Wal-Mart Stores Inc. is getting a major boost from the troubled economy — and a better apparel offering as well.
This story first appeared in the August 15, 2008 issue of WWD. Subscribe Today.
The retailer’s low-price message is hitting home with strapped consumers and so is its exclusive deal with the L.E.I. brand, analysts said.
The company said Thursday second-quarter earnings shot up 16.8 percent and that apparel comparable-store sales at its flagship division topped sales at other large retailers and many specialty stores last month.
That Wal-Mart is firing on all cylinders right now spells nothing but trouble for much of the rest of retailing, which seems to be stuck waiting for the back-to-school bus to come.
Wal-Mart’s second-quarter net income jumped to $3.45 billion, or 87 cents a share, from $2.95 billion, or 72 cents a year ago. Profits outstripped Wall Street’s best guess of 84 cents by 3 cents, according to Yahoo Finance. Revenues for the three months ended July 31 rose 10.4 percent to $102.67 billion from $93 billion.
“They’re well positioned for the environment, but they are doing a lot on their own to help convert traffic once it’s in their stores,” said Joseph Feldman, managing director and senior research analyst at Telsey Advisory Group. “They’ve done a much better job with their merchandising. The apparel looks significantly better.”
The company was hyping its pricing message as much as possible, said Feldman, pointing to prime-time TV spots during the Beijing Olympics.
He noted the company is taking share from nearly everyone in retailing, from department stores to specialty players such as Abercrombie & Fitch Co. and American Eagle Outfitters Inc.
“The introduction of L.E.I. jeans in our juniors and girls’ department has exceeded expectations and this line is now exclusive to Wal-Mart,” said Eduardo Castro-Wright, executive vice president and head of the Wal-Mart Stores division, on a prerecorded call for investors Thursday. “Our strong pricing pressure and improved merchandise quality are driving increased traffic within apparel.”
Wal-Mart has also improved its presentation and signage for a cleaner store, said Craig Johnson, president of Customer Growth Partners. “The customer experience environment is markedly improved from a year or two ago,” he said.
Not so long ago Wal-Mart’s fashion business was struggling as assortments became too trendy and didn’t sell, but the discounter got back on track about a year ago, emphasizing its value proposition just in time to take advantage of the downturn.
“That value proposition has become more relevant to even a broader reach of American households than was the case a year ago,” said Johnson.
During the first half, Wal-Mart’s earnings increased 12 percent to $6.47 billion, or $1.63 a diluted share, on a 10.4 percent rise in revenues to $197.96 billion.
The firm also lifted its full-year profit guidance to $3.43 to $3.50 a share from continuing operations. In February, the company put the bar at $3.30 to $3.43 a share. Shares of the company moved up 0.4 percent to close Thursday’s trading at $58.10.
“Wal-Mart’s customer is reflective of society in general,” said H. Lee Scott Jr., president and chief executive officer, on the call. “While some of them live paycheck to paycheck, our customers represent a broad income segment, and they are all challenged today. When energy and oil prices go up on top of inflation in health care and core food items, there’s a great deal of pressure on the customer.”
Scott said the tough economy, which started in North America, spread to Europe and is now showing up in developing countries. The downturn is changing consumer behavior around the globe.
“People are eating more sandwiches in Puerto Rico and relying more on private label products in the U.K.,” he said. “Customers in many areas are buying cheaper cuts of meat for dinner. And similar to the United States, people in other countries are eliminating vacations and entertaining more at home.”
On Tuesday, investors will get a look at how Wal-Mart’s largest discount competitor, Target Corp., fared in the second quarter. The early indications are that Wal-Mart widened its competitive gap with the cheap-chic discounter, which has faltered somewhat on the fashion front just as Wal-Mart successfully has revamped its offerings.
Last week, Target said comparable-store sales for July fell 1.2 percent. Financial analysts expect Target’s earnings to fall to 76 cents a share, from 80 cents a year ago.