Recession or not, penny-pinching plays to Wal-Mart Stores Inc.’s strength as the retail giant posted a 4 percent profit gain on an 8.3 percent sales increase.
This story first appeared in the February 20, 2008 issue of WWD. Subscribe Today.
For the quarter ended Jan. 31, net income grew to $4.1 billion, or $1.02 a diluted share, from $3.94 billion, or 95 cents, a year earlier on sales that swelled to $106.27 billion from $98.09 billion. U.S. same-store sales increased 1.7 percent, excluding the impact of fuel sales at Sam’s Club.
The results reflect Wal-Mart’s success at returning to its low-price roots. And so far, appealing to the pocketbook in uncertain economic times seems to be working in the store’s apparel department.
Early spring sales of Wal-Mart’s private label apparel program, where key items cost $10 or less, were “very promising as a leading indicator” for the first half, said the company.
If the trend holds up and Wal-Mart shoppers also respond positively to the forthcoming Ocean Pacific and L.E.I. introductions, apparel might make its way out of the doghouse at the world’s largest retailer.
The chain is also putting some of its considerable financial might behind what it sees as “growth businesses,” including athletic apparel and shoes and licensed merchandise.
The emphasis on low prices marks a return to Wal-Mart’s bread-and-butter message, epitomized by its “Save Money. Live Better.” tag line, and a shift away from trendier offerings, such as Metro 7, which was rolled out aggressively, but didn’t resonate with shoppers.
“The price leadership strategy we put in place at the beginning of the [fiscal] year was exactly the right strategy for our customers around the world in a tough economic environment,” stated Lee Scott, the firm’s president and chief executive officer.
Calling Wal-Mart “A stock for tough times,” Banc of America Securities analyst David Strasser wrote in a research note that the key to the quarter was improved gross margins despite a focus on price.
“This is about better perception of pricing, not aggressive price cuts,” said Strasser. “They are managing [their] mix better and, most importantly, sourcing continues to be very accretive to margins. We have to imagine vendors not exactly sharing the joy of these gross margins.”
Wal-Mart is also accustomed to sailing against economic headwinds.
“The [Wal-Mart] customer has been in a recession for over five years, and the company is better adjusted for this slowdown than other retailers,” said Strasser. “They are benefiting from trade down at a time when [Target] is struggling to adjust its cost structure.”
For the full year, Wal-Mart delivered profits that gained 12.8 percent to $12.73 billion, or $3.13 a share, on an 8.6 percent rise in sales to $374.53 billion.
The retailer’s outlook calls for earnings from continuing operation of 70 to 74 cents a share in the first quarter and $3.30 to $3.43 for all of fiscal 2009.
Craig Johnson, president of Customer Growth Partners, applauded Wal-Mart’s turnaround. “But turning around a company this big is like turning around the Queen Mary,” Johnson said. “It has a large turning radius, and despite the great results to date, two major components are still a work in progress. Domestically, apparel and home are improving, but still are lagging.”
Johnson said on the international front, while “Brazil, Mexico and the U.K. are real stars [for Wal-Mart], and China is an emerging star,” Wal-Mart Japan’s Seiyu still needs work.