Aggressive Holiday Promotions Projected to Take a Toll on Walmart’s Q4 Gross Margins
Walmart projected lower than expected earnings for Q4 of $1.60-$1.70 per share, citing projected flat comps and “continued pressure on sales,” said Chief Financial Officer Charles Holley on the company’s Q3 earnings call Thursday. Analysts had been expecting Q4 guidance of $1.69-$1.70. Janney Capital Markets analyst David Strasser cited a “modest” cut in comps along with lower gross margins “as Walmart ratchets up the promotional engine with some pretty aggressive moves” in Black Friday sales plans.
Janney lowered gross margin projections to 24.7 percent due to the “biggest step up in Black Friday promotions we have seen in many years,” calling the one-hour price guarantee on products on Thanksgiving night “dramatic.” Aggressive promotions such as a 60-inch VizioTV for $688, Dr. Dre headphones for $115 and a $100 gift card with the purchase of an iPad mini drove the earnings guidance cut, Strasser said, and will provide “a significant challenge across retail … as Walmart is determined to lead the industry into the promotional abyss this year."
Sam’s Club stores are also “investing in price,"said CEO Rosalind Brewer. Club members will receive two Instant Savings books and a chance to attend an exclusive VIP event the Sunday before Thanksgiving, she said. Sam’s Club will “transition” three times in December alone, she said, which will more than double the number of new general merchandise items stores carry versus last year.
In Q3, Walmart’s U.S. entertainment segment -- including toys and electronics -- had a mid-single-digit negative comp due to “ongoing industry softness and deflation,” said Walmart U.S. CEO Bill Simon. It “made some progress in TVs,” due to a “sharpened” pricing strategy on key brands and an improved selection to overcome share losses in Q2, he said.
Net sales for Q3 grew 2.4 percent to $67.7 billion, but comp sales slipped 0.3 percent, due to a 0.4 percent decline in traffic, Walmart said. Comp traffic was up slightly from Q2, it said. Its third quarter started “slower than we've liked,” Simon said, but comp sales picked up in September and October, driven by large-scale promotions that helped offset “consumer noise” in Q3 from the government shutdown. Later in the quarter, Walmart saw improvement in “the more challenging categories of TVs and snacks and beverages,” while it reported strength in home, produce, apparel and wireless, he said.
Walmart CEO Mike Dunn said Walmart plans to open about 50 stores in the U.S. in Q4, including new stores, expansions, relocations and conversions that will total roughly 3.7 million additional square feet.
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A Walmart spokeswoman gave us more detail on the various promotions Walmart will run on Thanksgiving and Black Friday. Walmart is offering for the first time “wristband” deals, traditional doorbuster items that will sell out when the number of items in stock is depleted, she said. The number of wristbands should match the number of items in inventory, versus the “one-hour guarantee” sale items, which customers are guaranteed to receive for the deal price either that day or when they return to the store to pick up the item before Christmas, she said. Customers who buy one of 15 wristband sales items must exchange the wristband for the product within two hours of the designated sale time. The wristband assures them of nabbing a price while still being able to shop.
Four products overlap the two deal categories, appearing in both, which is likely to cause some confusion for shoppers on Thanksgiving night. The one-hour guarantee sale runs from 6-7 p.m. and the wristband sale begins at 8 p.m., according to a news release. Overlapping items include a Vizio 60-inch 1080p smart TV ($688), a 16 GBiPad mini with $100 Walmart gift card bundle ($299), a Straight Talk Samsung Galaxy S III smartphone prepaid phone ($299) and a Funai 32-inch 720p LED-litLCD TV ($98).
Some of the products on Walmart’s deals are shown as a “special buy” -- the Funai TV and a $49 RCA tablet, for instance. Those are items Walmart doesn’t typically carry, while other regularly stocked deal items are shown with their savings included. A Vizio 70-inch 1080p, for example, is listed as a “wristband” sale item for $998, $700 off the regular price.