Highlights From WMT's Q3 Conference Call: International Sales Increased 20% Y-o-Y

Wal-Mart Stores (NYSE: WMT) reported Q3 EPS of $0.97, $0.01 worse than the analyst estimate of $0.98. Revenue for the quarter came in at $110.23 billion versus the consensus estimate of $107.98 billion. Shares are down 2.32% in late trading.

Highlights From WMT's Q3 Conference Call:

• (Michael T. Duke) First, Walmart reported earnings per share from continuing operations of $0.97, within our guidance.
  
• Second, both Walmart U.S. and Sam's Club exceeded comp guidance for the third quarter, with Walmart U.S. increasing comp sales 1.3% and Sam's Club posting a comp, without fuel, of 5.7%.
  
• Third, the company leveraged operating expenses, with each of the three operating segments achieving this goal, as well. We remain committed to leveraging expenses again this year.
  
• Net sales increased 8.2% to $109.5 billion.
  
• International reported net sales of more than $32 billion, approximately a 20% increase over last year's third quarter. This includes our acquisitions and currency impact.
  
• Consolidated operating income grew 4.8%.
  
• Walmart ended the quarter with free cash flow of $3.4 billion.
  
• The company returned $2.7 billion to shareholders through dividends and share repurchases for the quarter. These results continue to reinforce our strong financial position. Every business segment is stronger than it was a year ago and we delivered solid earnings growth.
  
• I'm really pleased with our top-line performance and our momentum going into the fourth quarter.
  
• Our overall performance reflects the Walmart strategy of driving the productivity loop, leveraging expenses and investing in price leadership.
  
• Walmart U.S. has said consistently that its goal was positive comps by year-end and the team delivered on this goal in the third quarter. Operating income also grew faster than sales.
  
• And only one in 10 Walmart moms that we survey view the state of the U.S. economy as good. They want to save money. They're juggling credit cards, using coupons and skipping restaurants and vacations. There is a real sense that the economic strain is taking its toll.
  
• Walmart International delivered strong sales in the third quarter. Operating income was up 14.2%. Like the U.S., our international markets are ready for the upcoming holidays. We continue to see strong consumer demand in emerging markets and our mission is relevant across all formats around the world. EDLP is becoming an even stronger competitive advantage for us, as we integrate that positioning into more markets.
  
• Sam's Club posted impressive results, with another quarter of strong comp sales growth and greater momentum in membership. I continue to be really pleased with the merchandising and the operations improvements. Sam's is also very well positioned for the holiday season, both for Advantage and Business members. We fully expect Sam's to surpass the $50 billion mark in net sales by year-end and this would be a milestone for our clubs.
  
• We will reduce SG&A expenses further and use those savings to drive prices down for our customers. We will make visible progress in building our eCommerce business and we will recruit and develop even stronger talent throughout the organization. Looking ahead, we will be an even stronger company a year from now.
  
• (Jeffrey A. Davis) Consolidated net sales increased 8.2%, or $8.3 billion, to $109.5 billion for the quarter. The increase included $2.1 billion in sales from the acquisitions of Netto stores in the UK and the Massmart operations in sub-Saharan Africa and a currency exchange benefit of $1.3 billion.
  
• Excluding the effects of acquisitions and currency, consolidated net sales increased 4.8% over last year's third quarter sales of $101.2 billion.
  
• Total U.S. comp sales, without fuel, for the 13-week period ended October 28, were 1.9%.
  
• For the third quarter, gross profit margin on net sales was 24.6%, a 52 basis point reduction compared to the same time last year. All three operating segments realized a decline in gross profit margin from the impact of price investment and cost inflation.
  
• Unallocated corporate overhead and other, which includes our Global eCommerce area, increased approximately 40.7% to $536 million for the third quarter.
  
• Consolidated operating income was $5.9 billion, a 4.8% increase versus last year.
  
• Operating income included a $48 million currency translation benefit. Net interest expense for the quarter increased 3.7% to $535 million, which included a reduction in tax-related interest accruals.
  
• For the fourth quarter, we are forecasting high-single-digit growth in net interest.
  
