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Wal-Mart Net Passes $2B; Penney’s and TJX Improve

NEW YORK — Consumers might be spooked and the economy still a puzzle, but Wal-Mart Stores isn’t flinching.<br><br>Second-quarter profits at the world’s largest company shot up 25.6 percent to $2.04 billion, or 46 cents a share. Wall...

NEW YORK — Consumers might be spooked and the economy still a puzzle, but Wal-Mart Stores isn’t flinching.

Second-quarter profits at the world’s largest company shot up 25.6 percent to $2.04 billion, or 46 cents a share. Wall Street had the firm pegged for earnings of 45 cents.

Investors approved and drove up shares of Wal-Mart 30 cents, or 0.6 percent, to close at $48.71 on the New York Stock Exchange Tuesday.

J.C. Penney Co. and TJX Cos. also reported second-quarter results ahead of expectations, with the former realizing narrower losses and the latter double-digit profit increases. Penney’s shares slid 60 cents, or 3.6 percent, to end the day at $16.15 while shares of TJX advanced 75 cents, or 4.2 percent, to close at $18.75. Both issues trade on the NYSE.

Wal-Mart’s second-quarter performance marked the first time it netted $2 billion in income in a non-holiday quarter and compared with year-ago earnings of $1.62 billion, or 36 cents.

Year-ago results included a 1 cent per share charge to bring Walmart.com in-house as well as the amortization of goodwill. After adjusting for these items, earnings growth still exceeded 19 percent.

Revenues for the period ended July 31 advanced 13.1 percent to $60.26 billion from $53.27 billion a year ago. Comparable-store sales were up 6.4 percent.

“While pleased with our results, we are not satisfied,” said Lee Scott, president and chief executive, on a recorded conference call. “This quarter again, we did not leverage expenses. Controllable expenses showed improvement, but higher insurance, benefits and legal costs resulted in a consolidated increase of 16 basis points.”

Leading in both girth and profitability was Wal-Mart’s flagship division with a 17.2 percent jump in operating profits to $3.05 billion. Part of this strength came from good sell-throughs and lower inventory shrinkage. The division’s sales surged 14.1 percent to $38.64 billion. Comparable-store sales strengthened 7.1 percent, while inventories at stores open at least a year dropped 1.3 percent.

Next in line, with what chief financial officer and executive vice president Thomas Schoewe described as an “outstanding performance,” was the international division, which saw operating profits skyrocket 61.9 percent to $510 million. Excluding the impact of amortizing goodwill a year ago, operating profits were still up 38 percent. Sales of $9.69 billion marked a 15.9 percent improvement.

Scott said the division’s runaway quarter showed that Wal-Mart’s everyday low price philosophy was “a pricing strategy that can be successful worldwide.”

Operating profits exceeded plan in Mexico, Canada and the U.K. while Germany’s operating loss was within plan and improved against a year ago.

In the U.K., Asda’s performance was solid with sales of the George apparel line up almost 30 percent. Fast fashion, a program that turns around George’s apparel fashions in about 5 weeks, has become “very popular,” said Wal-Mart and accounts for about 8 percent of total apparel sales in Asda. George is also being tested in about 70 German stores and is doing “quite well.”

Equity analyst Bill Dreher with WR Hambrecht noted overall sales were “good” and the international division “did a superb job.” Back-to-school apparel sales have gotten off to a slow start, though, “They’re doing well with the mission-critical supplies,” such as note books and backpacks, he said.

“Back-to-school has become less significant to consumers, particularly with the advent of everyday low-price stores like Wal-Mart,” observed Dreher. The season is pushed back further and further, he said, and may not take hold until September when kids are already hard at work.

For the half, the Bentonville, Ark.-based firm’s profits escalated 23 percent to $3.69 billion, or 83 cents a share, from $3 billion, or 67 cents, a year ago. Sales during the six months ascended 13.6 percent to $115.67 billion from $101.83 billion a year ago.

For the third quarter, Wal-Mart’s expecting EPS of 40 to 41 cents a share, 1 cent ahead of the range analysts are currently projecting. EPS estimates for the full year, however, remain unchanged at $1.76 to $1.78. The firm lowered its comp-sales projections for the 12 months to 4 to 6 percent. Initially, the retailer was looking for a 3 to 5 percent uptick, but later raised it to 5 to 7 percent.

With August’s timid start, Dreher said the third quarter will come down to the firm’s success in full-price selling during September “before they get to clearance in October.”

In comparison with the rest of retail, Wal-Mart has superior systems, management, visibility and the leading business model, said Dreher, and they’re still adjusting their estimates.

“If this is what we’re seeing from Wal-Mart,” he said, “we’re expecting other companies to be less positive.”

J.C. PENNEY

Though it posted a loss, J.C. Penney, in the middle of a turnaround effort in its department stores, fared decently in the second quarter.

The company’s losses narrowed to $6 million, or 5 cents a diluted share, against the year-ago deficit of $69 million, or 23 cents. Results include a $2 million restructuring credit in the most recent quarter, and a $12 million charge a year ago.

