WAL-MART: NEIGHBORHOOD MARKETS SHOW PROFIT

ELLIOT ZWIEBACH

BENTONVILLE, Ark. -- Wal-Mart Stores here said last week Neighborhood Markets showed their first-ever profit during the second quarter ended July 31.

However, uncertainties in the national economy may result in an overall earnings shortfall during the current quarter, with increases ending up in the single-digit range rather than the double-digit levels the company had been anticipating.

According to Lee Scott, president and chief executive officer, the development of the Neighborhood Markets format is being affected favorably by the company's experience in international markets.

"In many ways, these stores are benefiting from the experience of associates outside the U.S.," Scott said, "including our Bodega stores in Mexico, the smaller Asdas in the United Kingdom and hypermarkets in Germany, and our Toda Dia unit in Brazil. Our global earnings are reflected in the evolution of the Neighborhood Markets, and we are confident they will be an important part of Wal-Mart's future growth."

Wal-Mart said it has opened two additional Neighborhood Markets since the end of the quarter, bringing the total to 25.

Tom Schoewe, chief financial officer, said Wal-Mart is also pleased with the growth of its supercenter business, noting that food sales grew by 36% during the quarter, while comps increased in the double-digit range, though he was not specific.

Scott and Schoewe made their remarks during a prerecorded call last week reviewing financial results for the second quarter and first half ended July 31. The company said sales and earnings increased to record levels during the quarter, though earnings per share were flat.

Total company sales rose 14.5% to $52.8 billion for the second quarter and 13.2% to $100.9 billion for the half, while comparable store sales increased 5.7% for the quarter and 4.7% for the year to date. Net income was up 1.6% to $1.6 billion for the quarter and 2.7% to $3 billion for the half.

Earnings per share were flat at 36 cents, including a one-time charge of 1 cent resulting from Wal-Mart's purchase of the minority interest in Walmart.com, the company indicated.

Despite strong sales, "we've been unable to convert our revenue growth to earnings," Scott said, because of pressures on gross margins and increases in labor, utility and health care costs.

Deborah Weinswig, an analyst with Bear Stearns, New York, said Wal-Mart is operating in a "tough promotional environment, with Kmart coming on strong, so it has to be more competitive on pricing. And with the soft economic environment, it's seeing an increase in customers who prefer to buy the lowest-priced items."

Danny Wegman, left, president, Wegmans Food Markets, Rochester, N.Y., is shown with his wife, Stency, and David Merrefield, VP, editorial director, SN, at an award ceremony last week at which Wegman and SN were winners of the American Business Media's William D. Littleford award for Corporate Community Service.

Winners were selected in a nationwide competition. Littleford corporate recipients were selected because they exemplify companies with programs that successfully address pressing social concerns. Wegmans was nominated by SN for the award in connection with Wegmans' founding and sponsorship of a program now called the "Hillside Work-Scholarship program," which was featured in the April 23, 2001, issue of SN. The program involves the assignment of advocates and mentors to high-school students at risk of failing to complete school. Students in the program are also given part-time employment at Wegmans stores, and ultimately are eligible for college scholarships if they complete high school. The program has been instrumental in sharply reversing high-school dropout rates in the Rochester area. The Littleford award was accepted by Wegman at the ceremony at the Union League Club, New York City. Merrefield accepted on behalf of SN. Also at the ceremony representing SN were David Orgel, editor-in-chief; Drucie DeVries, associate publisher; and Mike DeBartolo, Fairchild Publications' VP, group publisher. SN is a unit of Fairchild. Wegmans and SN placed second in the Littleford competition. The Grand Littleford winner was Sodexho, a provider of food and facilities management, including food service. Other corporate winners were Cessna Aircraft Co. and Fairmont Hotels & Resorts. Another award went to a "Cops and Docs" program aimed at stemming violence.