• Debt-to-capitalization ratio at the end of the third quarter was 46.9% compared to 46.4% last year. The effective tax rate for the quarter was 34.5% versus 29.5% last year. Recall that last year's rate included a $191 million benefit from certain tax adjustments mentioned earlier.
  
• Consolidated inventory grew 7.5%, driven primarily by Walmart International's growth through acquisitions, new stores and currency impact. Payables as a percentage of inventories were 85%, in line with the prior year.
  
• Capital expenditures were approximately $3.9 billion for the third quarter compared to $3.8 billion last year. In October, we updated our fiscal 2012 capital expenditure guidance to be between $13 billion and $14 billion, which includes approximately $500 million for acquisition-related capital expenditures for ASDA and Massmart.
  
• Total company square footage expanded approximately 8.7 million square feet during the quarter.
  
• Free cash flow was $3.4 billion at the end of the quarter, ahead of $2.9 billion last year. Year-to-date, our strong operating cash flows more than offset the additional $225 million spent on capital expenditures versus last year.
  
• Return on investment, or ROI, for the trailing 12 months ended October 31, 2011, was 18.2% compared to 18.6% for the previous year. As we had anticipated, the majority of the decline was attributable to the impact from acquisitions.
  
• (William S. Simon) Comp sales for the 13-week period ending October 28 were above our guidance and this comp increase represents more than $750 million in additional same store sales for the third quarter over last year.
  
• Net sales rose 2.7% to $63.8 billion in the third quarter versus the prior year's comparable period, clearly upward momentum.
  
• Traffic also benefited from the extension of our Gas Rollback program, as well as our holiday layaway service, which launched on October 17. Three key elements drove the third quarter improvement.
  
• Second, our integration of technology with associate productivity programs has improved in-stock. On-shelf availability continues to improve and is above the 93% we shared at the October Analyst Meeting. We're very well positioned with inventory in both store and online for the fourth quarter.
  
• Among our business units, Grocery, Health and Wellness and Hardlines all delivered positive comps in the third quarter. Our Food business had positive traffic trends throughout the quarter and posted mid-single-digit comp.
  
• Sales of Consumables continued to improve, increasing approximately 100 basis points sequentially from the second quarter. The improvements in on-shelf availability contributed to higher conversion and traffic. Consumables are also another area where our assortment initiatives in such categories as Cosmetics and Pets are making a large impact.
  
• Within Pets, the Dog Food category improved approximately 300 basis points, benefiting from continued add-backs and strength in our Value brands. Grocery, which includes Food and Consumables, continued its positive trend and overall delivered a low single digit positive comp for the quarter.
  
• Our comp for Hardlines improved 300 basis points sequentially from the second quarter to a low single digit positive comp for the third quarter. This improvement was primarily driven by our Heritage categories, including Sporting Goods, Stationery and Crafts.
  
• Tire sales, helped by special events, also remained strong. As we've expanded assortment and updated modulars, sales increased in Stationery and Crafts.
  
• During the third quarter, we had a major modular reset for our Toy business and this helped drive sales at the end of the period, just as layaway began.
  
• It's not surprising that our top toy on layaway is the Leap Pad Learning System, along with bikes and ride-on vehicles.
  
• In Electronics, top layaway products are tablets, TVs and laptops. As you know, Electronics and Toys make up our Entertainment business and are critically important sales drivers for the fourth quarter.
  
• Apparel sales improved approximately 170 basis points over the previous quarter, leading to a low single digit negative comp. Men's and Ladies' Apparel had the strongest sales, where our focus on core basics and assortment initiatives is paying off.
  
• Gross profit dollars were up 1.9% over last year's third quarter to $17.9 billion, growing slower than the rate of sales. Gross margin rate is down approximately 22 basis points from last year's third quarter. We leveraged expenses for the quarter. As a percentage of sales, operating expenses decreased 41 basis points. On a dollar basis, SG&A was up approximately 70 basis points compared to last year on a 2.7% increase in sales. Operating income grew faster than sales for the quarter. Operating income rose to $4.6 billion versus $4.4 billion last year.
  
