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Wal-Mart’s Numbers Boosted by Apparel, But Dallas Says ‘No’

NEW YORK — It was a good news-bad news day for Wal-Mart Stores Inc. on Wednesday: It won the numbers game, but was soundly defeated in its attempt to build a smaller-format store in Dallas. <br><br>After a day of tense debate in front of a packed...

NEW YORK — It was a good news-bad news day for Wal-Mart Stores Inc. on Wednesday: It won the numbers game, but was soundly defeated in its attempt to build a smaller-format store in Dallas.

After a day of tense debate in front of a packed hearing room, the 15-member Dallas City Council unanimously rejected the giant retailer’s third proposal for a new concept. The motion was denied with prejudice, meaning Wal-Mart cannot come back with another try at the same site for two years.

Dallas Mayor Laura Miller, however, is working with Wal-Mart to try to secure another parcel for its smaller format.

On the plus side for the world’s largest company, though, its growing apparel business helped it to double-digit gains in third-quarter sales and earnings.

On a recorded call before the news of the Dallas defeat, Lee Scott, president and chief executive of Wal-Mart, said he was “particularly excited” about the namesake division’s improved apparel offerings: “Our merchants have shown that we can deliver both price and quality.”

In addition to its British-born George line, which is still establishing itself in the U.S., Wal-Mart will be introducing Levi Strauss Signature jeans into its stores next year, as reported.

Profits swelled 22.9 percent to $1.82 billion, or 41 cents a share, during the period ended Oct. 31. This compared with year-ago income of $1.48 billion, or 33 cents. The discounter beat Wall Street’s estimates of 40 cents by a penny.

Sales during the three months climbed 11.5 percent to $58.8 billion from $52.74 billion a year ago. Comparable-store sales advanced 3.5 percent.

“After a strong start to the year, comparable-store sales slowed,” Scott said, “consumer confidence dropped to a nine-year low, gasoline prices rose and, of course, our customer worried about terrorism and a possible war with Iraq.” He stressed that the firm thrived during the quarter without raising prices.

UBS Warburg analyst Linda Kristiansen, in a research note, said the firm’s “improved business mix including gains in apparel, lower shrinkage and markdowns were key factors driving gross margin.” Gross margins rose 43 basis points during the quarter.

The Wal-Mart division drove operating profits up 15.5 percent to $2.68 billion from $2.32 billion a year ago. Sales for the unit, which includes 1,567 discount stores and 1,243 Supercenters, pushed ahead 11.8 percent to $37.57 billion from $33.6 billion during last year’s third quarter. Comps perked up 4.2 percent, while comp inventories grew by 1 percent.

Sam’s Club didn’t fare as well with operating profits of $240 million marking a 2.4 percent drop from year-ago income of $246 million. Sales rose 6.1 percent, to $7.74 billion, on a 0.4 percent comp increase.

WR Hambrecht & Co.’s Bill Dreher said the firm was “one of the few leaders in retailing able to muddle through an incredibly challenging period. It was a good performance.”

As for the Wal-Mart division’s apparel strategy, he noted: “They’re always going to focus on offering national brands.” The business is unlikely to have as high a private label saturation as Target, its nearest competitor, which, according to Dreher, has 75 to 80 percent of its apparel offering in private label.

During the nine months, the firm’s bottom line amassed a 22.9 percent uptick to $5.51 billion, or $1.24 a share, from $4.48 billion, or $1, a year ago. Sales inflated 12.9 percent to $173.45 billion from $153.59 billion a year ago. Comps were up 6.1 percent.

Wal-Mart is anticipating earnings of 53 to 55 cents a share in the fourth quarter on a comp sales increase of 3 to 5 percent. Analysts had been expecting 55 cents. The firm also noted that legislation expected to come to a vote next year in Germany, if passed, could eliminate its tax benefits from prior operating losses. If approved, the bill would effect a non-cash impact on earnings.

FEDERATED

Cost controls, lower inventories and gains from discontinued operations allowed Federated Department Stores Inc.’s profits to skyrocket in the third quarter even as sales remained essentially flat.

For the three months ended Nov. 2, the Cincinnati-based department store giant posted a 3,433.3 percent increase in net income to $106 million, or 54 cents a diluted share. That compares to last year’s quarter when the company earned $3 million, or 2 cents. Excluding a $31 million gain from the sale of certain assets in this year’s third quarter, as well as restructuring charges from the closing of Stern’s stores and the conversion of Liberty House Stores to Macy’s in the prior-year period, income from continuing operations before extraordinary items nearly tripled to $75 million, or 38 cents, from $26 million, or 20 cents. Earnings per share beat Wall Street forecasts by a penny.

Sales were “disappointing,” ticking up just 0.1 percent to $3.479 billion from $3.475 billion a year ago. Third-quarter comparable-store sales also failed to advance, falling 2 percent.

In a statement, chief executive officer James Zimmerman said the quarter’s earings performance benefited from lower markdowns resulting from lower inventories, as well as reducing expenses to maximize cash flow.

On a conference call with analysts, chief financial officer Karen Hoguet said: “Even though sales are disappointing, we believe we are managing very well in this difficult retail environment. As you will recall, our sales trend weakened dramatically in July and it stayed weak. The onset of cold weather in October did help somewhat, but geographically, sales were disappointing in all areas.”

However, Hoguet held out hope for the year’s final act: “As we head into the fourth quarter, we are somewhat optimistic that we will improve, versus the year-to-date numbers.”

The persistent erosion of the department store channel continues to give some analysts pause. In a research note, Robert Buchanan of A.G. Edwards & Sons Inc. wrote: “With same-store sales having declined now for seven quarters in a row — this, as Federated has joined every other conventional department store operator in the land and lost market share — we see no compelling reason to ‘step up’ and buy this name. Our view is that Federated’s relatively high-cost structure precludes it from being able to provide comprehensive and everyday strong values on the selling floor, in a related manner requiring this retailer to be selectively promotional.”

Overall, for the first nine months of the year, Federated produced a 178.9 percent improvement in net earnings to $477 million, or $2.39 a diluted share, versus last year when the company recorded profits of $171 million, or 88 cents. Excluding nonrecurring items, earnings improved a more modest 42.8 percent to $297 million, or $1.48, from $208 million, or $1.13. Sales for the period declined 1 percent to $10.42 billion from $10.52 billion a year ago, as comp-store sales were off 2.6 percent.