Byline: Evan Clark

NEW YORK — Strength in softlines pumped up Wal-Mart Stores Inc.’s fourth-quarter earnings and helped push them over the $2 billion mark for the first time.
Net income for the quarter ended Jan. 31 was $2 billion, or 45 cents a share, a 4.5 percent improvement over a year ago and one penny ahead of Wall Street’s expectations of 44 cents.
Analysts noted, though, that on an operating basis results for the quarter were flat.
“Apparel was very good for us last year,” a Wal-Mart spokesman told WWD. A strong sell-through of softlines helped the company maintain its profit margins as well as keep a steady hand on inventory, he said.
Net income during the year-ago quarter was $1.92 billion, or 43 cents a share.
Sales for the quarter jumped 10 percent to $56.56 billion from $51.39 billion a year ago. Same-store sales for the total company were up 3.1 percent for the quarter.
Investors liked, but weren’t blown away by, the results. They prodded shares of Wal-Mart up $1.04 to close at $53.40 on the New York Stock Exchange Tuesday.
Robert Buchanan, an analyst with A.G. Edwards, said the quarter was saved in some respects by accounting, “the recording of a much-larger-than-expected credit on the basis of last-in/first-out accounting.”
In a research note, he said that absent the differential between the $206 million pretax credit and the estimated $40 million pretax credit he estimated, the results for the quarter would have been flat.
Michael Exstein, an analyst with Credit Suisse First Boston, said the company had cautioned investors about the charge and pointed to the major positive of the quarter as “just how well the gross margins held.”
Inventories during the quarter did not back up so the margins weren’t sacrificed to excessive markdown activity.
“The bottom didn’t fall out from under these numbers” because of the gross margin, he said.
The Wal-Mart Stores division saw an operating profit of $2.77 million for the quarter, a 1.5 percent increase over a year ago. Sales for the division were up 11.8 percent to $35.48 billion compared to the fiscal 2000 fourth quarter. The division’s 3 percent comp increase was slightly lower than the overall company’s.
The Sam’s Club division posted operating profits of $294 million, an 8.5 percent improvement over a year ago. The division saw sales rise 6.1 percent to $7.48 billion compared to $7.05 billion a year ago. Same-store sales for the quarter at the discount club rose 3.3 percent, ahead of the company average.
Operating profits for the International division were up 8.9 percent to $490 million for the quarter. Sales for the division rose 2.2 percent to $10.01 billion against the fiscal 2000 fourth quarter.
Lee Scott, president and chief executive, acknowledged on a conference call that his first year in his new position was “more challenging than we would have expected 12 months ago.” During the second half consumer spending “slowed dramatically,” causing comp-store results to drop 200 to 300 basis points from the prior year.
“The current slower retail environment is largely a result of declining consumer confidence,” said Scott.
“Fortunately, we do not see any indication that spending will further slow from current levels,” he added. This bodes well for the retail sector and overall U.S. economy, which closely watches the nation’s largest retailer.
For the year, Wal-Mart’s net income was up 17.1 percent to $6.3 billion, $1.40 a diluted share, from $5.38 billion, or $1.20, a year ago. Results for fiscal 2000 include a $198 million, or 4 cent, charge due to the accounting change. Excluding the charge, earnings for the year were up 12.9 percent.
Sales for the 12-month period were up 15.9 percent to $191.33 billion. This compares to sales of $165.01 billion in fiscal 2000. The global retailing giant said that currency exchange against the strong U.S. dollar trimmed about $1.7 billion off of sales, accounting for almost 1 percent of consolidated sales for the year.
Scott called the economy a “difficult” one to read, but pointed to the drop in interest rates, the possibility of a tax cut and the easing of fuel expenses due to warming weather and decreased gasoline prices to boost consumer spending in the coming quarters.
Though the recent economic climate was described by Scott as “tough,” the ceo said “it was a good year, but not quite up to our high Wal-Mart standards,” which he defined as increasing earnings at a higher rate than sales.
“We are capable of better than this year’s results would indicate,” he said.
Bright spots for the year were the company’s food operations in the domestic market, its international initiatives, driven by strong performances in Canada, the United Kingdom and Mexico, and the acquisition of the British supermarket chain Asda. Overall food sales account for about one-third of the company’s revenues.
Germany continued to be a trouble spot for Wal-Mart and Scott said it would be several quarters until the company is back on plan in the region.
Buchanan also noted, “The substantial fourth-quarter LIFO credit boosted underlying disappointing results that reflected a slowing economy, yes, but also… some slippage in terms of day-to-day execution at store level in some parts of the country,” said the analyst.
Buchanan’s field research in the St. Louis and Washington-Baltimore markets as well as other areas in the Midwest and mid-Atlantic region showed Wal-Mart to be “‘off its game’ in such important matters such as speed of checkout; friendliness of associates; housekeeping; and even in some units and in some good classes, in-stock positions.”
While he did view the company’s near-term outlook as “less-than-rosy,” he said, “Inventory control for the company as a whole was good, as an 8 percent rise in total stocks at quarter’s end compared with a 10 percent rise in total sales.”
He also said the company “in an anecdotal sense” seems to have made good progress with its cleaned-up, easy-to-maneuver e-tail site. Wal-mart.com, once a sticking point for the company and plagued by relaunches, is now “showing signs of becoming better integrated with the bricks-and-mortar operation,” according to Buchanan.
Shelly Hale, an analyst with Banc of America Montgomery, was also surprised by the magnitude of the LIFO credit and said that she expects to see “flat to down” earnings for the company in the near future.
“The move into the supercenters was clearly the right move for Wal-Mart,” she said, pointing to the 9 percent comp in food products which helped drive traffic during the quarter. “Consumers are hesitant to be making more discretionary purchases right now.”
Deborah Weinswig, an analyst with Bear Stearns, saw another side and described the results as, “surprising in a positive way.” While the pluses for the quarter and year came more from the food and international portions of the company’s business, its domestic apparel business was still healthy, she said.
“In the past, it was fashion fall-apart and now its very fashion forward,” noted the analyst, who also focused on both brand and price points as strengths.
By comparison, she said a pair of jeans from the Faded Glory or Wrangler brands was comparable with higher-priced jeans from the Gap. On Wal-Mart’s Web site a part of Wrangler carpenter jeans sells for $19.83, while a pair of carpenter jeans on Gap’s e-commerce site sells for $39.50.
“The fact that they’ve been able to keep their price point so well and still offer a trendy mix is pretty impressive,” she said. Wal-Mart has also built a solid stable of recognizable brands which appear to be working well with the American consumers across-the-board.
With 90 million people, or approximately one-third of the U.S. population, walking into a Wal-Mart every week, Weinswig noted, “you see everyone from A to Z.” The large and widespread customer base is one reason analysts and economic observers look to the retail giant as an indicator of the economic condition.
Weinswig said the company was “a huge economic indicator.”
For the upcoming first quarter, First Call/Thompson financial is looking for earnings of 32 cents a share.
Thomas Schoewe, executive vice president and chief financial officer, said on the call, “Our results in the upcoming quarter will be in line with the current First Call estimate. However, there’s little room for an upside.”
He said the current economic environment will allow the company to “leverage our strength and provide our customer with what they’re asking for and that’s a great deal.”
Wal-Mart is looking for first-quarter comparable-store sales of 3 percent to 5 percent for the overall company. Schoewe said, if those expectations come to fruition, earnings during the first half will grow in the single-digit range due to difficult comparisons against a year ago. The second half, though, should return the firm to double-digit earnings gains.

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