5 Ugly Facts From Wal-Mart’s Disappointing Earnings

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Wal-Mart (WMT) announced Q4 adjusted earnings of $1.60 per share this morning, a penny higher than analysts’ expectations.

Guidance was fairly weak, and the early read on Q2 doesn’t seem too promising.

Management pointed to unfavorable external factors.

But we can’t ignore internal issues.

Brian Sozzi, chief equities strategist at Belus Capital Advisors, points to “five shocking aspects” of the report. From his note to clients: 

Wal-Mart is accelerating new store openings in the U.S. while failing to address (and communicate to the Street) the operating issues in its supercenters, such as unproductive space and out of stocks in fast-turning products (fresh food, consumables).  That turning a blind eye is a recipe for long-term margin and returns pressure. Bill Simon has entered 2014 as the President of Wal-Mart U.S. following another year of over-promising and under-delivering.  We think if performance does not stabilize shortly, the company will make a change in its U.S. leadership ahead of back to school 2014. At +2.4%, Wal-Mart's inventory growth continues to run in advance of its negative comps.  This is something on display in our latest video footage inside Wal-Mart stores. Specifically, excess clothing and seasonal goods on deep discount in dedicated areas of the store (such as garden centers). Core Wal-Mart and Sam's Club 4Q13 comps (excluding online) -0.7% and -0.5%, respectively.  Our interpretation is that this performance was worse than implied by management's warning issued in late January. Gross margin -40 bps in 4Q13, giving us a glimpse into what Wal-Mart is having to do on price to compete with price matching competitors and their (and its own) website.

“Wal-Mart is not one to acknowledge operating missteps,” writes Sozzi. “The company went onto express confidence in positive U.S. comps for 1Q14 after underperforming its goal consistently in 2013, and beginning the quarter with weather and economic impacted negative comps.”

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