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Wal-Mart Posts 9.2% Net Gain

<CS:BOLD>NEW YORK -- Wal-Mart Stores' sporty British import, George, is completing its conquest of the U.S. by rolling out to another 1,000 Wal-Mart women's departments this month. <BR><BR>The apparel line, which has been shining in the U.K., made its...

NEW YORK — Wal-Mart Stores’ sporty British import, George, is completing its conquest of the U.S. by rolling out to another 1,000 Wal-Mart women’s departments this month.

The apparel line, which has been shining in the U.K., made its women’s wear debut in 1,600 U.S. doors last fall. Men’s apparel and shoes under the label will be tested in 500 to 700 domestic locations.

The company also reported solid fourth-quarter results with deficiencies that many other retailers would envy.

A few percentage points short of its stated goal to increase earnings at the same double-digit clip as sales, Wal-Mart eked-out a 9.2 percent bottom-line gain, weighing in finally with profits of $2.19 billion, or 49 cent a share, in the fourth quarter. This was in line with estimates and compared to earnings of $2 billion, or 45 cents, a year ago.

These earnings were carved out of a 13.5 percent sales gain to $64.21 billion for the period ended Jan. 31. Year-ago fourth-quarter sales totaled $56.56 billion.

“Although we did not attain our goal of increasing earnings at the same rate as sales,” explained president and chief executive Lee Scott in a statement, the growth in earnings per share “represents more than triple the growth rate experienced in the first six months of the year.”

He allowed that it had been, “a good ending to a difficult year.”

Wall Street was lukewarm on the results and pushed shares of the firm down 74 cents, or 1.2 percent, to close at $59.29 on the New York Stock Exchange Tuesday.

This was in line with the Dow Jones Industrial Average’s decline of 157.90, or 1.6 percent, to close at 9745.14 and the S&P Retail Index drop of 12.58, or 1.3 percent, to 928.38.

On a recorded call, Jay Fitzsimmons, senior vice president of finance and treasurer, said of the U.K., “The performance of Asda’s George clothing line has been especially strong with comparable-store sales in the mid-teens for the year, reflecting the Essentially George opening price point product which now accounts for 30 percent of the line.” George is now the third-largest clothing brand in the U.K., said the treasurer.

William Blair & Co. equity analyst Mark Miller, noted, “George is doing fantastically over in the U.K.”

A Wal-Mart spokeswoman said of the fourth quarter, “George’s ladies continued very well. Customers seemed to be very responsive to it. They like the name, quality, value and pricing of the product.”

Thomas Schoewe, chief financial officer and executive vice president, noted on the call that, while overall gross margins were slightly up for the quarter, they slid for the year on factors that will persist for the foreseeable future. Gross margins for the quarter were up 17 basis points. The measure fell 24 basis points for the full year.

A shift by domestic consumers to more opening price points and basic items carrying lower margins will continue, he said. “Although we recently have seen an increase in sales, there is no clear evidence that this opening price point phenomenon has abated.”

Profit margins will also continue to be pressured by the growing importance of food, and its lower margins, to overall revenues.

Total inventories were up 5 percent for the year, which Schoewe described as “a tremendous performance considering our objective is that inventories increase half as fast as sales.

The cfo added that while emphasis was placed recently on discounting, given the more competitive environment, that trend was expected to decrease going forward.

J.P. Morgan equity analyst Shari Schwartzman Eberts said, “Wal-Mart is clearly benefiting from stealing share, two-thirds [of its comp increase] is from increased traffic and the rest is from ticket price.

“With Kmart’s well-publicized bankruptcy, people probably feel a little more confident shopping at Wal-Mart,” she said. Kmart’s Chapter 11 filing also heightened awareness of the discounter’s difficulties competing with Wal-Mart on price and amounted to “lots of free p.r. and advertising,” noted the analyst.

The Wal-Mart stores division for the quarter posted a 12.8 percent increase in operating profits to $3.12 billion. This increase was culled from sales of $40.91 billion, a 15.3 percent increase. Comp-store sales were up 7.2 percent.

The international business grew faster on a smaller base, with operating profits jumping 19.2 percent to $584 million. Sales were up 7.4 percent to $10.81 billion.

For the year, earnings were up 6 percent to $6.67 billion, or $1.49 a diluted share, from $6.3 billion, or $1.40, a year ago. Sales for the 12 months totaled $217.8 billion, a 13.8 percent improvement over year-ago turnover of $191.33 billion.

Schoewe noted, “Fiscal ’03 began a lot better than last year.” While Valentine’s Day sales were strong, he noted, “The evidence wasn’t strong enough for us to believe that our economy has turned the corner. On the other hand, we do not see any signs that consumer spending is actually declining.”

Despite these factors, and assuming the economy remains relatively flat, he upped the firm’s profit expectations for 2003 to $1.74 to $1.76 a share, 3 to 5 cents above previous expectations. He projected first-quarter eps of 35 to 36 cents on a 5 to 7 percent same-store sales increase.

William Blair & Co.’s Miller was bullish on Wal-Mart, noting the discounter “has a lot of room to grow outside of the U.S.” Germany, which has been a trouble spot, he said, was “much improved” and demonstrated that “when top management focuses on a problem, the problem gets fixed.”

Improved working capital trends, partially demonstrated by Wal-Mart’s low inventory position, were also a positive sign, he said.

Things are also looking better on the home front. “The U.S. division is at an inflection point for faster profit growth,” said Miller. “U.S. margins were under pressure throughout most of 2001, and we’ve now come full cycle.”