U.S. and Sam's Club comp sales from Bill and Brian.
  
• For the quarter, gross margin on sales was 24.7%, a 10-basis point reduction compared to last year. Sam's Club fuel sales were the primary contributor to the margin decline. Unallocated corporate overhead and other, which includes our ongoing investment in global eCommerce, increased approximately 21.8% to $509 million for the second quarter.
  
• Consolidated operating expenses as a percentage of sales were flat to last year at 19.5%.
  
• Consolidated operating income, which included $110 million currency benefit, was $6.4 billion, a 3.1% increase versus last year. Net interest expense for the quarter increased 19.2% to $578 million.
  
• The additional debt raised our debt to total capitalization ratio to 45.7% at the end of the second quarter compared to 43.2% last year.
  
• The effective tax rate for the second quarter was 32.2%. We expect the effective tax rate for fiscal 2012 to be at the lower end of our range of 33.5% to 34.5%, although we may see quarterly fluctuations.
  
• During the second quarter, the company repurchased $1.4 billion of shares, representing approximately 26.1 million shares, which brings the year-to-date repurchase to $3.5 billion or 65.4 million shares. In June, the board approved a new $15 billion repurchase authorization, which has $14.1 billion remaining.
  
• Consolidated inventory grew 11.1% compared to last year. Walmart International was the major contributor to the increase primarily driven by currency valuation, acquisitions, and significant international growth. Payables as a percentage of inventories were 90% versus 98% in the prior year.
  
• Free cash flow remained strong. We ended the quarter with a positive free cash flow of $4 billion compared to $4.5 billion last year. As I mentioned earlier, the increase in accounts payables from the timing cycles enhanced free cash flow last year. Return on investment or ROI for the trailing 12 months ended July 31, 2011, was 18.4% compared to 19% for the prior year.
  
• (William Simon, President and Chief Executive Officer, U.S. Division) Walmart U.S. gained sales momentum throughout the quarter after a difficult May, which was impact bid high prices at the gas pump and severe spring weather. Our sales trend improved in June and again in July. In fact, our July 4-5-4 comp was positive and we improved in both customer traffic and ticket as the quarter progressed.
  
• Our net sales rose approximately 40 basis points to $64.9 billion for the second quarter. Comp sales for the 13-week period ending July 29, was inside our guidance at negative 0.9%, and the best quarterly comp performance in almost two years. Ticket was positive every month of the quarter.
  
• Better traffic was driven in part by the 90-day rollback program at the gas pump. This program, which is available in 18 states saves customers $0.10 a gallon on gas and diesel when using a reloadable Walmart gift card or credit card.
  
• Grocery and Health and Wellness, which represent two-thirds of our sales revenue, continue to deliver positive comps. We also saw trend improvements in all other businesses except entertainment. This improvement is attributable to our focus on expanding merchandise assortment, price leadership, and increased in-stock levels. Weather trends across the country later in the quarter also helped.
  
• In addition, more than 15% of Walmart moms in our monthly survey have experienced a loss of a household wage earner's job in the last year. Almost 40% of these Walmart moms indicate they're holding off or eliminating items they would normally buy, reinforcing the need for us to drive every day low price.
  
• Our Health and Wellness business again delivered a low single-digit positive comp driven by the strength of our Prescription business. We continue to benefit from the additional traffic in our pharmacies as a result of the Humana program, and our Optical business benefited from the kickoff of our $29 back-to-school eyewear offering.
  
• We are well positioned to gain sales in share for he important back-to-school season. We are expanding our offerings in important categories to regain customers and we're adding back items in key brands.
  
• Entertainment had high single digit negative comp sale for the quarter. As others have reported, media and gaming continue to experience significant headwinds.
  
• Sales of licensed toys associated with new movie releases and seasonal items including pools, water toys and bikes improved significantly.Hardlines had low single digit negative comp sales but improved over the first quarter.
  
• Today, roughly 60% of Walmart.com sales involve the stores through services such as site-to-store and pickup today. In fact, some of our highest volume site-to-store sales come out of large metropolitan areas such as New York City and the San Francisco bay area.
  
• During second quarter we also launched a delivery and installation service rogram for electronics. We're providing delivery, setup and installation for TVs. We also offer a basic setup for home theater and wireless networks. The in-home service network has up to 50,000 technicians available to service ourcustomers. Our prices are very competitive and this now puts us on par with other electronics retailers.
  
