Wal-Mart's Strategy for Getting Sales on the Upswing

After it posted good year-end numbers, but weak sales, Wal-Mart Stores (WMT) said it will keep cutting prices, cutting costs and finish remodeling all its stores. It acknowledged that top-line sales growth will likely continue to be difficult, and that's an area where the company is focusing its efforts.Wal-Mart will finish an overhaul of all U.S. Walmart stores this spring with a design to draw in more shoppers and more sales, said executives in a pre-recorded conference call. And it will squeeze out more cost savings, thanks to a new Global Sourcing Initiative that consolidates its product buying. That initiative "will be the anchor" to reduce the cost of Wal-Mart's goods and increase margins, while continuing to cut prices to entice more customers, said Vice Chairman Eduardo Castro-Wright.

The discount retailer reported quarterly earnings of $4.7 billion, up 23.7% from the $3.8 billion it earned in last year's fourth quarter. The earnings of $1.23 per share easily beat the company's guidance of $1.08 to $1.12, and analysts' expectations of $1.12 per share. Earnings for fiscal 2010 were up 7% to $14.2 billion, or $3.66 per share, which also beat the guidance of between $3.57 and $3.61 that management had given analysts late last year. In midmorning trading, the shares were down nearly 2% at around $53.

Tepid First-Quarter Guidance

The company issued earnings guidance for fiscal year 2011 of between $3.90 and $4 per share and 81 cents to 85 cents per share during the first quarter ending April 30. Chief Financial Officer Tom Schoewe acknowledged that the first-quarter guidance was tepid, noting that Wal-Mart's first-quarter results are up against a tough comparison with the first quarter of 2009, but those comparisons will become easier as the year progresses.

Total comparable sales -- for stores open at least a year -- were down 1.2% in the fourth quarter, a smaller decline than in previous quarters, but still a bad sign, considering other retailers have begun to show positive comparisons. Wal-Mart U.S. sales were down 2%, but sales at Sam's Club warehouse stores were up 3.7%, thanks to rising gas prices.

Sam's Club CEO Brian Cornell noted that gas prices were up 44% in the fourth quarter over the year before. If the impact of fuel sales is factored out, Sam's Club would have still been up, but by a much smaller 0.7%. Comparable sales for the year were down 0.3% -- or flat if gas is excluded. Annual comparable sales at Walmart stores were down 0.2%, while Sam's Club was down 0.8%, or up 1.4% minus gas sales.

The company forecasts that comparable sales at U.S. Walmarts will be down 1% to flat in the current quarter ending April 30, and it expects sales at Sam's Club will be between down 1% to up 1%, after factoring out fuel.

More Shoppers, but They're Spending Less

Vice Chairman Castro-Wright said Wal-Mart chose to speed up its store-remodeling program after seeing sales go up in the initial locations remodeled as part of its Project Impact overhaul. Now, all stores will be redone by the end of the first quarter, he said.

Investors have been concerned that the world's largest retailer was getting hit at the checkout counter by continued high unemployment and tighter consumer spending. While traffic at Walmart stores has held up -- and even increased in some cases due to households' belt-tightening -- average receipts have declined, and sales were under pressure all last year. Wal-Mart responded by cutting its own costs to preserve margins, including closing down 10 weaker Sam's Clubs stores and restructuring purchasing. But Wall Street wanted to see sales trending higher as a sign that profit growth will continue.

Castro-Wright acknowledged that traffic at U.S. Walmart stores rose 1.3% for the year, but that average receipts fell, mostly due to price deflation. Overall price deflation ran to 3% year-over-year, he said, and prices for electronics have dropped for the last two years in a row.

"The Economy Remains Challenging"

Price deflation has bedeviled the retailer's sales totals all last year, but Castro-Wright said it appears to have bottomed out and is abating. He noted that food-price inflation added about 3% to prices in the last quarter. Sam's Club CEO Cornell said Sam's Club stores were also affected by price deflation, but it got a boost late in the year from the rising gas prices, and its traffic and average receipts were up in the fourth quarter by 0.4% and 0.3%, respectively.

"The economy remains challenging for many of our customers around the world," said Wal-Mart CEO Mike Duke. Executives are disappointed that U.S. sales were below expectations but glad the company still managed to deliver record profits during the fourth quarter, he said.

Duke warned the first quarter is shaping up to be difficult, but Wal-Mart plans to deliver top-line sales growth this year and keep its expense growth below its sales growth rate to keep profits on the upswing. Said Duke: "We successfully shifted the productivity loop into high gear." Investors will be watching closely to see if that's really the case.
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