Walmart Results Fail To Excite Analysts

by Thom Forbes, Feb 22, 2012, 7:47 AM

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The good news for Walmart is that same-store sales rose for a second straight quarter after nine quarters of decline. Analysts see the results as an indication that resuscitation of its everyday low pricing policy and holiday-season layaway plan, as well as restoring the 10,000 items or so that it had withdrawn in an ill-advised attempt to declutter its shelves, has put the retailer back on the right track. But, at best, it’s the local, not the express.

Those same-store results –- a gain of 1.5% -- came at the expense of profits, which dropped 15%, as Miguel Bustillo and Dana Mattioli point out in the Wall Street Journal. Walmart executives note that a one-time tax break from the closure of its failed German retail business accounted for a good piece of last year’s results but the price cuts also ate into profits.

“Year-end reports from Wal-Mart, Home Depot [see Sarah Mahoney’s coverage here] and Macy's say a lot about how those companies, all leaders of their retail categories, are managing to gain market share at their competitors' expense,” Bustillo and Mattioli write.

"I don't think the pie has gotten much bigger in the last year," Macy's CEO Terry Lundgren tells them. "I think we're just getting a bigger piece of it."  Macy’s also saw sales rise as profits were squeezed –- albeit by just 0.3%. But its fourth-quarter margins were 41% of sales, compared to 24.3% for Walmart.

January was Walmart’s strongest month for sales and traffic, the New York Times’ Stephanie Clifford reports, after its layaway program had been put away for the year. “That speaks to the momentum we have in the Walmart business,” says CFO Charles M. Holley Jr. “We feel very good about where we are with market share grabs in most categories that we operate in.”

“Our price leadership is making a difference across the United States, as many families are settling into a new normal,” Walmart president CEO Mike Duke says in a statement announcing the results. The Street has a transcript of the earnings call here.

But that new normal isn’t like the normal of before, Holley observes. “We’ve seen the unemployment numbers come down a little bit, and that’s really good, but that hasn’t stopped the paycheck cycle,” he says, meaning that many consumers are still living week to week.

The New York Post’s James Covert, highlighting disparity in the results for high-end retailers such as Saks –- which was up 48% -- was quick to point out that Walmart’s “humbug” quarterlies aren’t “merely a reflection of the divide between the nation’s haves and have-nots, according to analysts. It’s also an indication that Walmart is facing brutal competition from rivals on a host of fronts -- from Bed Bath & Beyond to dollar stores,” he writes.

Indeed, Deutsche Bank analyst Charles Grom foresees “2,000-plus more dollar stores a year from now than there are today.”

The results fell short of analysts’ expectations, writes Reuters’ Jessica Wohl, and the company’s forecasts aren’t cause for great optimism. "Everything had the hint of conservatism in the guidance," ITG Investment Research analyst John Tomlinson says. "People are contemplating bear-case scenarios, what they could mean for earnings growth."

It’s more instructive for potential investors to look at the yearly results, writes Justin Weinstein in Seeking Alpha, which “point to a company that is in a similar situation to many other blue-chip companies: just nowhere to go.”

Weinstein says that the company needs “to find its sweet-spot for pricing, customer perception, etc.,” if it is to stay at the top of the retailing heap. He then quotes Jason Raznick in Forbes: "Walmart appears to be facing the same problems as Microsoft. The company is a large cap cash cow whose stock offers little to no growth." In order to get out of that rut, it should do what it did a couple of decades ago, the thinking goes: adapt and expand. That means vastly improving its ecommerce platform and continuing its growth into emerging markets such as Brazil and China.

Back at home, several observers point out that the gains in store traffic face another potential jam: rising gas prices could put a damper on shopping. William S. Simon, Walmart’s head of U.S. operations, chooses to put a positive spin on the looming oil crisis, reports Tiffany Hsu story in Los Angeles Times. "A challenging economy and rising gas prices will continue to drive customers to seek value,” Simon says.

We shall see what his customers actually do.

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