Wal-Mart's 4Q results show rebounding US business

Customers walk into and out of WalMart in Methuen, Mass., Monday, Feb. 20, 2012. Wal-Mart Stores Inc. reported an almost 15 percent decline in fourth-quarter profits as the world's largest retailer's U.S. namesake business continued to rebound over the critical holidays. (AP Photo/Elise Amendola)
February 21, 2012 4:36:22 PM PST
Wal-Mart Stores Inc.'s business offers insight into how Americans are reacting in the slow economic recovery: they will spend, but only if they believe they're getting the lowest prices.

The world's largest retailer guaranteed holiday shoppers that they'd get the lowest prices on merchandise. As a result, Wal-Mart had its first increase in-store traffic in at least two years. But operating income growth for the quarter was slower than the rate of sales for Wal-Mart's U.S. business as gross profit margin declined.

"Core customers remain cautious about their finances," said Mike Duke, president and chief executive of Wal-Mart Stores Inc. in a statement. "They rely on Walmart's (everyday low price) promise to help them manage through today's economic challenges."

The new consumer behavior is likely to have an impact on companies of all shapes and sizes as they struggle with how to lure shoppers in with low prices without cutting them so much that they completely erode profits. Wal-Mart, which draws nearly 10 percent of all nonautomotive spending in the U.S., highlights the compromise companies have to make when they focus on rock-bottom pricing in the still-weak economy.

Wal-Mart had struggled since the recession as its core low-income customers at its U.S. namesake business have been hard hit by jobless and other challenges. Meanwhile, the business, which accounts for 62 percent of the company's revenue, had veered away from its low-price strategy. At the same time, rivals like Target and Amazon.com have lured away some of its customers by cutting their prices.

But in the third quarter of last year, Wal-Mart reversed a string of quarterly sales declines that lasted for more than two years by refocusing on low pricing and restocking popular products it had gotten rid in a bid to de-clutter stores. And in the fourth quarter, Wal-Mart's U.S. namesake business posted its second consecutive quarterly gain in revenue at stores opened at least a year -- an indicator of a retailer's health.

Wal-Mart said Tuesday that revenue at stores open at least a year at its U.S. namesake business rose 1.5 percent, slightly above the 1.6 percent gain analysts polled by FactSet had expected. Overall, it's U.S. business had a 2.1 percent increase in revenue at stores opened at least a year, including a 5.4 percent increase at Sam's Clubs.

Net sales, excluding membership fees from its Sam's Club division, rose 5.9 percent to $122.28 billion. Analysts had been expecting revenue of $123.9 billion.

While sales rose, margins fell. Overall gross margin was 24.3 percent in the quarter, down from 23.9 percent in the year-ago quarter. All three segments contributed to the margin decline.

The discounter, based in Bentonville, Ark., said Tuesday that net income was $5.16 billion, or $1.50 per share in the three months ended Jan. 31. That compares with $6.05 billion, or $1.70 per share, in the year ago period.

Excluding certain tax matters and real estate transactions, Wal-Mart recorded $1.44 per share for the latest quarter. The year-ago results included benefits from discontinued operations; excluding those benefits, earning were $1.41 per share. Analysts were expecting earnings per share of $1.46.

"They working extremely hard just to see improving sales," said Brian Sozzi, chief equities analyst at NBG, an independent research analyst. "But it's coming at the expense of profits on each sale. Just imagine if they weren't doing this."

Reclaiming its reputation as the lowest-prices leader is critical for Wal-Mart, to sustain the upward sales trend. So, going forward, Wal-Mart says it will keep looking for ways to cut prices as it seeks to sustain the improvement in its business.

"You can expect us to invest even more in lower prices," Duke, Wal-Mart's CEO, said.

For the current quarter, Wal-Mart expects revenue at stores opened at least a year to be anywhere from flat to up 2 percent. For the year, it expects earnings per share to be $4.72 per share to $4.92 per share. Analysts had expected $4.90 per share.

During a media call with reporters Tuesday, Charles Holley, chief financial officer, said that January has the best performance in the quarter, reflecting the sales momentum the discounter is enjoying.

"I do think there's a new normal with customers," Holley he said during a call with analysts on Tuesday. "The markets are more volatile. Gas prices are more volatile. Customers are looking for new ways to save money because they don't know around the corner."


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