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Wal-Mart, Target Nets Rise, Early Bell for B-T-S Season

Oil prices reached a 21-year high, but Wal-Mart and Target executives were upbeat, citing strong initial demand for back-to-school items.

NEW YORK — Oil prices may have reached a 21-year high Thursday but that didn’t dent the optimism of the nation’s top two discounters, which cited strong initial demand for back-to-school items as good news for the future.

Both Lee Scott, president and chief executive officer of Wal-Mart Stores Inc., and Robert Ulrich, chairman and ceo of Target Corp., were upbeat in their comments about the second half as they discussed in separate conference calls second-quarter results posted on Thursday.

Meanwhile, Kohl’s Corp., which reported second-quarter results after market, said income for the three months ended July 31 jumped 39 percent, citing significant progress on its 2004 initiatives. The company was hopeful that it will return to positive comparable-store sales increases in the third quarter.

Wal-Mart said income for the quarter ended July 31 rose 16.1 percent to $2.65 billion, or 62 cents a diluted share, from $2.44 billion, or 56 cents, in the year-ago period. Total revenues rose 11.3 percent to $69.72 billion from $62.64 billion, which included a 10.2 percent gain in Wal-Mart stores to $46.91 billion from $42.57 billion. Wal-Mart also operates the warehouse division Sam’s Club, as well as international operations. Total U.S. comps sales rose 4.1 percent, representing a 3.2 percent jump in same-store sales for Wal-Mart stores and an 8.8 percent increase in comps for Sam’s Club.

In the six months, income rose 11.9 percent to $4.82 billion, or $1.13 a share, from $4.31 billion, or 98 cents, a year ago. Total revenues rose 12.7 percent to $134.49 billion from $119.4 billion.

Scott told Wall Street analysts during the call, “Each of our divisions grew earnings faster than sales and we exceeded our total shareholder return target. Our improvement in operating income was due to increases in gross margin. This did not come from raising prices.”

He disclosed the improvement came from lower costs, particularly from global sourcing initiatives and a reduction in the amount of markdowns.

“In the Wal-Mart stores division, apparel had a good quarter. This is a marked improvement over last year and markdowns were down for the quarter. Initial response to back-to-school is encouraging and bodes well for the second half of the year,” Scott said.

This story first appeared in the August 13, 2004 issue of WWD.  Subscribe Today.

The ceo said pointedly that while comp-sales growth declined from the first quarter, he still felt good about the year.

“Although I am concerned about high gasoline prices, I continue to believe growth in employment and real income will lessen the impact,” Scott concluded.

At Target, income rose to $1.42 billion, or $1.54 a diluted share, from $358 million, or 39 cents, in the same quarter last year. During the quarter the company recorded a $1.02 billion gain related to the sale of Marshall Field’s to The May Department Stores Co. Revenues rose 10 percent to $10.56 billion from $9.6 billion, which included a gain of 10.2 percent in sales to $10.3 billion from $9.3 billion and an increase of 3.1 percent in credit revenues to $279 million from $270 million.

For the six months, income rose to $1.85 billion, or $2.02 a share, from $707 million, or 77 cents, last year. Total revenues rose 12 percent to $20.74 billion from $18.52 billion.

“As we look to this year’s third and fourth quarters our basis performance from last year is more challenging, yet our momentum remains strong,” said Ulrich during the call.

Gregg Steinhafel, president of the Target Stores division, said that the “sharp focus on our ‘Expect More — Pay Less’ strategy” has helped the company sustain its competitive advantage and remain relevant to consumers. In July, the firm launched a performance apparel line called C-9 Athletic Wear by Champion, and Steinhafel said Target was pleased with consumers’ initial response to the assortment.

Steinhafel said the back-to-school assortment for children and teens features denim and such fashion looks as layered styles. While it’s too early to say how sales are going, he said, sales are in line with expectations.

Jerry Storch, vice chairman at Target, discussed a launch last week at the target.com site called Target to a T, a custom apparel shop that “allows guests to order apparel items customized to fit their specific bodies.” The site includes selected items from Mossimo Jeans for women and Cherokee chinos for men.

“Guests can choose everything from color to fit to pocket styles, and the site is complete with photo examples for each choice….Once the custom garment is assembled and finished it is shipped directly to the guest [from the factory.] The whole process takes less than a month,” Storch said.

Christine Augustine, analyst at Bear Stearns, noted, “Consumer traffic does seem to have slowed across the board,” she said. “Perhaps gasoline is beginning to impact consumer shopping behavior. I’ve heard that back-to-school is getting mixed reviews among the retailers, but Wal-Mart and Target specifically have gotten off to a big start. One reason is that the stores may have a broader assortment. Consumers who are concerned about gasoline costs may be adjusting their behavior and buying everything from Wal-Mart and Target since they’re already in the stores buying other things.”

At Kohl’s, income was $155.8 million, or 45 cents a diluted share, from $122.1 million, or 33 cents, in the year-ago quarter. Sales rose 13.1 percent to $2.5 billion from $2.21 billion.

For the six months, income gained 20.8 percent to $269.6 million, or 78 cents, from $223.2 million, or 66 cents, last year. Sales rose 12.8 percent to $4.88 billion from $4.33 billion.

Kevin Mansell, president, said during a call to Wall Street that misses’ and junior apparel categories did well in the quarter.

Larry Montgomery, chairman and ceo, said in a statement, “We have seen continued improvement in the selling of new receipts throughout the second quarter. This fact, along with our planned new merchandise launches throughout the third quarter, gives us confidence that we will return to positive comparable-store sales increases in the third quarter.”

Montgomery said during the call that Kohl’s might not be as impacted by the high price of gas and its potential concern for the consumer as its competitors. “I think that people like Wal-Mart and Target with their customers might be worried about that. When you look at the price of gas and our locations being [more] convenient to get to, I think it might be a positive.”