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Wal-Mart Set Back, Target Scores

Wal-Mart Stores missed Wall Street's first-quarter estimates by a penny on Thursday, and Target Corp. beat quarterly expectations by 2 cents.

NEW YORK — First-quarter results were like night and day for the industry’s top two discounters, with Wal-Mart Stores Inc. missing Wall Street estimates by a penny and Target Corp. beating expectations by 2 cents.

And while executives at Target expect market share growth throughout 2005 and beyond, Wal-Mart is anticipating a challenging second quarter, but is still hoping to pick up some momentum in the second half.

Meanwhile Kohl’s Corp. posted double-digit earnings and sales for the quarter.

For the three months ended April 30, Wal-Mart delivered a 13.6 percent gain in net income to $2.46 billion, or 58 cents a diluted share, from $2.17 billion, or 50 cents, in the prior period. Excluding the benefit of 3 cents per share from tax and legal resolutions, the company earned 55 cents a share, 1 cent below Wall Street consensus estimates. This was the second time in Wal-Mart’s history as a public company that it missed Wall Street estimates. The last time Wal-Mart disappointed was in the first quarter of 1994.

On Thursday, the world’s biggest retailer said total revenues in the quarter increased 9.5 percent to $71.68 billion from $65.44 billion. Top-line results were bolstered by a strong performance in sales of domestics and fashion apparel.

Same-store sales in the U.S. were up 2.9 percent, which included a 2.8 percent contribution from Wal-Mart stores and a 3.5 percent gain for Sam’s Club.

Lee Scott, president and chief executive officer, said in a prerecorded conference call to Wall Street analysts and investors that the company “missed our sales plan for the quarter in comparable stores by almost 150 basis points.” He added that first-quarter results were not up to Wal-Mart standards.

“The quarter started strong as improvements in the economy appear to largely offset the impact of higher gasoline prices, but March proved very difficult. Gasoline prices rose dramatically, Easter was early, and spring was not. This negatively impacted the Wal-Mart division, in particular,” Scott said.

Thomas Schoewe, chief financial officer, said the second quarter will be challenging. “The Wal-Mart division expects to see improved sales of seasonal merchandise given the current weather outlook for the latter half of the quarter. However, we anticipate that gasoline prices will continue to impact our customers and result in below planned sales,” he added.

This story first appeared in the May 13, 2005 issue of WWD.  Subscribe Today.

The company estimates a comps gain for the second quarter, somewhere between 2 percent to 4 percent, with EPS coming in between 63 cents and 67 cents. Schoewe said on the call “we expect strong results in the second half of the year,” and noted that its fiscal 2005 EPS forecast of $2.70 and $2.74 is “still possible, but far more difficult given our current outlook for the second quarter.”

Emme Kozloff, senior retail analyst at Sanford C. Bernstein & Co., wrote in a research note that guidance at 63 cents to 67 cents compared with consensus estimates of 70 cents represents a “sizeable reduction for Wal-Mart to make if history is any judge.

James Degen, president of retail consultancy JM Degen & Co. in Templeton, Calif., said Wal-Mart’s push toward food and gasoline is costing the retailer by diluting the impact of high-margin soft and hard goods sales.

“General merchandise is really where these guys make their dough,” he said, adding Wal-Mart is “fighting the battle of how we can now drive up frequency [of shopping visits] without sacrificing margin, which is a very fine line to walk.”

In contrast, fashion-forward Target reported at 14.4 percent rise in net income to $494 million, or 55 cents, from $432 million, or 47 cents, a year ago. Earnings from continuing operations — the retailer sold its Mervyn’s and Marshall Field’s operations last year — climbed 26 percent to $494 million, or 55 cents a diluted share, from $392 million, or 43 cents, a year ago. Total revenues grew 12.7 percent to $11.48 billion from $10.18 billion. Same-store sales rose 6.2 percent.

Bob Ulrich, chairman and ceo, said in a statement that the firm’s performance reflects its discipline in “executing our strategy and success in delighting guests with the right combination of innovation, design and value. We are optimistic about our ability to sustain our competitive advantage and remain confident that we will continue to enjoy profitable market share growth throughout 2005 and beyond.”

Gregg Steinhafel, president, disclosed during a conference call to Wall Street analysts that the quarter’s 6.2 comps gain was “above our expectations of 4 percent to 5 percent, and compared to a 7.3 percent increase a year ago.” He cited strong growth in guest traffic and an “even stronger increase in the average transaction amount and [a] better-than-average performance” in intimates and women’s apparel categories for the gain.

Kohl’s first quarter saw a 21 percent net income gain to $124.7 million, or 36 cents, from $103.1 million, or 30 cents, in the prior year on sales that rose 15.2 percent to $2.7 billion from $2.4 billion. Comps rose 3.7 percent.

“The Wal-Mart miss falls into the big-deal bin,” said Darryl Rigby, retail director with Bain & Co., in Boston. “The truth is for Wal-Mart the going is getting tougher. They can’t blame the overall retail market … Results suggest competitive pressure is dragging down growth.”