• (C. Douglas McMillon) (International) We've added 12.7 million square feet of organic growth since the beginning of this year and we're on track to meet our forecast of 24 million to 27 million square feet
  
• We will leverage our brand and customer loyalty further in developed markets, like Canada and the UK, as well as our emerging markets.
  
• In Brazil, eCommerce is growing at twice the pace of the market and we have an award-winning Web site for customer friendliness.
  
• The fourth pillar is strategic acquisitions. We're encouraged by the successful integration work in Chile and now in South Africa and I'm very excited about the management teams in each of these markets.
  
• Walmart International reported third quarter net sales of $32.4 billion, an increase of 20.3% over last year. Changes in currency translation increased our reported net sales by $1.3 billion.
  
• On a constant currency basis, net sales were $31 billion, an increase of 15.3% over last year's third quarter and 7.5%, excluding acquisitions.
  
• All of our markets had constant currency sales growth, with China, Mexico and Argentina providing the strongest net sales growth in the third quarter.
  
• Walmart International leveraged constant currency operating expenses, growing them slower than sales at 12.4%. When you exclude our recent acquisitions, constant currency operating expenses grew only 5.5% on expense leverage from the UK, Japan, Chile and Brazil.
  
• Our third quarter reported operating income grew 14.2% from last year to $1.4 billion and includes a benefit of $48 million from changes in currency exchange rates. On a constant currency basis, operating income grew 10.3%.
  
• Excluding acquisitions, constant currency operating income grew faster than sales at 8.5%. On a reported basis, Walmart International's inventory grew at 18.7%.
  
• In the UK, ASDA had a solid third quarter, growing sales and growing operating income faster than sales, excluding fuel. In the third quarter of this year, comparable sales, excluding fuel, increased 1.3%. Traffic declined by 1.3% and average ticket increased 2.6%, as customers continue to consolidate their trips in the face of high prices.
  
• The UK Grocery market is entering into what is traditionally a heavy promotional period in time for Christmas. ASDA, however, continues with a very simple promise to customers. Our prices are 10% cheaper than the competition on comparable baskets or we'll give you the difference. And ASDA's customers like it. Since this year, the prices of more than 13 million baskets have been checked online.
  
• ASDA's online grocery sales continued to grow strongly in the third quarter and now customers can order groceries using a smartphone. The on-time delivery rate has improved with 19 of 20 customers receiving their purchase within the allotted time slot.
  
• ASDA opened a record number of stores this quarter, for a total of 83, which includes 77 Netto conversions. This brings ASDA to a total of 542 stores, including 139 Supermarkets.
  
• Now for Canada, Walmart Canada continued to have solid sales growth; however, operating income grew slower than sales. Net sales grew 4.9% in the third quarter compared to last year, driven by Food, Consumables and Health and Wellness. For comparable stores, third quarter comparable sales increased 0.9% from last year. Average ticket increased 2.2% for the third quarter and traffic declined 1.3%
  
• Fiscal 2013 is a big growth year for Walmart Canada, with a goal to complete a record 73 store growth projects. This includes the renovation of the 39 Zellers stores' leases we recently acquired.
  
• During the third quarter, customer traffic in Mexico declined 0.4%, and this includes the 1% increase we saw in September. In its October comp sales release, Walmex also cited traffic improvements for the first month of the fourth quarter.
  
• Mexico's third quarter consolidated comp store sales for the self-service formats grew by 2.6%, while ANTAD's comp store sales report for the rest of the industry, excluding Walmex, grew faster at 3.3%.
  
• In real terms, Brazil's third quarter net sales declined 1% and comparable sales declined 5.7%. Average ticket declined 0.8% in real terms, and customer traffic was also down. We need to improve our reputation for price leadership in Brazil to increase our transactions.
  
• In the last 12 months, we've opened 44 net new stores in Brazil, bringing our total store count to 496. This includes 9 new stores in the third quarter of this year.
  
• Moving to Asia, Japan's net sales, comparable sales and average ticket all grew in the third quarter in nominal terms, but Japan's operating income ended with a loss when compared to last year's profit. Walmart Japan continues to outperform the market, growing sales and comp sales approximately 1.9% in real terms. Third quarter traffic grew 0.4% and ticket grew 1.5% in real terms.
  
