Wal-Mart Posts First Profit Decline in 10 Years

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The New York Sun

Wal-Mart Stores Inc. posted its first profit decline in a decade yesterday as the world’s largest retailer paid a hefty price for closing its loss-making German stores while high energy prices hit its sales and costs at home.

Wal-Mart’s chief executive, Lee Scott, said sales were disappointing at Wal-Mart’s American stores, its largest division. Customers were making fewer shopping trips to save gas, while Wal-Mart’s own bills for fuel and utilities were up, he said.

“In the United States, customers tell us they are most concerned about gas prices,” Mr. Scott said in a prerecorded message. “This has been consistent every month this quarter.”

Results were still in line with expectations and the company reiterated its guidance for the year.

But analysts questioned whether a third-quarter forecast on the low end of expectations meant the company could meet its target for the year. Wal-Mart’s stock fell 73 cents, or 1.6% to $44.37 in late morning trading yesterday on the New York Stock Exchange.

The company forecast third-quarter earnings between 59 cents and 63 cents a share, compared with the average analyst estimate of 63 cents. It reiterated a full-year forecast of $2.88 to $2.95 a share, while analysts were predicting $2.92 a share.

“The quality of the quarter itself is kind of moderate. It does not look nearly as good as what we’ve seen from some of their peers as far as earnings and sales growth,,” a portfolio manager for Minneapolis-based Thrivent Investment Management with $67.5 billion in assets, David Heupel, said. The large-cap growth fund within Thrivent that Heupel manages sold its Wal-Mart shares this year.

Mr. Heupel said the tepid third-quarter forecast meant Wal-Mart will have to do very well in the fourth quarter — the holiday season that is traditionally the strongest period for retailers — to make the full-year target.

“What they’re up against at this point is not only a hard place in the economy for their consumers, but also the fact that they just can’t grow at the same rates as in the past,” a portfolio manager and retail analyst at Wentworth, Hauser & Violich in Seattle, which manages $8.2 billion in assets and holds 51,000 Wal-Mart shares, Patricia Edwards, said

For the quarter ended July 31, Wal-Mart posted net income of $2.08 billion, or 50 cents per share, down from $2.81 billion, or 67 cents a share, a year ago. That includes an $863 million charge for the sale of its German stores to Metro AG.

The last time Wal-Mart saw quarterly profit fall was in 1996.

Wal-Mart pulled out of Germany in July and, South Korea two months earlier, after racking up losses there. It said it would focus resources on expanding in more profitable markets like China and Latin America.

Excluding the German and South Korean operations, the sales of which are both pending, Wal-Mart’s income from continuing operations grew 5% to $2.98 billion, or 72 cents a share, from $2.85 billion, or 68 cents a share, a year ago.

A retail analyst from Coldstream Capital Management in Bellevue, Wash., which manages about $1 billion in assets including Wal-Mart shares, Don Gher, said Wal-Mart was in a remodeling squeeze right now that may pay off in the future with improved sales.

Wal-Mart is remodeling about 1,800 American stores to make them more attractive. Mr. Gher said that program is increasing expenses at the same time as it disrupts sales in those stores.

Wal-Mart said it expects to finish 1,200 of those projects by the end of the third quarter before taking a break over the holiday shopping season and finishing the rest next year.

In the meantime, sales are slowing. Sales at stores open at least a year — a key retail measure — were up 1.5% at Wal-Mart American stores in the second quarter, compared to 3.8% in the first quarter and 3.6% a year ago.

Rival Target last week said its sales at stores open at least a year rose 4.6% for the quarter.

Wal-Mart’s domestic profit margins are also under pressure from factors including higher transportation costs and more sales of lower-margin products, Chief Financial Officer Tom Schoewe said.

Food sales grew faster than general merchandise, he said. That pressured margins because groceries are less profitable than items like apparel, home furnishings or electronics.

The New York Sun

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