Wal-Mart Feels Profit Squeeze

ELLIOT ZWIEBACH

BENTONVILLE, Ark. — Wal-Mart Stores said last week lower pricing and a broad range of offerings in grocery, pharmacy and electronics resulted in market-share gains during the second quarter — a reflection of the company's strategy of trading profits for sales to gain share, analysts said.

However, earnings fell short of investor expectations, analysts said, and they noted that they expect Wal-Mart to continue to seek market-share gains by putting more emphasis on lower-margin food items, increasing price rollbacks and continuing to feature markdowns in apparel and home merchandise.

H. Lee Scott, chairman and chief executive officer, acknowledged overall financial results during the quarter were disappointing but said Wal-Mart is committed to improving its performance to help hard-pressed consumers make ends meet.

“Our overall performance is not where it needs to be, and the U.S. team is working hard to improve it,” Scott said in a pre-recorded conference call, noting that consumers appear to be financially strained because of high gas prices and other factors (see Page 1).

He said Wal-Mart's management team is focused on three primary areas: delivering quality products at low prices, improving store execution and making inventory management improvements.

“Many customers around the world continue to be under economic pressure, and they expect Wal-Mart to be their advocate. We will continue to be the undisputed price leader [everywhere],” Scott said.

Wal-Mart said last week it was lowering its earnings guidelines for the year to between $3.05 and $3.13 per share, down approximately 3% from the range of $3.15 to $3.23 per share it forecast at the beginning of the year.

For the second quarter, which ended July 31, net income increased 49.1% to $3.1 million, with overall sales up 8.8% to $92 billion; for the half, net income climbed 26.3% to $5.9 million, with sales up 8.6% to $177.4 billion.

Food sales at supercenters rose more than 14% during the quarter, and comparable food sales were up “in the mid-single digits,” Eduardo Castro-Wright, president of Wal-Mart's U.S. operations, said during the conference call.

Sales at discount stores, including supercenters, rose 6.5% to $59 billion for the quarter and 6.1% to $114.5 billion for the half; sales at Sam's Clubs increased 8.6% to $11.4 billion for the quarter and 7.2% to $21.7 billion for the half; and international sales jumped 15.7% to $21.6 billion for the quarter and 17% to $41.2 billion for the half.

Comparable-store sales in the U.S. rose 1.9% for the quarter excluding fuel — including 1.2% at discount stores/supercenters and 5.9% at Sam's Clubs — with fuel at Sam's adding 0.6% to the total; for the half comps rose 1.3% — including 0.6% at discount stores/supercenters and 5.3% at Sam's — with fuel at Sam's contributing 0.1% to the total.