Word on the Street: Wal-Mart’s Quarterly Earnings

What analysts and financial advisers have been saying today about Wal-Mart’s quarterly earnings, released today.

Systemic Problems
Wal-Mart’s disappointing sales aren’t just about gas prices and sub-prime mortgages. The company’s own practices are damaging its bottom line.

Wal-Mart cuts full-year earnings forecast [Financial Times]

The retailer appears to have turned its back on a strategy of focusing on fashionable merchandise after sluggish sales, instead refocusing on low prices. Last month Claire Watts, executive vice-president of apparel merchandising and a driving force behind the strategy, quit the company.

The controversy surrounding the company is not only related to its plans for new stores. The retailer is facing the US’s biggest-ever biggest sex discrimination class-action lawsuit and another class-action from employees who claim they were locked inside stores after closing time to perform extra work without pay. In May, Human Rights Watch accused Wal-Mart of undermining workers’ rights to form unions.

Merchandising Missteps
Wal-Mart’s fashion problems are only one example of how the company is stuck in the past and unable to change course.

Wal-Mart Posts Profit Below Estimates, Cuts Forecast [Bloomberg News]

“They still have not gotten the fashion proposition down the way that Target has,” said Peter Sorrentino, senior portfolio manager at Huntington Asset Management in Cincinnati “They’re just not getting the customer traffic through the store.”

Wal-Mart Profit Jumps but Outlook Cut [Associated Press via Baltimore Sun]

But the retailer’s sales, particularly in apparel and home furnishings, have also been sluggish because of its own merchandising mistakes. Wal-Mart, which downplayed discounts last year, has in recent months stepped up price cuts. This fall, it announced price cuts on 16,000 items to boost sales in the critical back-to-school season.

Wal-Mart Lowers Outlook As Customers Feel Squeezed [Wall Street Journal]

But home-related goods and apparel, which carry higher margins and are crucial to overall profits, remain a challenge for Wal-Mart. Apparel sales saw “pressure in all areas,” said Eduardo Castro-Wright, president of U.S. stores. The company expects apparel to remain soft through the third quarter, although it said it was “encouraged” by demand for some back-to-school merchandise in August.

In an interview, Chief Financial Officer Tom Schoewe said a tighter focus by store managers on keeping shelves fully stocked with key merchandise has spurred significant improvements. An effort to better match staffing hours with customer traffic patterns also continues to shorten checkout lines.

Wal-Mart Posts Profit Below Estimates, Cuts Forecast [Bloomberg News]

After U.S. sales of more expensive apparel and home goods faltered, Chief Executive Officer H. Lee Scott shuffled managers in an as-yet-unsuccessful attempt to boost results. Price cuts during the holidays and back-to-school seasons have failed to attract shoppers..."Our underlying operating performance this quarter is not what we expect of ourselves, and not what our shareholders expect of us,’’ Scott said in a statement.

International Sales
Wal-Mart’s international division has been the company’s life raft for many years. Having almost reached total market saturation in the United States, Wal-Mart’s international growth has kept the otherwise stagnant company afloat. Now even the international divisions are facing trouble.

Wal-Mart Profit Jumps but Outlook Cut [Associated Press via Baltimore Sun]

One area of concern is the international division, which had been a buffer to weak domestic sales. Wal-Mart said that it is seeing the same economic pressures internationally, particularly Mexico. On Tuesday, the company reported that the international division’s operating income rose 5.1 percent, while Wal-Mart stores rose 3.8 percent.

Wal-Mart cuts full-year earnings forecast [Financial Times]

While Wal-Mart expansion plans within the US have often met with opposition from local communities fearful that small retailers will be forced out of business, the retailer’s attempts at international expansion have been patchy. More than one-fifth of its sales come from outside the US, mainly Canada and Mexico. But last year Wal-Mart decided to abandon Germany and South Korea; it has failed to penetrate China and India; and its stores in Japan have been loss-making for several years.

Unsustainable Strategies
As one analyst on CNBC put it, these strategies don’t help Wal-Mart so much as hurt everyone else.

Wal-Mart posts higher profit [Reuters via ABC News]

Wal-Mart has slashed prices on thousands of items by as much as 50 percent to boost sales at its U.S. stores during the back-to-school season. The retailer said last week that while the price cuts attracted shoppers, they also hurt margins.

Wal-Mart Lowers Outlook As Customers Feel Squeezed [Wall Street Journal]

Asked whether Wal-Mart will accelerate its aggressive discounting as it heads into the second half, Mr. Schoewe said, “I don’t think so.” At the same time, he said Wal-Mart’s business model is “an everyday low-price business model. We’re not going to lose track of that commitment.”

Wal-Mart Posts Profit Below Estimates, Cuts Forecast [Bloomberg News]

“The absence of sustainable improvement” at the company’s U.S. operations remains a chief concern to investors, wrote Krista Zuber, an analyst at UBS Securities LLC, in a research note.

Poor Management
This isn’t the first time Lee Scott has come under fire, and it surely won’t be the last.

Wal-Mart Posts Profit Below Estimates, Cuts Forecast [Bloomberg News]

“The company and this management has suffered a credibility blow that will take time to overcome,’’ wrote Grom. ``The timeframe around such a turnaround will likely be measured in years, not months.”

All This Leads to Trouble

Wal-Mart Shares Fall as Results Disappoint, Company Cuts Forecast [CNBC]

Charles Grom, an analyst at J.P. Morgan Securities Inc. in New York, downgraded Wal-Mart to “neutral’’ from “overweight’’ today, citing economic pressures into next year.

Grom had upgraded Wal-Mart in June after the company said it would open fewer new U.S. supercenters. Efforts to improve results haven’t been successful, he said.

“I certainly think that (the results have) come as a little bit as surprise, not necessarily the second quarter number, but when you look at the second-half and guiding down for the year, the market’s saying that’s a disappointment,” John Lawrence, senior retail analyst at Morgan Keegan, told “Squawk Box.”

Posted by Alex Goldschmidt on Tuesday, August 14, 2007

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