Wal-Mart Profit Gains but Guidance a Concern

Tougher times are proving to be a boon for Wal-Mart Stores, which reported a 17 percent rise in quarterly profit Thursday as shoppers headed to its stores for low prices on food, health care products and electronics, and the discount retailer raised its full-year earnings outlook.

Wal-Mart, the world's largest retailer, also forecast on Thursday profit for the current quarter that could miss Wall Street targets and said it continued to see sales volatility from week to week. Its shares rose 0.6 percent in premarket trading.

"What we see, as do many around the world, is a global economy that is difficult," Wal-Mart Chief Executive Lee Scott said in a recorded call.

"When energy and oil prices go up on top of inflation and health care and core food items, there's a great deal of pressure on the customer," he said.

Scott also noted the changing habits of consumers in a weakened economic climate, one that he described as spreading from North America to Europe to some developing countries.

"People are eating more sandwiches in Puerto Rico, and relying more on private-label products in the UK," he said.

Wal-Mart's net income rose to $3.45 billion, or 87 cents per share, in the second quarter that ended July 31, from $2.95 billion, or 72 cents per share, a year earlier.

Earnings per share from continuing operations increased to 86 cents from 75 cents.

Analysts on average had been expecting 84 cents, according to Reuters Estimates.

"They're good numbers, the 86 cents is above the expectation; the guidance of 73 to 75 (is) certainly a little bit lighter than expected," said retail analyst Dana Telsey. "I think they'll meet the upper end of that. I think part of the reason they probably did that is the same-store sales, 1 to 2 percent, (and) the impact of the stimulus package checks going away; definitely a more cautious environment. I think that's the key; gross-margin expense ratio, that'll be the element to look at next. The markdowns, especially on the apparel area, have been lower lately, and that should be a positive sign."

(For Telsey's full comments, see the accompanying video.)

"I think Wal-Mart continues to work internally to get the trade down; it's the internal initiatives, whether it comes from Sam's [Club], whether it comes from reducing square-footage growth, reducing capital expenditures, and managing that top line," said Telsey of the Telsey Advisory Group. "I think those are the keys. I think it's less external; I think it's continuing on the initiatives of the internal."

The retailer also got a boost in the quarter from U.S. tax rebate checks as shoppers came into its stores to spend the excess cash, but its sales waned later in the period as those funds dried up.

In July, Wal-Mart raised its second-quarter earnings-per-share forecast to a range of 82 cents to 84 cents from an earlier outlook of 78 cents to 81 cents, citing improved sales results.

"The pullback in gasoline, even just for the psychological impact of retail stocks, that's a benefit, and given that we don't have many other large-cap names, that could have the same benefit, given that they're so much more discretionary, that's an opportunity for WalMart," said Telsey.

Wal-Mart forecast third-quarter earnings per share from continuing operations at between 73 cents and 76 cents, while analysts on average had expected 76 cents.

Joseph Feldman, a retail analyst with the Telsey Advisory Group, said investors may be disappointed by Wal-Mart's forecast, given the strong profit rise in the second quarter.


"Investors may read this negatively and will want to better understand if the company is being overly cautious or the outlook has slowed," Feldman told Reuters via an e-mail. "If the outlook has slowed, I view that as bad news for all retailers."

Sales Gains

Investors are watching retail results closely for signs of how consumer spending, which accounts for two-thirds of U.S. economic activity, will hold up heading into the crucial year-end holiday shopping season.

In the past year, Wal-Mart has benefited both from internal efforts to improve its business and from the weak U.S. economy, which is driving shoppers to its stores in search of bargains.

The discount retailer also got a boost in the latest quarter from U.S. tax rebate checks as shoppers spent the excess cash, but its sales waned later in the period as those funds dried up.

"Inflation, particularly in food, has affected consumer discretionary purchases," said Eduardo Castro-Wright, head of Wal-Mart's U.S. operations.

"Customers are spending more time looking for ways to stretch their dollars," he added.

Wal-Mart's second-quarter net sales rose more than 10.4 percent to approximately $101.6 billion.

Sales rose 8.5 percent to $64.05 billion at its namesake stores and increased to $12.28 billion from $11.38 billion at its Sam's Club warehouse unit. International sales jumped 17 percent to $25.26 billion.

Total sales at U.S. stores open at least a year, a key retail gauge known as same-store sales, rose 4.5 percent.

Same-store sales at its namesake discount stores increased 4.6 percent and rose 3.7 percent at Sam's Club.

For the third quarter, Wal-Mart expects U.S. store sales to rise between 1 percent and 2 percent.

The company raised its estimate for full-year earnings from continuing operations to a range of $3.43 to $3.50 per share.

In February, it said it expected $3.30 to $3.43.

Wal-Mart shares rose to $58.20 in premarket activity from Wednesday's close of $57.88 on the New York Stock Exchange.

"When you look at the landscape of retail, and what names are out there, certainly the value names that are offering value will have the opportunity to do better," Telsey said on CNBC's "Squawk Box." "WalMart would fit in that camp. So many other retailers which are more discretionary could have more challenging times than WalMart."