WHAT, WAL-MART WORRY? PROFIT UP 19%

Byline: Thomas J. Ryan

NEW YORK — No worries about a slowdown in consumer spending are bothering Wal-Mart Stores Inc.
Wal-Mart on Tuesday banged out a 19 percent profit gain before year-ago special charges in the first quarter, beating Wall Street forecasts, and told analysts it expects second-quarter earnings to reach the high end of expectations.
And chairman David Glass told analysts on a conference call that Wal-Mart would thrive even if a consumer slowdown materialized.
“We’ve had a good start to the year, exceeding our own aggressive plan and against a tough comparison the prior year. And although many of you may be correct in predicting a slowdown in consumer spending, I’m confident that that will give us a chance to gain market share and continue to meet investor expectations,” Glass said.
Wal-Mart’s earnings before a year-ago accounting charge rose to $1.33 billion, or 30 cents a share, from $1.11 billion, or 25 cents. Results exceeded Wall Street estimates of 29 cents a share. Estimates were around 27 cents at the quarter’s start.
After the $198 million charge related to the treatment of layaway sales, net earnings in the 1999 first quarter were $916 million, or 21 cents.
Sales jumped 23.8 percent to $43 billion from $34.7 billion. Same-store sales rose 9.1 percent, up 9.6 percent at Wal-Mart and 7 percent at Sam’s Club.
Wal-Mart’s performance should stand out in the first quarter since many retailers, including Kmart, Ames and Gap, have warned that a poor spring would lead to lower than expected results. On Monday, May Department Stores said first-quarter earnings slid 1.6 percent and analysts have trimmed estimates on J.C. Penney, Saks and Dillard’s because of anemic sales. Many chains have blamed inclement weather, particularly in the Northeast, and the late Easter.
Wal-Mart had said apparel was among its weaker categories in April, but analysts said Wal-Mart generally seems to have done a better job in soft goods this spring than other chains simply by its ability to constantly build store traffic.
“The company has delivered sales and earnings growth with remarkable consistency over the last few years,” said Bernard Sosnick, at Fahnestock & Co.
Glass said consumer spending “remained strong” and average transaction size increased to help lift gross margins to 21.7 percent from 21.5 percent. This improvement came despite Wal-Mart’s “Price Rollback” program that cut prices on $2 billion worth of goods, or about 7 percent of discount and superstore total revenues, during the quarter. Higher labor costs offset better sales leverage to cause selling, general and administrative expenses to rise slightly, to 17.02 percent of sales from 16.96 percent.
“Earnings were strong across the board,” said Rosemary Sisson, at UBS Warburg. “Wal-Mart continues to perform well in just about any economic environment.”
Results at its three main operating segments were as follows:
At Wal-Mart Stores, which includes supercenters, operating earnings rose 20.2 percent to $2.16 billion from $1.8 billion. Sales advanced 15.1 percent to $27.5 billion. Gross margins grew 20 basis points due to a favorable mix of higher-margin goods such as apparel, higher growth in transaction size, and reduced shrinkage and markdowns. Food sales increased 36 percent due to its supercenter expansion, and same-store sales were running above average. Gross margins at its Supercenters continued to move closer to discount stores due to better food margins.
Sam’s Club’s operating earnings increased 10.5 percent to $189 million from $171 million, and margins and expense rate improved. Sales gained 8.9 percent to $6.1 billion, with strength in office equipment, household appliances, food and apparel. Club membership reached 39 million.
International operating income surged 140.3 percent to $149 million from $62 million. Sales surged 118.7 percent to $7.2 billion from $3.3 billion, primarily due to the acquisition of United Kingdom retailer Asda Group. Excluding Asda, sales were up 17.3 percent. Excluding the acquisitions last year of both Asda and Spar Handels, based in Germany, earnings rose 20 percent. Canada, Mexico and the United Kingdom drove results, offsetting weakness in Germany.
Inventories at quarter’s end were up 1.6 percent at Wal-Mart and flat at Sam’s Club.
Glass said retail inflation “is minimal, with prices still fairly stable,” though transportation expense “continues to be very high” and wages have increased. While some resources such as paper and rosin increased, “most suppliers are holding the line.”
But Glass told analysts that even if inflation rose about 3 percent, as predicted, Wal-Mart should do well since inflation provides better expense leverage. “Most of you have heard me say in the past that it’s much easier to run a retail company in a inflationary environment than in periods of disinflation, although that’s not the best thing for the country. And we’ve been fortunate to have an absence of inflation as long as we have had.”
Glass said Wal-Mart doesn’t see signs of the predicted slowdown in U.S. consumer spending, but he also pointed out that Wal-Mart historically gains market share in downturns. He noted that Wal-Mart’s “heritage” was the commodity-driven business, and food is currently its fastest-growing category with the supercenter expansion.
“We position our assortments in a way that we limit our upside potential in boom times, but eliminate downside exposure to the extent that we possibly can,” Glass said. “We are very basically assorted, selling everyday merchandise, and typically do not merchandise the higher-end goods that sell best in a boom economy.”
Wal-Mart continues to integrate its U.K and German operations. Glass said Asda, acquired last year, exceeded plan in the quarter and the everyday-low-pricing program at the end of the first quarter was extended to 4,000 items under Asda’s George apparel brand. Wal-Mart said it continued to add its own systems to speed checkout, improve management information, reduce inventories and increase in-stock positions. Glass said 54 percent of former Asda employees had participated in Wal-Mart’s employee stock ownership plan.
Wal-Mart shares closed at 53 on the New York Stock Exchange Tuesday, up 5/8.