By  on November 15, 2005

NEW YORK — Wal-Mart Stores Inc. had a solid third quarter and its president and chief executive officer, H. Lee Scott, is bullish about the future.

The discounter's third-quarter results met Wall Street's expectations, despite three major hurricanes in the period and gas prices over $3 a gallon in many locations.

The third-quarter growth was driven by improvements in Wal-Mart's fashion offerings as well as increases in intimates and cosmetics.

But the surprise was Scott's optimism about the future, including holiday. The Wal-Mart ceo has in the past been vocal about the impact of higher fuel prices on retail customers. Many retailers are nervous about the prospects for holiday, given the potential for high heating bills and the after-effects of three major hurricanes in the Southeast, but Scott said Wal-Mart foresees continued improvement in the months ahead.

"Hurricanes dilute consumer wealth in the short term, but they are accretive to [gross domestic product]," Scott said on a conference call with Wall Street analysts. "They are accretive to employment and real income in the longer term. Although January and February could be difficult as holiday and utility bills come due, I like Wal-Mart's prospects for this next fiscal year. This will be driven by an improving economy, plus our continued improvements in merchandising and operations."

John Menzer, vice chairman, told analysts that Wal-Mart has a new holiday marketing campaign called "Wal-Mart: Home for the Holidays." He explained that it was geared to getting consumers to think of the discounter first as a shopping destination. Among the categories Wal-Mart deems key for holiday are electronics, toys, apparel and home.

Menzer also noted the recent introduction of Metro 7, the retailer's new fashion line, and improved positioning of the George collection in its stores.

For the three months ended Oct. 31, Wal-Mart said income rose 3.8 percent to $2.37 billion, or 57 cents a diluted share, from $2.29 billion, or 54 cents, in the same year-ago quarter. The company posted a one-time charge of 2 cents per share, in part for expenses related to hurricane costs and for higher freight costs.

Revenues in the quarter rose 10.1 percent to $76.25 billion from $69.28 billion, which included a 10.1 percent gain in sales to $75.44 billion from $68.52 billion. Wal-Mart said sales at its Wal-Mart stores rose 9.5 percent to $50.24 billion from $45.89 billion, and Sam's Club sales were up 10.3 percent to $10 billion from $9.1 billion, while U.S. comparable-store sales rose 3.8 percent, a 2.9 percent increase at Wal-Mart stores and an 8.1 percent jump at Sam's Club units.For the nine months, income was up 7.6 percent to $7.64 billion, or $1.82 a diluted share, from $7.1 billion, or $1.66, last year. Revenues rose 9.9 percent to $225.53 billion from $205.23 billion, which also included a 9.9 percent increase in sales to $223.16 billion from $203 billion.

Noting the closing of hundreds of stores since the last earnings call due to the hurricanes and rising energy costs, Scott said during the conference call, "You know, if you would have told me that all this [was] about to occur, I might have been a little less optimistic during our last earnings call. But in the face of numerous obstacles, we actually performed well."

Shares of Wal-Mart closed at $49.30, up 30 cents, in trading Monday on the New York Stock Exchange.

"This was a good quarter for Wal-Mart, considering what they were up against: bad weather, a tough back-to-school cycle and rising costs," noted Richard Hastings, retail analyst at Bernard Sands. "Their third-quarter profit was supported by a really solid quarter at Sam's Club, where operating income rose 9 percent. This shows again why Sam's matters so much to Wal-Mart's consolidated profitability."

"We believe that Wal-Mart's sales have benefited from both customers trading in to Wal-Mart [buying groceries at Wal-Mart instead of a more expensive supermarket] and customers trading down to Wal-Mart [buying apparel when they traditionally only bought food]," observed Robert Drbul, analyst at Lehman Bros.

Drbul wrote in a note that Wal-Mart represents a compelling long-term investment for reasons that include its "distinct competitive advantage with its low-cost structure and distribution capabilities as well as a highly cohesive, talented and seasoned management team."

The divisional standout in the quarter was Sam's Club, which "achieved double-digit growth in sales and operating income and has grown earnings at a faster rate than sales for the quarter," according to Tom Schoewe, executive vice president and chief financial officer. Operating income grew 11.8 percent on a sales gain of 10.3 percent.

On the international front, Joseph Fitzsimmons, senior vice president and treasurer, said total international sales rose 12 percent to $15.2 billion, with stronger performances from operations in Mexico, Brazil, Argentina and China. He added that the U.K.'s Asda was still having some difficulties due to local trading conditions.The company said it expects earnings per share for the fourth quarter in the range of 82 cents to 86 cents, and for the year, at $2.64 to $2.68.

Bernard Sosnick, analyst at Oppenheimer, wrote in a note that fourth-quarter guidance assumes a 3 to 5 percent same-store gain in the U.S. "A pricing blitz expected on Friday after Thanksgiving is expected to hold down the gross margin. But the gross margin should benefit from the late sales of winter goods, which was an unexpected plus for the fourth quarter. In addition, expense control might result in enough expense leverage to offset higher interest and fuel costs," he noted.

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