Outlooks Differ at Wal-Mart and Target
the discount retail giant, rang up more than $288 billion in sales last year, the company announced yesterday, an impressive total that kept it in first place among American corporations in terms of revenue.
But the fine print told another story - of higher expenses, slower growth and profit increasingly coming from sources other than the stores themselves - that had the company pledging to investors that it would plan better for this year.
Target, Wal-Mart's chief discount rival, reported yesterday that sales for the year were $46.84 billion, an increase of 11 percent over 2003, with net income of $3.51 a share. Analysts cheered the Minneapolis-based chain's performance.
At Wal-Mart, earnings per share rose to $2.41 for fiscal year 2005, up from $2.07. Total revenue was $288.2 billion, compared with $258.68 billion a year earlier, and net income increased to $10.27 billion, from $9.05 billion. Wal-Mart's fiscal year, like many retailers, ran to the end of January.
Sales in Wal-Mart stores open at least a year, known as same-store sales, rose 1.5 percent in the quarter, which includes the all-important holiday shopping season. For the year, same-store sales increased 3.3 percent, with a 2.9 percent increase at Wal-Mart Stores and a 5.8 percent increase at its Sam's Club warehouse division.
For most of the year, Wal-Mart was hampered by the effect of high gasoline prices on its customers, who typically are hourly wage earners. When gasoline prices rise, Wal-Mart executives have said, customers buy less.
In addition, concern about the economy has made many shoppers more cautious. Sales of groceries may remain steady, while sales decline for more discretionary items, like sporting goods or electronics, that are more profitable than groceries.
The chief executive, H. Lee Scott Jr., told investors in a conference call yesterday that Wal-Mart stumbled in its merchandising in the second half of last year. Unexpectedly sluggish post-Thanksgiving sales led Wal-Mart to reduce prices sharply on a small assortment of goods and to take out newspaper ads - both unusual moves for it.
Mr. Scott also said that Wal-Mart left "a ton of business on the table" by buying too little in some categories, which reduced inventory costs but also meant lost opportunities.
Whatever the reasons, sales did not increase the way Wal-Mart would have liked.
"Thank goodness they had MoneyGram," said Emme P. Kozloff, an analyst for Sanford C. Bernstein, noting that income from services like MoneyGram and check cashing through Wal-Mart contributed more than usual to the company's profits.
"But what you can tell is that over 60 percent of their profit came from these noncore items," Ms. Kozloff said. "The results were not particularly strong."
Other analysts also spotted signs of problems. "Operating-expense pressure remains a challenge for Wal-Mart," Wayne Hood, an analyst at Prudential Securities, wrote in a note to investors. "Expense pressure was the result of higher wage and utility costs, below-plan sales, and rising health care expenses. Management does expect to show improvement in expense management in 2005, although we would be surprised if expense growth didn't continue to outpace top-line growth."
Among the costs that increased at Wal-Mart was interest expense, which grew 47.8 percent, to $297 million in the fourth quarter, Shari Schwartzman Eberts, an analyst for J. P. Morgan Chase, said in a note to investors, calling it "worse than expected."
At the same time, corporate expenses fell 18.3 percent, to $277 million, she added, which was better than forecast.
Mr. Hood expressed concern about the performance of Sam's Club, the Wal-Mart warehouse division that caters to small businesses as well as consumers. Noting that profit grew 3.5 percent in the fourth quarter, compared with 13.3 percent in the third quarter, he wrote: "We are forecasting 10 percent profit growth in 2005, but now have less confidence in that forecast."
The results at Target, which included growth of 5.3 percent for the year in stores open at least a year, won far more praise from analysts. Revenue for the year increased 11.5 percent, including $485 million in income from credit card operations. The company reported a charge of $65 million for the year because of an adjustment to its lease accounting system. Earnings per share rose to $3.51 for the year, from $1.97.
"A lot of accounting changes made it tough to see things clearly, but at the end of the day, they are out-executing Wal-Mart," Ms. Kozloff said. "They are feeling very good about the business," she said, predicting 5 percent sales growth for this year as well.
Target also reported higher expense rates, but benefited from a trimmed-down operation that sold its Mervyn's and Marshall Field's chains for $4.9 billion during 2004. In addition to intensifying its focus on Target Stores, its star performer, the sale means "they don't have nearly as much debt anymore," Ms. Kozloff said.
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