Wall Street caught the Wal-Mart woes on Tuesday, plunging by more than 200 points after the world's largest retailer expressed concerns its shoppers are under financial pressure — even though it delivered a 49 percent profits gain in the second quarter.
The Dow Jones Industrial Average fell 1.6 percent Tuesday to close at 13,028.92 as the broader S&P 500 lost 1.8 percent to 1,426.54. In the retail sector, the declines were steep and severe in some cases, despite robust earnings from watchmaker Fossil Inc. and TJX Cos. The S&P Retail Index shed 3.6 percent to 454.93.
Among the retailers that suffered the steepest decreases were Wal-Mart Stores Inc., down 5.1 percent to $43.82; Target Corp., down 5 percent to $60.09; Kohl's Corp., down 4.8 percent to $56.41, and J.C. Penney Co. Inc., down 4.5 percent to $62.12.
Wal-Mart's carefully chosen words in a prerecorded call sent shivers down the spines of investors during the early trading session. Wall Street was already jittery after a week of steep declines rooted in the collapse of the subprime lending market. But it was Wal-Mart's remarks that set Tuesday's dark tone on the Street.
"In the Wal-Mart U.S. segment, we certainly have made improvements in some areas of the store, most notably grocery, pharmacy and entertainment. Having said that, merchandising overall is still not where it needs to be....At the same time, U.S. consumers continue to be under difficult pressure economically," said Wal-Mart's H. Lee Scott Jr., president and chief executive officer, in a morning call to Wall Street analysts.
By noon, trading volume on Wal-Mart jumped to 35 million, well above its three-month average of 18 million, as the stock lost 5 percent and stayed at that level until the market closed.
For the three months ended July 31, Wal-Mart's net income rose to $3.11 billion, or 76 cents a diluted share, from $2.08 billion, or 50 cents, in the same year-ago period. Excluding an aftertax benefit of 4 cents a share, earnings per share were 72 cents, below the 76 cents some analysts had expected. Total revenues rose 8.9 percent to $93.01 billion, which included an 8.8 percent gain in sales to $91.99 billion, from $85.43 billion a year ago. The balance of the revenue came from other income such as membership fees. Sales at Wal-Mart stores gained 6.5 percent to $59.01 billion from $55.39 billion, while its same-store sales inched up by 1.2 percent.The company said it expects EPS for fiscal 2008 to be between $3.05 and $3.13, down from initial forecasts of between $3.15 and $3.23.
Scott said the warehouse operation Sam's Club grew profits faster than sales, and that, among its international businesses, the three top-performing countries were Argentina, Brazil and China. Trends in the U.S., such as financial pressures on consumers due to higher fuel prices and interest rates, are seen elsewhere, Scott said, noting softness in sales in Canada and Mexico.
Analyst Bernard Sosnick of Oppenheimer said in a research note that he believes "large quantities of summer apparel remain in U.S. distribution centers awaiting shipment to the stores," thereby delaying the transition to fall apparel. The projected turnaround date for apparel has been pushed back until "late third quarter," he noted.
Separately, TJX posted better-than-expected second-quarter earnings and raised its fiscal 2008 earnings outlook, thanks to a surprise upside in operating margins — and despite a massive charge related to a computer intrusion announced earlier this year.
TJX's second-quarter net income dropped to $59 million, or 13 cents a diluted share, from $138.2 million, or 29 cents a share in the year-earlier period. Excluding charges, TJX posted income of $177 million, or 38 cents a diluted share. The company garnered revenue of $4.31 billion, up from $3.96 billion in the same period last year. Analysts expected the company to post income of 37 cents a share on revenue of $4.32 billion, according to Yahoo Finance.
"Quarterly pretax profit margins continue to benefit from strong comp sales as well as our focus on cost reduction, trends that began in late 2005," said Carol Meyrowitz, ceo of TJX, in a statement.
TJX said second-quarter gross margins grew to 24 percent, up 0.6 percent from the year earlier, due to improved merchandise margins as well as buying and occupancy expense leverage. For its second quarter ended July 28, TJX recorded an aftertax charge of $118 million, or 25 cents a share, related to intrusions into its computer system. The charge includes $11 million, or 2 cents a share, for costs incurred during the period and a reserve of $107 million, or 23 cents a share, to account for the company's estimate of potential losses.Despite the charges, Lazard Capital Markets analyst Todd Slater called the company's quarter "sensational." Slater said that, while TJX naturally benefits from a sloping consumer spending environment due to its discount operations, its second-quarter gain comes from management's execution of picking up better inventory at lower prices.
For its third quarter, TJX expects earnings of between 53 and 55 cents a share, based on same-store sales growth between 3 and 4 percent. Analysts expect earnings of 55 cents a share.
Meanwhile, watchmaker Fossil Inc. reported a 30.6 percent jump in second-quarter earnings, driven by strong sales in the watch and jewelry businesses.
For the three months ended July 7, earnings rose to $14.7 million, or 21 cents a diluted share, from $11.2 million, or 16 cents, in the year prior. Results included an expense of 5 cents a share related to reviewing its option granting process. Sales for the quarter grew 18.2 percent, reaching $306.5 million from $259.2 million last year.
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