Wal-Mart Q1 Earnings Up 6.9%

Strong growth in sales of electronics, especially flat-panel TVs, helps the retailer post better-than-expected first-quarter results

by Pallavi Gogoi

It's not hard to understand that at a time when food and gasoline prices are at record highs (BusinessWeek.com, 4/14/08), shoppers are making a bee line for the world's largest discount store, Wal-Mart Stores (WMT), which has built its reputation as being the place for everyday low prices.

But what's interesting is Wal-Mart's sales of flat-panel TVs have also grown dramatically. The retailer has recorded as much as triple-digit increases in certain months during this downturn, a much quicker pace than its consumer electronics competitors at Best Buy (BBY) and Circuit City (CC). Those sales added nicely to the top and bottom line in the first-quarter results the world's largest retailer announced on May 13. Net income for the three months ended Apr. 30 was up 6.9%, to $3.02 billion, on revenues of $94.1 billion, a 10.2% increase.

The 76¢-per-share earnings beat analysts' expectations of 75¢ a share. But Wal-Mart CEO H. Lee Scott referred in a conference call to "uncertainties" in the sales picture in months ahead, and Wal-Mart's shares opened the day down 80¢, or 1.4%, to 57.22.

Stocking More Electronics

Wal-Mart's electronics strategy firmed up about two years ago, when its internal data showed that its discount stores were also luring higher-income Americans earning $75,000 annually or more. Wal-Mart made its first aggressive move during the 2006 holiday season, lowering prices on the popular 42-inch HDTV below $1,000 for the first time, from more than $2,000 at that time. That move had a cascading effect and within months led to a dramatic meltdown in sales at consumer electronics retailers (BusinessWeek.com, 4/23/07), leading several like CompUSA and Circuit City to shutter hundreds of stores and others like Tweeter Home Entertainment Systems and Harvey Electronics to file for bankruptcy last year.

Last year, the Bentonville (Ark.) retailer started beefing up its electronics aisles with a wider selection of digital and home entertainment systems from brands such as Samsung, Philips (PHG), and Vizio. Today, electronics and entertainment products account for about $37 billion of Wal-Mart's overall $375 billion in annual sales. "Consumers are more technology driven today than ever before and are searching for the right price and products to quickly meet their needs," said Kevin O'Connor, vice-president and general merchandise manager for consumer electronics.

The strategy is paying huge dividends. Wal-Mart today has 16% of the flat-panel TV market, up from 13% last year, according to researcher Stevenson Co.'s TraQline division, which compiles data from the most recent four quarters and compares that to the same period in the previous year. The research firm also found that of the people it surveyed who were shopping for flat-panel TVs, at least 28% are visiting Wal-Mart to check out the selection there, as opposed to just 23% last year. "Price reigns as the No. 1 driver of sales," says Robert Tancula, vice-president for research at TraQline in Louisville, Ky.

"Customers do shop for things they want, not just what they need," said Eduardo Castro-Wright, CEO of Wal-Mart's U.S. division, in a May 13 recorded earnings conference call. "They are making room for entertainment products, especially as they stay home more often."