• SG&A was up approximately 70 basis points compared to last year. Slightly higher payroll related expenses, management incentive plan accruals as well as the storm related damages.
  
• Operating income grew faster than sales for the quarter. Operating income rose 2.1% over last year to almost $5 billion. Inventory was up 4.8% compared to this time last year, which on a year-over-year quarter comparable is 150 basis points lower than what I reported last quarter.
  
• Our Neighborhood Market format is delivering a return at the same level as our Supercenters, which have the best ROI in the company. These results have encouraged us to move faster on expanding our grocery format.
  
• Based on the start of August sales, we're confident that our plans are working and we'll see ongoing sales improvement. We expect comp sales for the 13-week period from July 30 through October 28 to be between minus 1% and plus 1%. Last year's third quarter 13-week comp was negative 1.3%.
  
• (C. Douglas McMillon, Executive Vice President, President and Chief Executive Officer, International Division) As you know, ASDA completed its acquisition of 147 Netto stores in the U.K. ASDA has already converted more than 60 of these stores which now have more than four times the number of products than previously offered. This means customers can find what they need for the entire week just as they do in ASDA superstores.
  
• In addition, we completed our 51% acquisition of Massmart. Massmart is the leading general merchandise retailer and basic foods wholesaler in Sub-Saharan Africa and the second largest in consumer goods.
  
• Walmart International reported second quarter net sales of $30.1 billion, an increase of 16.2% over last year. Changes in currency rates increased our net sales by $2.3 billion.
  
• On a constant currency basis, net sales were $27.8 billion, an increase of 7.1% over last year's second quarter. All of our markets had constant currency sales growth except in Japan where sales were affected by the March 2011 natural disasters.
  
• Mexico, the U.K., Canada, Brazil and China provided the strongest net sales growth in the second quarter. As a percentage of sales, Walmart International's second quarter constant currency gross profit margin and other income was flat to last year.
  
• Second quarter reported operating expenses were $6 billion, which includes an increase of $500 million due to changes in currency exchange rates.
  
• Although Japan, Brazil, the U.K. and Chile had expense leverage in the second quarter, Walmart International's constant currency operating expenses grew faster than sales at 9.4%.
  
• Our second quarter reported operating income grew 8.9% from last year to $1.4 billion and this includes a benefit of $110 million in changes from currency xchange rates.
  
• Economic indicators suggest that 2011 will remain a challenging year for our U.K. consumers, and we're confident that ASDA and its Netto store conversions are entering the second half of the year with good momentum delivering availability and every day low prices.
  
• Overall, WalMex sales grew at a fast rate, but operating income declined fromlast year's second quarter due to the noncash accounting charge mentioned earlier by Jeff. As we mentioned last quarter, our operations in Mexico went live with the SAP implementation during Q2. This effort increased a level of precision for inventory valuation and the result was a noncash accounting charge of $17 million.
  
• WalMex is consolidated net sale for the second quarter were up 9.1%. Comparable sales for Mexico were up 1.1%. Average ticket in Mexico increased 2.2% and customer traffic declined 1.1%. Comp stores in Central America were up 6.2% on a constant currency basis.
  
• Mexico's second quarter consolidated comp store sales for the self-service formats grew by 1.9% while ANTAD's comp store sales report for the rest of the industry excluding WalMex grew faster at 2.2%.
  
• Moving on to Brazil, net sales grew in the second quarter, however operating income declined from last year. As part of our progress in implementing EDLP as a global pricing philosophy, Brazil began its EDLP conversion this year. The number of items converted to date represents a large portion of Brazil's overall sales. Brazil's second quarter net sales grew and comparable sales grew from last year. Average ticket increased 7.4% and customer traffic declined 4.6%.
  
• And for Canada, Walmart Canada had solid sales growth in the second quarter of this year with operating income growing faster than sales. Net sales grew 5% in the second quarter compared to last year, primarily due to the Supercenter expansion program and strong sales in many merchandise categories. Second quarter comparable sales increased 1.2% from last year. Average ticket increased 2.1% for the second quarter, and traffic declined 0.9% for comparable stores. Gross profit as a percentage of sales increased 62 basis points from last year as Canada's merchants continue to be very focused on inventory management.
  
