FOOD SALES PERFORMANCE DRIVES WAL-MART RESULTS

ELLIOT ZWIEBACH

BENTONVILLE, Ark. -- Wal-Mart Stores here said last week the growth in food sales and comparable-store sales at the company's 1,066 supercenters outpaced the company's total revenues for the year and fourth quarter ended Jan. 31 -- a situation likely to continue for the next few years, industry analysts told SN.

Food sales rose 34% for the year, compared with an increase of 13.8% in the company's overall sales, and supercenter comp sales climbed 10%, compared with a 5.8% boost for the company. For the quarter, food sales increased 34%, compared with 13.5% for the company, and supercenter comps were up 10%, compared with 6.9% for the company.

However, gross margins for the year fell 70 basis points because of the increased food revenues, the company noted.

Chuck Cerankosky, an industry analyst with McDonald Investments, Cleveland, said food sales could continue to outpace the company's total sales for another five years or so. "Wal-Mart is clearly in the food business, and as it continues to convert discount stores to supercenters, it has a strong customer base already built in. And the company shows no signs of slowing down the number of openings of new and converted supercenters or of Neighborhood Markets."

Wal-Mart is expected to open 185 new supercenters this year, including 100 conversions of existing discount stores, and 15 to 20 new Neighborhood Markets, according to industry estimates.

"One thing Wal-Mart has going for it when it opens a supercenter that's converted from a successful discount store is a built-in traffic flow from its existing customer base," Cerankosky said. "And it's also offering pharmacy and a broad assortment of general merchandise in that box -- all in an attractive price range -- that enables it to readily take share from independent or smaller operators."

Consumers also have confidence in Wal-Mart's ability to maintain a strong in-stock position, Cerankosky said -- something that gave it a leg up on Kmart, which he said has had "a poor in-stock position in consumables."

However, with so many more Wal-Mart supercenters than Super Kmart locations, any closures of stores by Kmart is unlikely to have much impact on Wal-Mart's food business, Cerankosky said.

He also said comparable sales will continue to surpass total comps for the next few years "because supercenters are still fairly new, so they're ramping up from a low base."

Deborah Weinswig, retailing analyst for Bear Stearns, New York, also said she sees ongoing strength in Wal-Mart's supercenter segment. "Wal-Mart continues to flex its muscle in food categories, with same-store food sales up 10% across the division, which continues the double-digit trend seen throughout 2001, and that should continue in 2002 as the 178 new supercenters opened in 2001 continue to ramp up."

She said the drop in gross margins "is inevitable as Wal-Mart aggressively expands the supercenter concept, and that is a long-term positive as food broadens the customer base and increases shopper frequency."

Wal-Mart does not break out supercenter sales. However, Wayne Hood, retailing analyst for the Atlanta office of Prudential Financial, said he estimated supercenter sales at Wal-Mart totaled $80.7 billion last year, or 37% of the total.

Total Wal-Mart sales rose 13.8% to $217.8 billion for the year and comparable-store sales jumped 5.8%, with comps at Wal-Mart stores, including supercenters, up 5.9% and comps at Sam's Clubs up 5.7%; net income for the year climbed 6% to $6.7 billion.

For the fourth quarter, total sales increased 13.5% to $64.2 billion and comps rose 6.9%, including a 7.2% jump for Wal-Mart stores and a 5.7% jump for Sam's; net income for the quarter rose 9.2% to $2.2 billion.

"Obviously, we had a very strong food performance," Tom Schoewe, chief financial officer, said during a prerecorded call in which Wal-Mart executives discussed the company's financial results.

The surge in food sales pulled down the company's gross margin percentage, Schoewe said, "though the high turns in food caused gross margin dollars per square foot to remain comparable."

According to Lee Scott, president and chief executive officer, "We had a good ending to a difficult year. We were able to increase sales and earnings to record levels while expanding market share and delivering great value to our customers."

Scott said the company did not reach the goal it set five years ago -- to achieve annual earnings growth of 15% -- "though our five-year average has been 17.9% growth per year," he added.

"Although we did not attain the goal of increasing earnings at the same rate as sales, the 8.9% growth in earnings per share for the fourth quarter represents more than triple the growth rate experienced in the first six months of the year."

Scott said fiscal 2003 began "a lot better than last year," with the company experiencing increasing customer counts since the end of December, "so we think our 15% earnings-growth target is very achievable this year."

He said the company is increasing its earnings guidance for fiscal 2003 to $1.74 to $1.76 per share, compared with earlier expectations of $1.71 per share, "assuming the economy remains at its current level." Scott also said the company expects first-quarter earnings to be 35 to 36 cents per share.