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Walmart's Massive Earnings Warning Underscores 2 Big Concerns

Updated from 8:29 a.m. ET to include further analysis based on the company's earnings conference call.

NEW YORK ( TheStreet) -- Walmart (WMT - Get Report) delivered a knockout punch to already bruised investors Thursday in the form of sluggish second-quarter earnings and a full-year earnings warning.

Two specific areas of the quarter report -- comments from executives on the sales performance of U.S. supercenters and global inventory levels -- should worry even the most long-term investor.  At the very least, each factor helps to explain the company's massive full-year earnings reduction from its prior expectations.

Walmart, which my firm Belus Capital Advisors rates a sell, announced second-quarter earnings of $1.21, in line to Wall Street estimates, and the mid-range of its $1.15 to $1.25 per share guidance. However, the profit figure could be viewed by the market as disappointing as Walmart issued below-consensus guidance when it reported first quarter earnings back on May 15. At the time, Walmart’s $1.15 to $1.21 per share guidance was below the then consensus forecast of $1.28.

Net sales for Walmart came in at $119.3 billion vs. Bloomberg estimates for $118.9 billion. Comparable store sales for Walmart U.S. and Sam’s Club were unchanged year-over-year, in line with the company’s guidance for the quarter. Walmart's traffic numbers at each division were once again weak, and could overshadow the company not missing on its same-store sales plan entirely. Traffic at Walmart U.S. fell 1.1%, and rose a modest 0.3% at Sam’s Club.

"As it relates to our challenges in the quarter, we wanted to see stronger comps in Walmart U.S. and Sam’s Club, but both reported flat comp sales. Stronger sales in the U.S. businesses would’ve also helped our profit performance," noted Walmart CEO Doug McMillon in uncharacteristically blunt language.

Where were sales not the strongest? U.S. supercenters. Walmart U.S. President and CEO, Greg Foran, who officially began his new position on Aug. 9, stated: "In Q2, our supercenter fleet had a comp decline of approximately 30 basis points. We recognize the need to improve the performance and standards of this format to meet customers’ expectations. We plan to open, relocate, or expand about 115 supercenters for the fiscal year." 

Walmart increased its U.S. supercenter square footage by 10.34% in fiscal year 2014 compared to fiscal year 2011, as tabulated by Bloomberg.

Supercenter sales lagging the performance of Walmart's online sales growth, and sales increases at smaller format stores such as Neighborhood Market and Walmart Express, should be a source of concern for investors. Those statistics show a company struggling with heightened competition for low-income consumers from an array of foes, including Dollar Tree (DLTR), Family Dollar (FDO) and Kroger (KR), while also contending with Amazon (AMZN - Get Report) amongst higher-income shoppers.

In the second-quarter, Walmart's Neighborhood Market concept realized a same-store sales increase of 5.6%, Walmart's Express concept sales were "solid" as noted by Foran, and Walmart's U.S. online sales were referred to as having increased by a "double-digit percentage." 

The poor performance of Walmart's supercenters, which are the largest component to the company's global square footage, are evidenced in return metrics.  Return on investment declined to 16.6% from 17.9% in the second-quarter. For the first-quarter, return on investment was 16.7%, down from 17.8% a year earlier. Per Bloomberg data, Walmart’s return on invested capital has gone from 14.61% in fiscal year 2011 to 13.02% in fiscal year 2014, as the company has invested in the aforementioned new supercenters, smaller store formats, and mobile initiatives.

Must Read: Walmart's Financial Problems Revealed in 5 Photos and One Vine Video

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