Wal-Mart Profit Report Should Give Clues on Coming Fiscal Year

Wal-Mart investors will be focused on the retailer's forecast for its new fiscal year and indications as to when sales at its U.S. store base may finally strengthen when the world's largest retailer reports fourth-quarter results on Tuesday.

Wal-Mart ended its fiscal year on Jan. 31 after posting a string of paltry sales gains at its U.S. stores open at least a year, including a 0.1% decline in November.

In the face of store remodeling projects, limited opportunities for U.S. growth, problems with its apparel offerings and a recent drop in temperatures that could pinch shoppers when heating bills roll in, investors are wondering when it U.S. business will get back on track.

"That's the $64,000 question," said Patricia Edwards, a portfolio manager with Wentworth, Hauser and Violich, who tracks retail companies.

The retailing heavy-weight is expected to post quarterly earnings of 90 cents a share, according to a Thomson Financial consensus estimate, up from 84 cents in the year-ago fiscal quarter. On Jan. 4, Wal-Mart said it would report fourth quarter earnings between 88 cents and 92 cents a share.

About Face

Wal-Mart has already forecast tepid gains for February, saying it expects U.S. same-store sales to rise 1% to 2%. Smaller rival Targetexpects February sales at its stores open at least a year to rise 4% to 6%.

If the forecasts hold, Target's same-store sales gains would have exceeded Wal-Mart's in 42 of the last 43 months, according to ThinkEquity Partners.

"It looks to me like Target is humming on all cylinders," said James Hardesty, president of Hardesty Capital Management, which owns Target shares. "They've found a niche that is above the discount chains, but below the high-end franchise department stores."

Wal-Mart is struggling as it has tried to widen its niche.

Last year, it downplayed its discount roots to try to expand its image beyond that of a low-priced retailer. It stocked more upscale items such as organic food and plasma TVs, hoping wealthier shoppers would spend more in its stores.

But its lower-income customers balked at some of the changes and, in the face of disappointing sales, Wal-Mart vowed its "most aggressive pricing strategy ever" for the holidays.

"Getting back to really every day low prices and making sure we were the price leader," said Charles Holley, Wal-Mart's treasurer, at a Citigroup conference this week. "That was very important to us in the fourth quarter."

Meeting Expectations?

J.P. Morgan analyst Charles Grom, in a note on Friday, said he expects Wal-Mart to report quarterly earnings in line with expectations, helped by better inventory and labor management.

But he said the Wall Street earnings estimate of $3.20 a share for its new fiscal year is "too ambitious" and implies year-over-year operating margin gains in its U.S. division.

"Such margin improvement is unlikely," he wrote.

This year, Wal-Mart faces more store remodeling projects, which have disrupted shoppers, and it is trying to get its apparel offering back on track. It is also struggling with trying to grow a U.S. store base that numbered more than 4,000 at the end of January, including its Sam's Club warehouses.

Its low-income shoppers could also feel a squeeze from higher heating bills as a blast of chilly temperatures grips much of the United States.

With business difficult in the United States, Wal-Mart could get some help from its international division.

Its Japanese subsidiary, Seiyu, has forecast a return to profit this year and Wal-Mart de Mexico plans to open 125 new stores and restaurants this year and boost investment by 19%.

"For all the concern we have about eroding productivity in Wal-Mart's core U.S. business -- and that concern remains -- we note that international is contributing disproportionately to the company's revenue and profit growth," wrote Merrill Lynch analyst Virginia Genereux in a note on Friday.

She said international operations contributed roughly 33% of Wal-Mart's profit growth in its last fiscal year and could contribute 36% of the growth in this fiscal year.

For its fiscal year ending Jan. 31, 2006, Wal-Mart's international unit accounted for roughly 20% of its sales.