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Wal-Mart cuts outlook, cites economy

Wal-Mart Stores Inc. cut its profit outlook for the year, saying Tuesday during its second-quarter earnings announcement that consumer spending has slowed in the U.S. and abroad.
/ Source: The Associated Press

Wal-Mart Stores Inc. cut its profit outlook for the year, saying Tuesday during its second-quarter earnings announcement that consumer spending has slowed in the U.S. and abroad.

Analysts said Wal-Mart still has not overcome merchandising difficulties and thus is less poised than its discount competitors, such as Target Corp., to build sales among penny-pinching consumers.

The world’s largest retailer has put a new focus on price cuts, moving away from its attempts to get more well-to-do grocery shoppers to walk over to the general merchandise aisles.

Retail analyst Patricia Edwards of Wentworth Hauser and Violich in Seattle said Wal-Mart is making some of the right moves.

“But until (merchandise is) in stock at the right time and for the right reason, price doesn’t matter,” Edwards said.

The company said that for the full year, earnings per share from continuing operations is now estimated to be between $3.05 per share and $3.13 per share. The company’s initial forecast was in the range of $3.15 per share and $3.23 per share.

For its second quarter, the Bentonville-based retailer reported a net income of $3.10 billion, or 76 cents per share. That compared with $2.08 billion, or 50 cents per share in the year-ago period. Analysts polled by Thomson Financial expected 76 cents per share.

The quarter ending July 31 included three items that provided a net benefit of $171 million after tax, or 4 cents per share. The benefits were offset by charges of $66 million after tax for legal and other contingencies.

Wal-Mart shares fell in afternoon trading on Tuesday.

Sales in apparel and home furnishings have been sluggish because of Wal-Mart’s experimentation with its merchandise mix, analysts say.

“Our underlying operating performance this quarter is not what we expect of ourselves, and not what our shareholders expect of us,” said Lee Scott, Wal-Mart president and chief executive officer in a statement. “For the remainder of this year, our management team is focused on inventory improvements, delivering quality products at low prices, and store execution at the highest standards.”

Scott pledged to keep prices low because consumers are under pressure.

Michael P. Niemira, chief economist at The International Council of Shopping Centers in New York, said the downturn in the housing market is having a broad effect on consumer spending.

“The slower housing demand is directly hurting demand for furniture and household durable and nondurable goods,” he said. “This drag on demand from the housing sector will linger.”

Niemira said discounters are better positioned for the downturn in that more people will be looking to stretch their dollars. But Edwards said Wal-Mart is not giving customers reasons other than price to buy.

“It goes beyond having products in stock. How do you display them? How do you entice that consumer to separate that money from that wallet?” Edwards said. Better arrangement of merchandise and more signs drawing attention to certain items would help, she said.

Edwards noted that Wal-Mart has made some executive changes and adjustments are slowly starting to show in the stores.

“Wal-Mart should spend more time looking in the mirror and less out at the economy,” Edwards said.

Tom Schoewe, Wal-Mart’s executive vice president and chief financial officer, said Wal-Mart has seen greater spending by consumers on or around payday, an indicator that shoppers are under more financial pressure than usual. Niemira said consumers have been visiting shopping centers less frequently and spending more per visit, which is a way to save on gasoline.

Niemira said the council’s research shows consumers have had time to adjust to higher fuel prices, but not to the housing market.

Wal-Mart was unable to rely on its international division to buffer the effect of the domestic sales slowdown. Wal-Mart said that it is seeing the same economic pressures internationally, particularly Mexico. On Tuesday, the company reported that the international division’s operating income rose 5.1 percent, while Wal-Mart stores rose 3.8 percent. Sam’s Club’s operating division rose 11.2 percent.

Kurt Barnard, president of Barnard’s Retail Consulting Group in Nutley, N.J., said Wal-Mart has a long history of experimenting and keeping what works, abandoning what doesn’t.

“I think Wal-Mart is in the process of trying to adapt itself to the developing economic realities that are increasingly governing consumer spending and consumer interest,” Barnard said. One result is Wal-Mart’s announcement last month that it would cut prices on 16,000 items.

“That’s going back to their (Wal-Mart’s) roots. Everybody else hates them for it,” Barnard said. “As they continue to work on it, they will succeed.”