By and  on February 18, 2005

NEW YORK — Despite macroeconomic forces crimping the spending power of its core shoppers, Wal-Mart Stores Inc. managed to deliver financial results that surprised Wall Street Thursday.

The world’s largest retailer pulled out better-than-expected profits in the fourth quarter and full-year 2004 as earnings for the year topped $10 billion with sales rising 10.4 percent to over $285 billion. Even so, H. Lee Scott, chief executive officer, said on a prerecorded call that he sees room for improvement, especially in the company’s ability to garner better sales.

“I am pleased with our results but not satisfied,” he said.

Profits in the three months ended Jan. 31 jumped 16.2 percent to $3.2 billion, or 75 cents a share, ahead of analysts’ projections by a penny. Comparatively, Wal-Mart earned $2.7 billion, or 63 cents, in the period last year. Total revenues in the quarter were $82.2 billion, up 10.4 percent from $74.5 billion a year ago. U.S. same-store sales increased 1.5 percent, below the company’s plan for a 2 to 4 percent increase.

On the call Scott said, “This past year, sales in the Wal-Mart division started strong but slowed in the second half. We were not aggressive enough in our merchandise plans and underbought in several key categories, particularly at the mid and premium price points.”

Scott went on to say that although “this resulted in lower markdowns and better inventory levels, the lack of sales resulted in greater expense pressure. We would have been better off if we had stayed with lower markdowns to sales and we will be more aggressive in our merchandise planning this year.”

And while the discounter said its core customer was hurt by higher gas and oil prices, Scott forecast a decrease in pressure on this shopper as the economy continues to mend in 2005.

The retailer sees sales in fiscal 2005 showing a gain at the low end of the 3 to 5 percent range. But because the first quarter will be impacted by two nonoperating issues, Wal-Mart forecast earnings that could come in below analysts’ current consensus.

First-quarter earnings were projected at 56 to 58 cents a share, versus Wall Street estimates for 58 cents. Wal-Mart said it does not expect to take a similar inventory-related credit this year after recording a $90 million benefit in 2004.  Additionally, the company expects that its interest expense could rise by as much as $250 million in 2005 due to the increase so far in federal interest rates. Consequently, full-year profit guidance from Wal-Mart is for $2.70 to $2.74, against the consensus estimate for $2.73.Meanwhile, merchandise has been an Achilles’ heel for Wal-Mart. Holiday results were disappointing as the company rehashed many of its time-honored presentations and failed to titillate customers with spectacular new deals. Executives did not divulge any specific new initiatives during the conference call, but its likely that apparel remains a priority and that international operations, particularly ASDA, may prove a source of ideas.

In May, for instance, Wal-Mart launched George Global, headed by U.K.-based trading director Andy Bond, to design, source and help roll out the successful careerwear brand worldwide. In addition to its country of origin, the U.K, George is currently sold in the U.S., Canada, Mexico, Korea and Germany.

Wal-Mart is also tinkering with a format it calls ASDA Living, a general merchandise store focusing on softline categories such as home, jewelry, clothing and health and beauty. Based on preliminary results from a pilot store that opened early last year in Walsall Midlands, ASDA will roll out five more Living stores this year.

ASDA has proven itself a strong and resourceful performer, accounting for 18 of the top 20 volume Wal-Mart stores worldwide at Christmas, according to Jay Fitzsimmons, senior vice president and treasurer.

In the year, Wal-Mart said profit was up 13.4 percent at $10.3 billion, or $2.41 a diluted share, versus $9.1 billion, or $2.07, in the prior year. Analysts had been expecting $2.40. Total sales rose 11.3 percent to $285.2 billion, including a 3.3 percent rise in U.S. comps and a $3.2 billion benefit from favorable currency translations from the pound and euro.

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