Bloomberg News

Wal-Mart Profit Trails Estimates on Commitment to Low Prices

November 16, 2011

(Updates share price in fifth paragraph.)

Nov. 15 (Bloomberg) -- Wal-Mart Stores Inc., the world’s largest retailer, reported third-quarter profit that trailed analysts’ estimates as it kept prices low to prop up sales at U.S. stores.

Net income for the quarter ended Oct. 31 declined 2.9 percent to $3.34 billion from $3.44 billion a year earlier, the Bentonville, Arkansas-based company said today in a statement. Profit excluding some items was 97 cents a share. Analysts projected 98 cents, on average.

Wal-Mart didn’t pass higher prices charged by suppliers along to customers struggling with persistent unemployment, Bill Simon, Wal-Mart’s U.S. chief, said on a conference call today. That hurt gross profit margin, or the percentage of net sales left after subtracting the cost of goods sold, which shrank to 24.6 percent, narrower than the 24.8 percent estimate of Colin McGranahan at Sanford C. Bernstein & Co.

“The miss on weak gross margins was not expected, and that is new news,” Colin McGranahan, a New York-based analyst, said in an e-mail. “The stock is down on the incremental news as more negative than expected.” He rates the shares “market perform.”

Wal-Mart slid 2.4 percent to $57.46 at the close in New York. The shares have risen 6.5 percent this year, compared with little change for the Standard & Poor’s 500 Index.

Chief Executive Officer Mike Duke has slashed prices and returned thousands of products to shelves to lure back shoppers. Higher spending per trip as well as increases in food and health and wellness sales boosted sales at U.S. Wal-Mart stores open at least a year 1.3 percent, the first gain in more than two years. Analysts surveyed by Bloomberg estimated a gain of 0.7 percent, on average.

Margin Forecast

Gross margin may continue to narrow in the fourth quarter compared with the year-earlier period as the company keeps reducing prices on merchandise, Simon said.

Customer traffic declined in the U.S., which made up 62 percent of total revenue last fiscal year. Sales abroad rose 15 percent, excluding the impact of foreign currency fluctuations, fueled by China and Mexico.

“Sales were solidly better than expected, which is what investors have wanted to see,” Joseph Feldman, a New York-based analyst at Telsey Advisory Group, said in an interview. “Despite the softer-than-expected gross margin, the company controlled and leveraged expenses.”

Sacrificing gross margin for sales “is a worthwhile tradeoff in the short run” in order to re-establish the retailer’s low-price reputation, Matt Arnold, an analyst at Edward Jones & Co. in Des Peres, Missouri, said in a note. He recommends buying the shares.

Sales Forecast

Wal-Mart’s better-than-expected sales mirrored the broader U.S. retail industry, where sales rose more than projected in October as American shoppers snatched up electronic gadgets and other items. The 0.5 percent gain followed a 1.1 percent increase for September, Commerce Department figures showed today. The median forecast of 81 economists surveyed by Bloomberg called for a 0.3 percent gain.

Wal-Mart forecast same-store sales in its namesake U.S. stores would rise as much as 2 percent in the fourth quarter, which includes the holiday season. U.S. retail sales growth may slow to 2.8 percent this holiday season amid decelerating job growth and a weak housing market, the National Retail Federation said last month. The increase to an estimated $465.6 billion in sales in November and December compares with a 5.2 percent jump last year, the Washington-based NRF said.

Unemployment Rate

The jobless rate has been 9 percent or higher for most of the past two years. Hourly wages adjusted for inflation were down 1.8 percent in the 12 months ended in September. The savings rate for the month dropped to the lowest level since December 2007 as the lack of income forced households to put away less in reserve.

“Our customers remain concerned about jobs,” Duke said on the prerecorded call. “They’re juggling credit cards, using coupons and skipping restaurants.”

Sales for the layaway program Wal-Mart brought back Oct. 17 were higher than expected, Simon said. The retailer is also offering to match rivals’ prices during the holiday season, and will start offering discounted toys like $5 Barbie dolls at 10 p.m. on Thanksgiving Day.

Total revenue increased 8.1 percent to $110.2 billion. Analysts on average projected $108.1 billion.

Wal-Mart said fourth-quarter profit per share will be $1.42 to $1.48. Analysts’ average estimate was $1.45. Per-share profit for the full year will be $4.45 to $4.51, compared with a previous forecast of $4.41 to $4.51. Analysts’ average estimate was $4.49.

“The stock has had a big move recently and may give some of that back, but we continue to like the defensive characteristics of the stock here,” David Strasser, an analyst at Janney Montgomery Scott, said in a note to clients today.

(Wal-Mart executives discussed results on a pre-recorded call today. For a transcript, visit EVTS <GO>.)

--With assistance from Sho Chandra in Washington. Editors: Kevin Orland, Robin Ajello

To contact the reporter on this story: Matthew Boyle in New York at mboyle20@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net


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