• Moving to Asia, Japan's constant currency sales declined in the second fiscal uarter, but operating income grew when compared to last year. Japan's second uarter results include the effects of the March 2011 natural disasters, which continue to affect the entire country in many ways such as brownouts food shortages and contamination fears.
  
• (Brian Cornell, President and Chief Executive Officer, Sam's Club) Fuel prices in this year's second quarter are approximately 43% higher than a year ago and gallons sold are up 16%. Fuel price is an important first price impression for our members, reminding them the value of their membership.
  
• Including fuel, second quarter net sales were $13.6 billion, a 9.5% increase over last year. And operating income increased 15% to $492 million. volatility in fuel prices can have a notable impact on our financial results.
  
• Net sales for the second quarter were $12 billion, up 4.9% from last year. Comp club sale for the 13-week period increased 5%, and were strong across all three geographic operating divisions. We are particularly pleased with the sales strength of our western division, which includes 22 states located in the western U.S. Recall that we have three divisions in Sam's Club, each headed by a seasoned SVP.
  
• Comp traffic and ticket increased for the 13-week period by 2.6 and 2.4 percentage points respectively. Comp traffic and ticket increased for both advantage and business members.
  
• Overall, we believe that inflation impacts our comp sales by 200 to 250 basis points. We continue to see mid single-digit inflation in key food categories. However, we have managed through these price increases with little impact on margin. Despite the impact of inflation, we continue to see growth in units sold year over year.
  
• Membership income for the second quarter increased 1.2% versus last year. We continue to see a trend from the past several quarters of improving net membership results. Growth in membership income on a cash basis was strong.
  
• Gross margin rate increased by nine basis points compared to the second quarter last year while the gross profit dollars increased 5.6%. As I mentioned earlier, we are experiencing inflation in several categories and we are managing this impact across the business.
  
• For the quarter, sales per labor hour increased 1.9%, and units per labor hour increased 69 basis points. Looking at the bottom line, our second quarter operating income without fuel increased to $467 million, a 13.3%increase over second quarter last year.
  
• We expect comp club sales without fuel for the 13-week period from July 30 through October 28 to increase 3% to 5%. Last year, Sam's comp club sales excluding fuel increased 2.4% for the comparable 13-week period. Now I will turn the program over Charles for our wrap-up and guidance.
  
• (Charles M. Holley, Chief Financial Officer and Executive Vice President) We expect comp club sales without fuel for the 13-week period from July 30 through October 28 to increase 3% to 5%. Last year, Sam's comp club sales excluding fuel increased 2.4% for the comparable 13-week period. Now I will turn the program over Charles for our wrap-up and guidance.
  
• Turning to leverage, our commitment to productivity and cost containment remains high. Although we were flat on this metric on a reported basis, I remain encouraged with our expense management.
  
• As you have heard from us before, we know that strengthening price leadersh ipstarts with being the low cost provider. As we continue to lower our cost, we will also be investing in price, helping our customers Save Money so they can Live Better.
  
• Based on how we view our business relative to the economy and sales environment in the United States and throughout the world, we expect third quarter 2012 diluted earnings per share from continuing operations to be between $0.95 and $1, which compares to last year's third quarter earnings per share of $0.95. Last year's third quarter included $0.05 per share of tax benefits. We are narrowing the range of our full-year earnings per share guidance and increasing it by $0.01. We now expect our full-year earnings per share guidance to range between $4.41 and $4.51, versus our previously stated range of $4.35 to $4.50. All of the above EPS guidance assumes currency exchange rates remain at current levels.
  
• To close, I will summarize a few key points from today's call. First,our second quarter earnings per share of $1.09 was solidly within our guidance. Looking ahead, we are raising our full-year EPS guidance. We continue to manage our business well despite a very tough global economy. Net sales increased 5.5% with contributions from all three operating segments. We re still on track to deliver our yearly sales growth target of 4% to 6%. We will use the productivity loop to deliver on our EDLC EDLP model and are committed to leveraging expenses for the full year. Walmart has a very strong balance sheet that we believe is an important advantage as the global markets remain volatile. Last, we remain committed to delivering shareholder returns through a combination of share repurchase and dividends as we did in the second quarter.

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