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

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."

Among Strapped Consumers, an Advantage

Indeed, Wal-Mart has managed to make gains in electronics at a time when consumers overall aren't too keen on spending on anything other than the basics. A survey of 4,735 consumers conducted by research firm ChangeWave Research in April showed 42% would be spending less over the next three months than last year. It was the sharpest decline in consumer spending trends the firm had seen since its inception eight years ago. Wal-Mart and warehouse club Costco (COST) were the only two places at which consumers said they were likely to spend more money. "So much of consumer electronics is commoditized and these discounters sell known brands at good prices," says Paul Carton, director of research at ChangeWave in Rockville, Md.

This weak sentiment is clearly hurting specialized electronics retailers. Best Buy, the leader with $40 billion in annual sales, reported that its sales at stores open a year or more decreased 4.6% in its fiscal fourth quarter ended Mar. 1, as it sold fewer DVDs and MP3 devices. Its much smaller rival, Circuit City, the No. 2 electronics retailer with annual sales of $11.7 billion, reported that in its fiscal fourth quarter ended Feb. 29 same-store sales declined 11.3%. That led CEO Philip Schoonover to say, "We are currently facing the toughest macroeconomic environment in years." Circuit City is now close to being bought (BusinessWeek.com, 5/9/08) by video rental outfit Blockbuster (BBI).

To be sure, flat-panel sales remained strong at both of those chains, increasing by double digits even though many other products stayed on the shelves. However, Wal-Mart is outperforming both of the specialty chains in TV sales growth. "The U.S. stores continued to generate triple-digit comparable sales in flat-panel TVs and GPS units, as well as double-digit growth rates in laptop computers, video games, and digital cameras," Castro-Wright said during a March sales call.

Electronics isn't the only area where Wal-Mart's low-price strategy is paying benefits in the downturn. Wal-Mart now is the nation's largest food retailer, an area that it entered only in 1988. Grocery is now the biggest money-generator for Wal-Mart, making up 41% of the company's overall annual sales. It helps to be the low-price leader for staples at a time when milk and eggs are up more than 30% and gasoline at the pump has hit $4 in places. But clearly shoppers are crossing the aisle and snapping up flat-panel TVs and GPS systems, as well.


Later, Baby
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