Wal-Mart, Target Predict Some Favorable Trends

BENTONVILLE, Ark. — Both Wal-Mart Stores here and Target Corp., Minneapolis, forecast some near-term improvements in business conditions for their companies during their recent conference calls discussing year-end earnings.

Target said consumer spending for non-essential items appears to be on the rise, while Wal-Mart cited an easing of the deflationary pressures that have limited sales growth in food categories.

In the fourth quarter, Target said both sales and profits increased as consumers seem to be slowly increasing spending on discretionary items in the wake of the recession.

“We believe that we've clearly passed that environment where there's more downside than upside, and there's more upside than downside,” said Gregg W. Steinhafel, chairman, president and chief executive officer, in response to an analyst's question about discretionary spending trends.

“We are seeing strength across the board in discretionary categories,” he later added in discussing the chain's P-fresh remodel prototype. “To what extent it's due to P-fresh vs. not P-fresh, we're just excited to see that the consumer has more discretionary income. We believe that over time our ability to cross-sell to those guests that are coming in for food and other necessities will improve, and we'll develop the right kind of surgical marketing programs that gets conversion in other parts of the store.”

The company said it expects gross margins to be pressured this year by the rollout of expanded grocery offerings in the P-fresh remodels, however, and as it seeks to remain competitive with rival Wal-Mart Stores on those items.

“We have a firm policy to be level priced with Wal-Mart locally on like items. In our zeal to execute that strategy it drives a gross margin rate sharply lower than the average grocer because the average grocer can't compete with Wal-Mart on price,” said Steinhafel.

The company posted a 53.7% gain in net income for the quarter, which ended Jan. 30, to $936 million. Revenues were up 3.2%, to $20.2 billion. Comparable-store sales rose 0.6%.

For the year, net income rose 12.4%, to $2.5 billion, on revenue gains of 0.6%, to $65.4 billion.

DEFLATION ABATING

Wal-Mart, meanwhile, said sales of food, pharmacy and other consumables at its U.S. stores were essentially flat for the fiscal year that ended Jan. 31, but the company expects to see improvements before mid-year.

“Deflation continued to have an especially onerous impact on comparable sales for the year, dropping by more than 300 basis points from the inflation we experienced late last year,” Eduardo Castro-Wright, vice chairman, said.

“In fact, grocery inflation in last year's fourth quarter ran approximately 600 basis points, while this year we've seen prices decline by approximately 90 basis points, thus creating a negative year-over-year swing of approximately 690 basis points.

“But the trends are improving, and we believe food deflation pressures will abate by the beginning of the second quarter.”

Castro-Wright made his comments during a pre-recorded investor call in which Wal-Mart executives discussed financial results for the year and fourth quarter.

Net income for the quarter rose 22.2% to $4.6 billion, while sales were up 4.5% to $112.8 billion; for the year, net income increased 7% to $14.3 billion while sales increased 0.1% to $405 billion.

Excluding fuel, comparable-store sales in the U.S. fell 1.6% for the quarter, with Walmart declining 2% and Sam's Clubs up 0.7%; for the year, overall comps excluding fuel were flat, dropping 0.2% at Walmart and rising 1.4% at Sam's.

The Great Value private-label rollout is doing well, Castro-Wright noted, with sales increases in the mid-single-digit area.

“Customers give us a lot of credit for having expanded the product offering, and what they now see is a single point of view across many aisles.

“Without a doubt, customers now consider Great Value a brand rather than a collection of items.”

Castro-Wright also said Wal-Mart is seeing early benefits from its global sourcing initiatives, “and we believe we're well-positioned to see the cost of goods sold come down, particularly where we have already completed the transition to the global merchandise centers.”

He said the company expects to complete remodelings on more than 50% of its store base by the end of the third quarter, “reflecting the new look and feel laid out in Project Impact.”

TARGET

Q4 RESULTS

WAL-MART

Q4 RESULTS

*EXCLUDING FUEL