Wal-Mart Performance Outpaces Competitions

Wal-Mart's fourth quarter profits fell, but revenues hit record level of $109.1 billion.

Wal-Mart Stores Inc. demonstrated the importance of price on Tuesday when it posted fourth-quarter profits that beat expectations and sales that were its highest ever.

This story first appeared in the February 18, 2009 issue of WWD.  Subscribe Today.

The retailer said net profits for the three months ended Jan. 31 dropped 7.4 percent to $3.8 billion, or 96 cents a diluted share, from $4.1 billion, or $1.02 a diluted share, a year earlier, but the numbers beat the company’s previously lowered forecast. Last month, Wal-Mart reduced its profit estimates for the quarter to a range of 91 cents to 94 cents a share from the $1.03 to $1.07 previously expected. Revenues for the quarter inched up 1.7 percent to a record-breaking $109.1 billion from $107.3 billion.

“Our performance relative to competitors was exceptionally strong in the fourth quarter and throughout the year,” said Mike Duke, the firm’s president and chief executive officer, during an earnings call. “We expect this momentum to continue. We’ve built strong momentum during the past year in a very tough economy. We will take what has worked for us and work hard at doing it even better.”

Net sales for the fourth quarter were $108 billion, an increase of 1.7 percent from $106.2 billion in the previous year’s fourth quarter. Income from continuing operations for the quarter was $3.8 billion, a decrease of 7.7 percent from $4.1 billion in the fourth quarter last year. The retailer paid $255 million to settle 63 class action wage and hour lawsuits.

Wal-Mart’s earnings for the full year rose 5.3 percent to $13.4 billion, or $3.39 a diluted share, on a 7.2 percent increase in revenues to $405.6 billion.

Looking forward, the company projected earnings of 72 to 77 cents a share for the first quarter and $3.45 to $3.60 for the current fiscal year.

“Wal-Mart is a clear out-performer in a challenging economy, benefiting not just from its price-value leadership, but also its upgraded soft-goods strategy that has infused the store with more compelling branded apparel names such as Norma Kamali, Ocean Pacific (Op), L.E.I., Danskin and Starter,” said Todd Slater, a retail, apparel and footwear analyst at Lazard Capital Markets.

Bill Dreher, a retail analyst at Deutsche Bank, said Wal-Mart will be a beneficiary of brands migrating out of department stores. “Right now the company is laying the groundwork for the improvement of the economy [when it will] be able to focus on greater merchandise clarity, more intuitive store planagrams as well as price leadership and cost reduction. Clearly, the apparel and home and other discretionary categories are being structured correctly. Dottie [Mattison, senior vice president over women’s apparel, jewelry, shoes and accessories as well as product development,] seems to be doing a great job of transitioning that department out of Arkansas and into New York. They will be able to transition the consumer to move across the aisle” when the economy improves.

Wal-Mart closed the year with about $11.6 billion in free cash flow. Under a $15 billion share repurchase plan authorized by the board of directors in May 2007, the company has spent almost $10 billion to repurchase about 203.6 million shares and plans to restart its share repurchase program this year.

The International division’s net sales rose about 9 percent to $98 billion, after currency impact. Before the impact of currency, on a constant dollar basis, sales would have increased 11.6 percent. Net international sales for the fourth quarter were $24.7 billion, which includes the negative $4.7 billion impact of currency valuation that led to an 8.4 percent decline in fourth-quarter U.S. dollar sales.

The strongest sales growth in the fourth quarter came in China and Brazil. The U.K., Canada and Mexico also showed strong results. However, comp-store sales were down 0.5 percent in the fourth quarter in Japan. “Gross margins were negatively affected in Japan by the ongoing conversion to everyday low prices,” said Mark Miller, a retail analyst at William Blair & Co. “In the U.K. gross margins were negatively impacted by increased markdown activity.”

Sam’s Club’s performance stabilized in comparison to the third quarter’s weak results. Total sales for the year rose 5.6 percent to $46.9 billion. Sam’s sales of $11.8 billion for the fourth quarter were flat in comparison to last year’s same period.

“The progress that’s allowed Wal-Mart to post a 5 percent earnings increase during a recession is very impressive,” said Deutsche Bank’s Dreher. “We’ve seen lots of other retailers slam guidance, but it’s steady as she goes at Wal-Mart.”

Wal-Mart stock on Tuesday closed at $48.24, up $1.71 or 3.68 percent, on the New York Stock Exchange.