A 2.7% third quarter same store sales increase at Sam’s Club was below expectations for a 3% to 5% increase. President and CEO Rosalind Brewer explained what went wrong yesterday morning during a pre-recorded message.
Total sales increased 4.7% to $13.9 billion as sales volumes from the addition of seven new clubs, the most since the fourth quarter of 2005 contributed to the 2.7% comp increase. Operating profits increased 12.7% to $435 million, well ahead of the mid-single digit rate of operating profit growth reported by the Walmart U.S. and Walmart International divisions.
Brewer said Sam’s was pleased with its positive results, but disappointed that comp sales were below our guidance and blamed the miss on a variety of factors.
"The combination of inflation and deflation across multiple categories affected comp sales," Brewer said. "Inflation in some categories led members to trade down. Deflation in other categories came faster and deeper late in the quarter, with October being the lowest inflation we have seen in some time. Finally, our business members continue to experience economic pressure and uncertainty, which led to slower growth in business member traffic. We anticipate this softening could remain a headwind in the fourth quarter."
Sam’s anticipates a further inflation-related deceleration in same store sales during the fourth quarter as member behavior is impacted. Comps are forecast to increase in a range of 1.5% to 3.5%. Sam’s is up against a prior year gain of 5.4%.
"Inflation is quickly moderating across the club, and the effect was most pronounced later in the (third) quarter," Brewer explained. "In last year’s third quarter, we estimated retail inflation across the club was approximately 325 to 375 basis points, while this year it was only 70 to100 basis points. This was down significantly also from our second quarter estimates of 175 to 225 basis points.
Meanwhile, as inflation occurs in categories like meat it causes members to shift purchases. Because price increases for beef are inflating mid-single digits, members are switching to different proteins, particularly pork, which is deflationary, according to Brewer. This protein-related trade down impacted comp sales and dairy categories such as milk, cheese and eggs are also experiencing deflation.
"Although units are increasing, the deflation has proven to be challenging to overcome in these categories. Sugar and coffee prices are moderating as well," Brewer said.