The retail tell: Big stores missing earnings not good news for economy
As a rule of thumb, retailers blaming the weather for earnings shortfalls are trying to hide much larger problems. Taking it a step further, the higher up in a press release weather is mentioned the worse a merchant is performing on a fundamental basis.
Here's a screen grab of Walmart's (WMT) earnings announcement:
Suffice it to say Walmart isn’t exactly hitting on all cylinders on a fundamental basis. The $1.10 in earnings per share came on $114.2 billion in sales. Analysts had been expecting to see $1.15 on $116.25 billion in revenues. In February Walmart had told Wall Street to expect $1.10 to $1.20 in earnings which compared to estimates of $1.24. In effect Walmart missed the same quarter twice.
On a comp store basis the company also continues to struggle. Total U.S. same store sales dropped .2%, ex fuel.
Curiously the company also guided lower for the current quarter despite the fact that there's presumably pent up demand left over from the inclement Q1 period. WalMart now expects to earn between $1.15 and $1.25. Analysts had been looking for $1.28.
No Growth
Walmart didn't become dumb overnight. The company is simply getting old and operating in an economy with no growth. Even in the relatively low-volume period of February to April Walmart generates about $750 million in revenue every day in the U.S. Walmart can't outgrow the economy because it in effect is the economy.
Earlier this week I suggested investors look to Walmart rather than government data as an economic tell on the health of the economy. Unfortunately the economy seems to be slightly weaker than official data suggests.
Buybacks
Like Macy’s (M) yesterday, Walmart management isn’t shy about deploying some smoke and mirrors when it comes to inflating EPS. During the first quarter the company repurchased eight million shares of WMT stock for a total of $626 million. Only that buyback kept the official EPS number comfortably above the low end of Walmart’s guidance.
It’s not so much that buybacks are a horrible choice for capital allocation. Walmart clearly has the cash and is still able to fund e-commerce initiatives. The problem is that management clearly has better ways to spend its time. The average price per share on Walmart’s repurchase was $78.25, well above where the stock is trading today and only slightly below all-time highs.
The world’s biggest discount retailer shouldn’t be in the business of paying a premium for its own stock.
As for the rest of retail, the news from Walmart and Macy’s doesn’t bode well for the rest of the sector. We already saw Kohl’s (KSS) miss by a mile and tonight’s report from JC Penney (JCP) promises to be epic. It’s looking more and more like the Gap's (GPS) ability to beat expectations was the exception rather than the rule.
The bar is set low for the retail world. Let’s hope they don’t trip over it anyway.
