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The Honolulu Advertiser
Posted on: Wednesday, May 19, 2010

Wal-Mart's outlook muted despite positive earnings

Associated Press

Hawaii news photo - The Honolulu Advertiser

Wal-Mart announced another round of price cuts on groceries yesterday in an attempt to retain customers like Mary Oksten of Paulsboro, N.J.

AP file photo

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NEW YORK The recovering U.S. economy may be a mixed blessing for Wal-Mart.

Wealthier customers who turned to the world's largest retailer during the Great Recession appear to be trading back up, and stubbornly high unemployment and gas prices are still squeezing its main customers, who are having more trouble stretching their dollars to the next payday.

The squeeze hasn't hurt its profits. Wal-Mart Stores Inc. reported a 10 percent increase in first-quarter net income yesterday, but that was driven by cost-cutting and growth overseas.

Wal-Mart also offered a muted outlook for the second quarter. Still, its shares rose more than 2 percent, or $1.29, to $53.99 after its results beat Wall Street expectations.

U.S. Walmart stores are seeing fewer customers. To win them back, Wal-Mart announced another round of price cuts on groceries yesterday and said it's scrambling to restock some products it eliminated over the past year as part of its campaign to declutter stores.

A key measure of revenue dropped for the fourth consecutive quarter as Wal-Mart's namesake stores saw people shopping less or defecting to rivals such as Target or dollar stores, which have heightened their discounting pitch.

Wal-Mart's 1.1 percent drop in revenue at stores open at least a year is in stark contrast to results from other retailers in recent days, including Home Depot, Lowe's Corp. and T.J. Maxx's parent, which reported rising sales as shoppers spend more on goods from riding mowers to shoes. The figure, which excludes revenue from fuel, was also worse than the 0.6 percent decline Wall Street expected.

"The economy is coming back, but (Wal-Mart is) not capturing their share," said Craig Johnson, president of retail consultancy Customer Growth Partners.

Wal-Mart chief financial officer Tom Schoewe acknowledged it's possible it lost some wealthier customers. That leaves the retailer more exposed to the most vulnerable consumer group.

Analysts reason that as shoppers with jobs and money feel more confident, some are going back to the malls for a better shopping experience even though Wal-Mart has improved customer service and cleaned up stores.

Chief rival Target Corp., whose business has perked up as it expanded its food offerings and increasingly marketed its low prices, is expected to announce first-quarter results today. It posted a 2.8 percent increase in revenue at stores open at least a year for the most recent quarter.

Wal-Mart posted net income of $3.32 billion, or 88 cents per share, for the period ended April 30. Revenue rose almost 6 percent to $99.85 billion, from $94.24 billion.

Wal-Mart, which generates more than $400 billion in sales annually, is considered a key barometer of consumer spending. The retailer's latest figures show that its shoppers are actually showing even more financial strain, with sales across many discretionary categories including clothing, home furnishing and entertainment disappointing. Wal-Mart officials said high unemployment and rising gas prices were the biggest factors depressing sales and traffic.

"It's bad enough that Wal-Mart guided lower, but what it had to say about spending trends had the frugality label all over it," David Rosenberg, economist at investment firm Gluskin Sheff, wrote in a research note.

The number of customers on food stamps increased significantly during the first quarter. And Wal-Mart saw more pronounced swings in spending days around payday than it had ever seen before a marked and more prolonged drop in spending in the days before paychecks arrive before splurging around payday, Schoewe noted.

Eduardo Castro-Wright, vice chairman of Wal-Mart who oversees its U.S. namesake business, cited a 2 percentage point difference in revenue at stores open at least a year in areas with the lowest and highest unemployment rates.

Company officials also acknowledged Wal-Mart's own stumbles not keeping up with rivals' price-cutting and reducing the number of products in its stores too deeply.

"Wal-Mart's customers are finding new stores to shop," said analyst Brian Sozzi with Wall Street Strategies, noting expanding merchandise offerings at dollar stores.

Schoewe said it's too early to tell whether price cuts, which began in April, have attracted customers.

With lackluster sales in the U.S., Wal-Mart is increasingly focusing on its international business, which posted a 21.4 percent revenue increase for the quarter, fueled by strong business in China, Brazil and Mexico.