Before the effects of the charges, operating losses of 5 cents a share compared with year-ago losses of 20 cents. Wall Street was expecting the Plano, Tex.-based firm to post losses of 10 cents, 5 cents more than those realized. Not figuring into analysts’ estimates was a 5 cent per share increase from the elimination of goodwill amortization.

Sales for the period ended July 27 dipped 0.2 percent to $7.20 billion from $7.21 billion a year ago.

Allen Questrom, chairman and chief executive, in a statement, noted each business contributed to the operating improvements.

“In department stores and catalog, operating profits improved from a combination of higher gross margins and expense management initiatives,” he said. “Despite weaker than expected department store sales, gross margin is benefiting from a better buying process under the new centralized merchandising model.”

Operating profits at the department stores, on a last-in, first-out (LIFO) basis, doubled to $22 million during the quarter. Department store sales slid 6 percent to $3.62 billion on a 2.4 percent comparable-store decline. The sales declines were attributed to lower-than-planned inventories throughout the quarter, resulting from stronger-than-expected first-quarter sales. Comp-store inventories were down 5 to 10 percent for most of the quarter and more so in the best-selling categories. Stocks, though, are now back on track, particularly in back-to-school categories.

While home and fine jewelry were the strongest performing merchandise categories, strength in apparel was seen in men’s sportswear and tailored, misses career sportswear and boys’ apparel.

Penney’s catalog business continued to swoon with a 21.4 percent drop in sales. The drop was not unexpected, though, and Vanessa Castagna, executive vice president, chairman and ceo of J.C. Penney stores, catalog and Internet, on a conference call said the business’ top line would turn positive by mid-2003.

Moody’s Investors Service debt analyst Elaine Francolino said Penney’s made “important progress” during the quarter. “This is a multiyear turnaround situation, but the company seems to be on target and still has a good cash position.”

A.G. Edwards & Sons analyst Robert Buchanan added, while Eckerd is strong, “The question mark is really on the department store side. It’s not a matter of if Allen [Questrom] and Vanessa [Castagna] can turn it around. It’s a question of when. It’s just such a Herculean task to move from a highly decentralized organization to a centralized organization.”

During the first half, net income of $80 million, or 24 cents a diluted share, compared with year-ago losses of $28 million, or 10 cents. Sales for the six months inched up 1.3 percent to $14.93 billion from $14.73 billion a year ago. The department stores, though, saw sales slide 3.6 percent to $7.63 billion.

The firm stood by its outlook for the second half. Operating earnings in the third quarter should come in at 15 to 20 cents a share while the full year is slated for EPS of 90 cents to $1. Penney’s expects pension expenses, which will deduct about 25 cents a share from operating earnings this year, to cost it between 20 cents and 30 cents a share in fiscal 2003.

TJX COMPANIES

Strength in juniors and home goods propelled The TJX Companies Inc. to robust second-quarter profit gains.

For the three months ended July 27, the Framingham, Mass.-based off-price giant reported net income swelled 15.8 percent to $129.6 million, or 24 cents a diluted share. That compares with last year’s earnings of $111.9 million, or 20 cents. Earnings per share beat Wall Street forecasts by a penny.

Sales for the quarter grew 11.2 percent to $2.77 billion from $2.49 billion last year as consolidated comparable-store sales gained 2 percent.

“They had a very clean quarter,” said Bear Stearns analyst Dana Telsey. “Margins came in a touch better than expected and inventory levels were good. They raised their third-quarter [EPS] guidance from $1.10 to $1.12 to $1.12 to $1.17 and I think their prospects are very bright.”

On a Tuesday morning conference call, chief executive officer Edmond English told analysts, “In the second quarter, our overall apparel sales were off a little bit, maybe by 2 points. That was led primarily by dresses, which was done intentionally. The decrease in sales was more than offset by margin improvements and we did that with our eyes wide open. Swimwear was off, men’s was off, but juniors had a 6 percent increase.”

At the Marmaxx Group, the combined entity of T.J. Maxx and Marshalls, second-quarter operating income increased 9.6 percent to $211.4 million from $192.9 million last year. Sales grew 6.4 percent to $2.21 billion from $2.07 billion a year ago as same-store sales notched up 1 percent.

Winners, the company’s Canadian operation, saw operating income soar 43 percent to $16.3 million on a sales increase of 18.1 percent to $185 million. European division T.K. Maxx reported operating income more than doubled, gaining 128.1 percent to $6.8 million on a sales increase of 40.1 percent to $157.5 million. Home Goods added $1.9 million in operating income to TJX’s bottom line after reporting a $4 million loss last year as sales jumped 41.2 percent to $156.8 million.

The company’s newest division, A.J. Wright, slightly compounded its loss to $3.1 million from $3 million last year on a 75.8 percent spike in sales to $59.7 million from $34 million a year ago.

Overall, for the first half of the fiscal year, TJX reported net income rallied 17.5 percent to $276.7 million, or 51 cents a diluted share. That compares with last year when the company posted earnings of $235.6 million, or 42 cents. Sales for the period ascended 14.1 percent to $5.43 billion from $4.76 billion a year ago as comps gained 4 percent.