good report for wmt this first quarter.
Wal-Mart profit pops; energy an issue
Retailer vows more progress in tightening inventory
E-mail | Print | | Disable live quotes By Jennifer Waters, MarketWatch
Last Update: 1:02 PM ET May 16, 2006
CHICAGO (MarketWatch) -- Wal-Mart Stores Inc. said Tuesday that its hard-line approach to keeping inventory in check and its new-fashioned merchandise helped it post better than expected first-quarter profit.
But the world's largest retailer said that rising costs for gasoline, utilities and interest rates are a potential drag on second-quarter income.
Analysts were unfazed by the warning, noting that Wal-Mart's efforts to improve its products and shopping experience are showing progress.
"Wal-Mart posted a strong first quarter despite facing pressure from cost challenges and an uncertain consumer outlook," UBS analyst Neil Currie wrote in a research note.
"Given the amount of restructuring that has taken place (since October), these results reveal that Wal-Mart is managing well despite the cautious forward tone," he said.
Investors seemed to agree, pushing shares of Wal-Mart (WMT : Wal-Mart Stores, Inc.
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WMT48.07, +0.64, +1.3%) higher by as much as 1.4% to $48.21 -- a level they haven't touched since late March.
For the quarter that ended April 30, Wal-Mart logged a 6.3% increase in net income to $2.62 billion, or 63 cents a share, compared with last year's profit of $2.33 billion or 55 cents a share. Last year's results included benefits of $145 million, or 3 cents a share, linked to a favorable tax resolution and legal settlement.
Revenue climbed 12% to $80.47 billion. Same-store sales, which tally receipts at stores open longer than 13 months, climbed 3.8% in the United States, with Wal-Mart stores coming in higher by 3.8% and Sam's Club outlets clocking at 4.3% gain.
At the Wal-Mart stores, sales rose 10% to $52.5 billion, while they rose 6.8% at Sam's Club to $9.78 billion. The international division -- considered an important growth engine for the retailer -- surged 23% to $17.34 billion, helped mostly by acquisitions.
Wal-Mart made three notable buys throughout the year. It boosted its holding to 53% in Seiyu Ltd., based in Japan; it bought 51% of Central American Retail Holding Co., or CARHCO, now known as Wal-Mart Central America; and it purchased Sonae Distribuicao Brasil S.A. in Brazil.
The results outpaced those expected by analysts reporting to Thomson First Call. Analysts surveyed were projecting, on average, a profit of 61 cents a share on revenue of $80.43 billion. The average Thomson First Call estimate was raised by a penny after the Bentonville, Ark.-based retailer reported earlier this month that April sales were unexpectedly robust. See more retail coverage.
Keep the goods moving
Wal-Mart executives pointed to moves they're making to clear shelves of clutter; clean out back rooms and risers of inventory that customers can't see or reach; and reduce the amount of merchandise that's held in outside warehouses near stores.
"The inventory achievements were significant this quarter," Chief Financial Officer Tom Schoewe said on a recorded conference call.
So, too, was the better mix of merchandise from skirts and pants to housewares and food, he added. "We're being more relevant to our customers."
Customers have responded well to a number of new product lines and items that Wal-Mart has launched as it reaches out to a broader audience. It has had trouble keeping shelves stocked with Metro 7 apparel, for example, and executives have said that the nearly 500 organic-food products in its Plano, Texas store have sold quite well.
Those initiatives also helped drive higher average receipts. But they haven't done much for customer traffic, which declined "just slightly" in the quarter, according to Schoewe.
In the meantime, customers -- as well as operations -- are facing higher energy costs that the finance chief said he believes will impact the second quarter. "Toward the end of the [first] quarter, we clearly saw the impact of rising fuel costs for our customer."
Charles Holley, senior vice president of finance, said in an interview with MarketWatch that the retailer fears the pinch of higher gas prices will bring back what's called the "payroll cycle," in which sales drop off at the end of the month as consumers run out of money before their next paycheck.
"If you look back at the last couple of years, when energy prices spike we see the payroll cycle become more pronounced," he noted. "We can't predict what impact it's going to have, but history tells us it will produce softer sales than normal.
"Having said that," he added, "some of that the things that we're doing can offset that."
Holley also said that the company is bracing for higher costs to run the stores and from rising interest rates. "The biggest unknown in the second quarter and the year is the effect of energy prices on sales and utility costs. We can control somewhat the utility costs and such. The hardest thing for us to control is sales -- and what can happen to them."
That was the thinking behind a second-quarter earnings estimate in a range of 70 cents to 74 cents a share. At Thomson First Call, the average forecast is 74 cents.
The company is holding steady on the fiscal-year range of $2.88 to $2.95 a share, according to Holley, mostly because of tax rates that he expects will bounce around quarter to quarter, assuming Congress renews the worker-opportunity tax credit in the third quarter as expected.
Wal-Mart's results came a day after Target Corp. (TGT : target corp com
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TGT49.33, -0.69, -1.4%) , its closest rival, turned in a 12% increase in income. Investors were disappointed, however, with pinched margins due to higher expenses and merchandising woes in the home-goods and Global Bizarre divisions. See full story.
Target's sales and profits have been growing at a faster clip than Wal-Mart's, which had put Wal-Mart out of favor with many analysts for some time.
However, since the beginning of the year, analysts have been changing their tunes about Wal-Mart, with the majority of them now recommending the stock.
Jennifer Waters is a reporter for MarketWatch based in Chicago.
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