Wal-Mart Stores Inc. reported on Tuesday a better-than-expected 9.8 percent increase in fourth-quarter profits, helped by new strategy and cost-control measures at its flagship U.S. stores division.
But the world’s largest retailer still faces the challenge of reinvigorating sales at its U.S. stores amid fierce competition, analysts said.
“They’re getting some traction, but they’ve still got a lot of work to do,” said Stephanie Hoff, senior retail analyst at Edward Jones.
While profits and total sales were up around 10 percent each, Hoff noted that sales at stores open at least one year, a key measure of retail performance, only grew 1.3 percent in the fourth quarter after annual rates well over 5 percent early this decade.
Wal-Mart forecast same-store sales growth between 1 and 3 percent in the current quarter.
“Those numbers will have to get stronger and be at the 3 percent end of the (forecast) range for investors to be willing to pay a higher premium for the stock,” Hoff said.
Wal-Mart said profit for the period ending Jan. 31 was $3.94 billion, or 95 cents per share, up from $3.59 billion, or 87 cents, from one year prior. Even without a $98 million tax benefit worth 2 cents per share, Wal-Mart’s earnings beat the 90 cents per share forecast by analysts surveyed by Thomson Financial.
The company had fourth-quarter sales of $98.09 billion, up 10.9 percent from a year before but below the $99.95 billion forecast by analysts.
Wal-Mart said it expects per-share earnings of between 68 cents and 71 cents in the first quarter and between $3.15 and $3.23 for the fiscal year 2008. Analysts surveyed by Thomson Financial were forecasting 68 cents for the first quarter and $3.19 for the year ahead.
Chief Executive Lee Scott singled out Eduardo Castro-Wright, president of Wal-Mart’s U.S. stores division, for his initiatives in strategy and in cutting costs for labor and inventory in Wal-Mart’s largest business. The U.S. stores account for nearly 70 percent of total group sales, followed by Wal-Mart International and Sam’s Club membership warehouses.
Scott praised the strategy launched last year by Castro-Wright, who has returned Wal-Mart to deep discounts on items like electronics and holiday toys after a brief foray into trendier merchandise. At the same time, Castro-Wright has started a three-year effort to tailor stores more closely to local demographics.
“I believe in the strategic plan that is guiding our U.S. stores,” Scott said in a recorded conference call for investors.
Castro-Wright also spearheaded inventory reduction and cost cutting last year, allowing U.S. store operating profits to grow 11.3 percent in the fourth quarter, ahead of sales growth of 6.7 percent.
Those cost controls include a new scheduling system that matches staffing more closely to peak shopping hours, a decision to close layaway departments late last year and a reduction in the size of accounting offices at each store.
Critics have charged that the new scheduling system cuts hours for individual workers and requires too much flexibility from its employees. Detractors like WakeUpWalmart.com maintain that the company’s decision to eliminate layaway programs hurts low-income shoppers by denying them the chance to buy an expensive item over time.
Meanwhile, Wal-Mart is achieving its goal of growing inventory at half the rate of sales. That has helped return on investment, a key metric that drives stock price, which rose at Wal-Mart’s U.S. stores.
Merrill Lynch analyst Virginia Genereux said the cost-cutting measures would continue to help Wal-Mart’s results this year.
“If apparel and home (same-store sales) materially improve this year, the stock should respond well,” Genereux said in a research note.
Those two areas are where Wal-Mart had the most trouble last year, while electronics, food and pharmacy did well.
Charles Holley, executive vice president of finance at Wal-Mart Stores, said during the conference call that sales of apparel and home furnishings “continue to be softer than we would like.”
Still, even some skeptical investors said they saw signs of improvement in the U.S. that complement Wal-Mart’s growth overseas.
Fund manager Patricia Edwards, who has long been doubtful about Wal-Mart’s ability to keep up with faster growing rivals like Target Corp., said the latest results contained “some signs that they might be getting it”.
Edwards said the changes in strategy and costs at Wal-Mart U.S. may give the retailer momentum for growth in the year ahead. Edwards is a portfolio manager and retail analyst at Wentworth, Hauser & Violich in Seattle, which manages $8.2 billion in assets and holds 51,000 Wal-Mart shares.
Don Gher, chief investment officer for Coldstream Capital Management, said Wal-Mart has overcome headwinds in the past year including remodeling projects that interrupted sales and an overly ambitious push into trendier women’s apparel.
“The company moved back to basics by concentrating on discount pricing with less emphasis on high priced merchandise, with U.S. Superstore food sales, in particular, being a key performer,” Gher said. Bellevue, Wash.-based Coldstream manages assets of about $1.1 billion, including Wal-Mart shares.
Shares of Wal-Mart rose $1.80, or 3.71 percent, to close at $50.28 on the New York Stock Exchange on Tuesday.