WWD.com/business-news/financial/wal-mart-apparel-disappoints-2496249/
government-trade
government-trade

Wal-Mart Apparel Disappoints

Wal-Mart's fourth-quarter earnings rise 22.2%, but comps, clothing weak.

Wal-Mart Stores Inc. remains very much the king of the retail hill, but the discount giant’s continuing struggles with apparel last year have convinced analysts the company has yet to figure out exactly who it’s trying to dress.

The questions are also being asked in the Bentonville, Ark., headquarters of the world’s largest retailer. “We’re disappointed with our apparel performance for the quarter and for the year, and a full review of our apparel merchandising strategy has been under way now for a few months,” Eduardo Castro-Wright, vice chairman and head of Wal-Mart’s namesake U.S. unit, said on the company’s quarterly earnings call. “We have refocused efforts on the basics business, which continues to perform well, and we are pleased with our apparel inventory throughout the chain.”

The challenges with apparel didn’t prevent the firm from expanding its fourth-quarter profits by 22.2 percent, even with the U.S. business showing some signs of strain.

Sinking prices and tough comparisons pushed down comparable-store sales at Wal-Mart’s U.S. discount division 2 percent for the 13 weeks ended Jan. 29. Wal-Mart expects comps to range from down 1 percent to up 1 percent for the 13 weeks ended April 30.

The company is in the midst of a series of organizational and cultural changes. Last month, Wal-Mart said it would rejigger its U.S. organization and inked a deal to consolidate an initial $2 billion of its $300 billion product budget under Hong Kong sourcing giant Li & Fung.

Castro-Wright said the deal with Li & Fung and its other production initiatives would drive down costs. “Global sourcing will be the anchor for [a] cost-of-goods-sold reduction and margin enhancement while giving us a competitive advantage to further reduce prices,” he said.

And it was a tight rein on expenses that boosted fourth-quarter profits.

Quarterly earnings attributable to the company increased to $4.63 billion, or $1.21 a diluted share, from $3.79 billion, or 96 cents, a year ago. Adjusted profits of $1.17 a share topped Wall Street estimates by 5 cents. Revenues for the quarter ended Jan. 31 advanced 4.5 percent to $113.65 billion from $108.75 billion. For the year, profits increased 7 percent to $14.34 billion, or $3.70 a diluted share, on a 0.9 percent rise in revenues to $408.21 billion.

The retailer projected first-quarter earnings would rise to between 81 cents and 85 cents a share, opening up room for them to fall short of Wall Street’s current estimate of 85 cents. Investors Thursday pushed down the stock 1.1 percent to $53.47 following the disclosure of earnings results.

Like other retailers, Wal-Mart finds itself in a struggle with consumers who simply do not want to spend. A new Gallup poll found consumers said they pulled back again after splurging a bit for the holidays.

Americans in upper-income households making more than $90,000 a year said they spent an average of $113 a day in stores, restaurants, gas stations and online in January, down from $132 in December, but just ahead of the $110 spent a year earlier. Middle- and lower-income Americans said they spent $54 a day in January, down from $62 in December and $58 a year earlier.

“There are still people who have money, but they’ve pulled back,” said Gallup’s chief economist, Dennis Jacobe. “It was kind of discouraging.”

It’s not clear how Wal-Mart’s results and outlook will fare when compared with other retailers.

Investors will get a better feel for final 2009 results and the outlook on 2010 when J.C. Penney Co. Inc. gives its quarterly update today. Fourth-quarter retail earnings season then will be in full swing next week.

Softness in apparel may not be at all restricted to Wal-Mart, noted Charlie O’Shea, debt analyst at Moody’s Investors Service. “We’ve got a lot of people reporting next week,” he said. “I think you’re going to see top-line apparel sales [are] soft. The things that we have really been focused on here have been margin preservation and inventory discipline.”

Wal-Mart has tried to up its fashion savvy by moving more of its apparel operations to Manhattan, but analysts said the company has yet to find its groove.

“I think they’re still trying to figure out — did they do the right thing moving everything to New York?” said Deborah Weinswig, equity analyst at Citi. “They just need to figure out who their target customer is. One season it’s basics, one season it’s fashion.”

Bill Lewis, executive vice president at Karabus Management, said the retailer is still trying to define itself as pressure builds from fast-fashion firms such as Zara and H&M.

“It’s one thing to be able to differentiate on price…but the fashion relevancy is not really there yet relative to their competitors,” Lewis said. “They haven’t found their anchor. Wal-Mart needs to think about three or four key demographics in each of their main businesses, whether it be men’s or women’s, and define that customer head to toe. There’s no doubt that they will continue to be a major player in apparel and will improve execution. The question is just, how quickly?”