Wal-Mart beats on earnings, raises lower end of guidance, but revenue falls short

The world's largest retailer on Thursday topped Wall Street's earnings expectations during the latest quarter, and lifted the lower end of its full-year guidance.

While Wal-Mart's revenue eked out another gain, its sales fell short of what analysts were expecting, as foreign exchange headwinds weighed, and it recorded a slight miss on domestic comparable sales growth.

The company's shares fell 2.7 percent in premarket trading Thursday.

Wal-Mart said it earned 98 cents a share during the fiscal third quarter, slightly lower than 99 cents a share in the prior-year period. It raked in sales of $118.18 billion, an 0.7 percent increase over the prior-year period but below the Thomson Reuters forecast of $118.7 billion.

U.S. comparable sales came in just shy of expectations, at 1.2 percent growth. Wall Street was looking for a 1.3 percent increase. Still, the retailer's store traffic notched another quarter of growth, making it eight consecutive quarters.

Notably, Wal-Mart's digital sales — which have been a source of ongoing softness — picked up during the period, growing 20.6 percent excluding currency swings. Recently acquired Jet.com was included in the quarter for six weeks.

Wal-Mart's results included the operating impact of Jet.com for half of the quarter, as well as the transaction costs related to the $3.3 billion acquisition. Both of those factors were initially expected to fall in the fourth quarter. Meanwhile, food deflation dented revenue by 150 basis points this quarter. Grocery accounts for roughly half of the company's overall sales

In light of the results, Wal-Mart raised the lower end of its full year earnings guidance range to $4.20 to $4.35 a share, adjusted. That compares with $4.15 to $4.35 a share previously. The adjusted figure excludes the 14 cent noncash gain from the sale of Chinese website Yihaodian to JD.com in the second quarter.

"We had a solid third quarter. Our e-commerce growth accelerated, operations in the U.S. continued to strengthen and international delivered another solid performance. We are pleased that we can see real progress stemming from our strategic choices," CEO Doug McMillon said in a statement.

In its overseas business, 10 of Wal-Mart's 11 markets recorded positive comparable sales results, with China flipping into the green. The hypercompetitive U.K. market remained a challenge. International sales declined 4.8 percent, but increased 2.4 percent when adjusting for currency swings.

Wal-Mart entered the fiscal third quarter with wind at its back. During the prior three-month period, the world's largest retailer grew its domestic same-store sales by 1.6 percent, marking the largest quarterly increase since July 2012.

The company has been focusing on making its stores cleaner and faster to shop, with an eye on customer service. During the critical holiday shopping period, the company is tapping designated "holiday helpers" to direct shoppers to the shortest checkout line, and open additional registers when the store gets busy. It's also spicing up the shopping experience by doubling the number of product demonstrations it holds, to 150,000, and setting up festive selfie booths.

"They have a lot of momentum," Guggenheim Securities analyst Bob Drbul told CNBC. "Traffic was positive this quarter again, up 70 basis points, and in retail that's just one of the biggest and strongest metrics that you need to have positive."

Meanwhile, the company has expanded its online assortment, and will roll out its Black Friday deals on Walmart.com hours before they hit stores Thanksgiving Day. It's also benefited from the expansion of its online grocery service, which allows shoppers to place their orders online and have them loaded into their car. Those initiatives are part of Wal-Mart's broader bid to jump-start its online sales growth, which had slowed.

The company completed its acquisition of Jet.com in September.

"Wal-Mart continued to capitalize on its investments in [the third quarter] as evidenced by its impressive online sales performance, with growth of over 20 percent on a $14 [billion] to 15 billion base, without a full quarter of impact from Jet.com," Moody's analyst Charlie O'Shea said in a note.

While Wal-Mart's traffic and sales have been trending in the right direction, those improvements have come at a cost. They include a two-year, $2.7 billion investment in wages.

At its annual investor meeting last month, Wal-Mart reiterated its guidance for the current fiscal year, but walked down expectations for the following year, saying it would invest more in digital and technology. The retailer also said at that time that it would slow its store expansion plans in favor of digital investments.

During the fiscal third quarter, Wal-Mart's consolidated operating income decreased 10.4 percent, as a result of those investments and currency pressures. Excluding a lease accounting benefit from last year, operating income declined 7.9 percent.

A gain on the sale of shopping center assets in Chile, a tax benefit related to its agreement to sell its Mexican Suburbia business, and dilution from the earlier-than-expected completion of its Jet.com acquisition had a minimal impact on the company's results.

Wal-Mart repurchased $1.4 billion in stock during the period.

On Wednesday, competitor Target reported sales and earnings results that blew past analysts' estimates, and raised its full-year guidance.