• Following the reopening, traffic and sales were strong, as customers reacted in a positive way to the changes made during the brief closure. As mentioned in various media reports, the Chongqing Mayor approved of Walmart's actions and said the government supports additional development by the company in China.
  
• (Brian C. Cornell) (Sam's Club) Consistent with the overall Club channel, our top-line performance this quarter was exceptional. Comp sales, excluding fuel, increased by 5.7%. This is our seventh quarter of sequentially increasing comps.
  
• Membership renewals and members joining at the Plus level continued to grow. And we leveraged expenses again this quarter. We opened a new club, expanded a club and relocated three clubs during the period. This added over 190,000 square feet to our footprint.
  
• Fuel prices in this year's third quarter were approximately 34% higher than a year ago, and gallons sold were up 11%.
  
• Including fuel, third quarter net sales were $13.3 billion, a 9.5% increase over the last year. Gross profit increased by 5%. SG&A expense as a percentage of sales decreased by 62 basis points, and operating income increased 6.3% to $390 million for the quarter.
  
• Gross profit increased by 5%. SG&A expense as a percentage of sales decreased by 62 basis points, and operating income increased 6.3% to $390 million for the quarter. Volatility in fuel prices can have a notable impact on our financial results.
  
• Net sales for the third quarter were $11.8 billion, up 6.2% from last year. Comp club sales for the 13-week period increased 5.7% and were strong across all three geographic operating divisions, led by the West Division.
  
• Comp traffic and ticket increased for the 13-week period by 2.3% and 3.4%, respectively. Comp traffic and ticket increased for both Advantage and Business members.
  
• Our Pet Supply business was strong, turning in high-single-digit comps. Impacted by deflation, Laundry and Home Care comps were down. And in a tough competitive market, Baby Care was down.
  
• Deflation continues to negatively impact Technology and Entertainment categories, which hit a low-single-digit comp. Earlier this year, we made a decision to transition our leased Wireless Centers to an owned model.
  
• We continue to deliver on our commitment to quality and value, especially with our proprietary brands. These initiatives are important in giving our members choices. Here are a few highlights. Since the beginning of the year, we've introduced three new brands: Artisan Fresh in the Deli and Bakery areas; Simply Right in Baby and Health and Beauty Aides; and Daily Chef in Frozen Foods and Refrigerated Products.
  
• These new brands represent over 200 items to-date, with plans to add 150 more by the end of Q1 next year. Early sales and member feedback are overwhelmingly positive, with results at or above expectations. Our upcoming Holiday Taste of Sam's event will feature Artisan Fresh and Daily Chef items.
  
• Membership and other income were down 13 basis points as a percentage of sales when compared to the third quarter last year.
  
• Membership income for the third quarter increased 1.7% versus last year.
  
• Remember, for reporting purposes, membership income is recognized over the membership period, rather than when it's collected. Renewals continue to increase at a rate that has exceeded our expectations and outpaced last year's performance, and our penetration of Plus members continues to grow at a healthy pace. Business sign-up growth was stronger in the third quarter, both sequentially and versus last year.
  
• Our gross margin rate decreased by 28 basis points compared to the third quarter last year, while gross profit dollars increased 4%. The highly competitive retail environment, as well as cost inflation in several categories, impacted our gross margin performance.
  
• Looking at the bottom line, our third quarter operating income increased to $378 million, a 3.3% increase over the third quarter last year. At the end of the third quarter, inventory, including fuel inventory, was up 1% compared to last year. Overall, we are pleased with the inventory levels in our clubs and distribution centers.
  
• Going into the fourth quarter, our sales momentum remains strong and we expect comp club sales without fuel for the 13-week period from October 29, 2011, through January 27, 2012, to increase 4% to 6%. Last year, Sam's comp club sales, excluding fuel, increased 2.7% for the comparable 13-week period.
  
• Our full-year earnings per share guidance is now between $4.45 and $4.51. All guidance estimates assume that currency exchange rates remain at current levels. This compares to last year's results of $4.18, or an underlying $4.07 due to the $0.11 of tax benefits.

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