Wal-Mart's Strong Earnings Overshadow Bribery Allegations
Headlines about Wal-Mart Stores' better-than-expected earnings mean that, at least for now, Wall Street isn't so concerned about bribery allegations in Mexico and pending investigations.
The world's largest retailer beat the Street on both the top and bottom line, reporting earnings of $1.09 a share on revenues of $113 billion. The second-quarter forecast calls for earnings of $1.13 to $1.18 a share, a range that brackets the average analyst estimate of $1.16 a share, reported by Thomson Reuters.
Wal-Mart's U.S. same-store sales growth is arguably the most important — and closely watched — metric, and the first quarter's gain of 2.6 percent year-over-year continues to put it on a positive trend.
The gain in the latest quarter was not only above the company's forecast, but also its best same-store sales growth in three years, with an increase in both traffic and average ticket.
The only mention of the bribery allegations first reported by the New York Times on April 21 on the company's pre-recorded conference call came from CEO Mike Duke.
"We take compliance with the U.S. Foreign Corrupt Practices Act very seriously and continue to strengthen our anti-corruption programs around the world," Duke said. "The investigation is ongoing and we are working aggressively to determine what happened, and we will take appropriate action if violations of the law or our policies occurred."
In its 8-K filing with the Securities and Exchange Commission, Wal-Mart notes it has been informed by the Department of Justice and SEC that it is the subject of investigations into possible violations of the Foreign Corrupt Practices Act. But says it doesn't presently believe it will have a material impact on business.
"It’s very open-ended at this point, in terms of the investigation, I don’t see how Mike Duke could say he knows whether or not it's material when the investigation is not over," said Daniel Binder, an analyst at Jefferies. "I’m probably less concerned about the financial impact and more concerned about the headline risk. What else comes out of this investigation? Do you have resignations, things of that nature, and we don’t know what shareholder lawsuits are going to look like."
Many other analysts were encouraged by the financial fundamentals.
"The bribery scandal has been front-and-center, now that might be back-burner now that the... same-store sales are still moving in the right direction," said Stacey Widlitz, president of S.W. Advisors and a CNBC contributor. "The reality is that’s how business is done in Mexico....More importantly, when you poll the [Wal-Mart] consumer, they don’t care."
Four-eight hours after the scandal broke, CNBC asked Wal-Mart shoppers in New Jersey how they felt about the allegations. The resounding theme was that while bribery shouldn't be an acceptable practice for Wal-Mart in any country, it will not prevent them from shopping at the company's stores because their prices simply cannot be beat. And that is what investors want to hear.
On the heels of the earnings, Wal-Mart shares have recovered the losses the stock has suffered since the allegations surfaced. In fact, UBS Senior Analyst Robert Carroll said Wal-Mart shares have "overcorrected" compared with the stock-price reactions of other publicly traded companies that have faced FCPA violation allegations.
"The public stock price, the average correction for all has been about 8 percent to 9 percent — and that’s cumulative days where there has been new information released," Carroll said. "If you looked at the end of the week after the New York Times allegations surfaced, Wal-Mart was lagging the market by about 8 points…while every other stock with an FCPA action had seen that 9 percent cumulative decline over several years, Wal-Mart saw it all in about 72 hours....The stock has corrected, now we move on, and these results today really help to focus on the key results."