updated 2/22/2007 1:47:01 PM ET 2007-02-22T18:47:01

After flirting with trendy fashion and fancy food for much of last year, Wal-Mart Stores seems to be going back to its old mantra of "everyday low prices."

In a conference call after reporting its fourth-quarter and full-year earnings on Feb. 20, there was no mention of the trendy Metro 7 apparel line or the organic foods that Chief Executive Lee Scott had so enthusiastically endorsed last year. Instead, Scott was full of praise for the strong sales momentum of the fourth quarter, which benefited directly from the company's return to deep discounts across all categories—from food and toys to electronics.

"It's a reaffirmation of the proposition that's synonymous with Wal-Mart: Saving people money so they can live better," says Scott. "Sam Walton started our company in 1962 with this simple principle, and this is the mission that drives our strategy around the world today."

The company beat analysts' profit expectations, as net income increased 9.8%, to $3.94 billion, in the fourth quarter ended Jan. 31. Sales increased 10.9%, to $98.09 billion, but that was below the $99.95 billion forecast by analysts. The company's stock rose 3.6% on Feb. 20 to close the day at 50.26.

In the same conference call, Scott suggested that much of the company's future growth would come from its international operations. "Expect to hear more from Wal-Mart about where we're going in emerging markets like India and China," the CEO said. Spokesman John Simley says the company's strategy to pursue upscale customers is still on track, and the fact that Scott didn't refer even once to Metro 7 or organics was not a "conscious omission." Rather, he says, the focus on international was a reflection of the fact that the conference call's guest executive this year was Mike Duke, vice-chairman of Wal-Mart's international division.

Still, the results speak for themselves. Last year's guest executive — Eduardo Castro-Wright, who was CEO of the U.S. division of Wal-Mart Stores until recently — talked about Wal-Mart's strategy of driving sales by attracting "the selective customer," by rolling out Metro 7 in 1,500 stores. Castro-Wright laid out how Wal-Mart would work toward luring "those customers who shop at Wal-Mart for basics, but don't see us as an alternative for home, apparel, or electronics."

Traffic slows
Of course it soon became apparent that the "selective customers" didn't take the bait, and both apparel and home sales were soft in 2006, according to Executive Vice-President Charles Holley. Electronics sales were positive, but only because Wal-Mart slashed prices on hot items such as flat-panel TVs and started carrying more high-profile brands, including Samsung and Apple.

But reverting to "everyday low prices" and international expansion doesn't guarantee growth in sales and profits either. One big sign of trouble is the fact that Wal-Mart's store traffic in the U.S. has been falling for four quarters now. Even the deep discounts the company offered in the fourth quarter failed to bring people into stores. Same-store sales for the quarter were up 1.3%, driven by an increase in the average ticket during the quarter, while customer traffic declined slightly, says Holley.

"Convincing customers to buy more commodity products than they were already purchasing from Wal-Mart, even if they're at low prices, is not an easy path to growth," says retail expert Darrell Rigby, partner at consulting firm Bain & Co.

Continued exploration
International growth, however, looks promising. Wal-Mart's stores in Mexico saw same-store sales growth of 7.1% in the fourth quarter, and its stores in China saw growth in the "high single-digits." Still, international expansion can be tricky. In 2006, Wal-Mart shut down its operations in South Korea and Germany after trying hard to lure customers in both countries for almost eight years. It sold its money-losing operations in those countries for a pretax loss of more than $1 billion. "Less than one in three international retail expansions succeed when expanding overseas," according to research conducted by Bain.

Still, Rigby believes that Wal-Mart has no choice but to explore all avenues of growth, whether in distant lands or at home. "Wal-Mart will have to reinforce its value to core customers, and we will likely see a more gradual appealing to upscale customers," he says.

Copyright © 2012 Bloomberg L.P.All rights reserved.


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