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Wal-Mart earnings post rare decline

High fuel prices and the closure of its stores in Germany lead to the first quarterly drop in a decade for the retail giant.

By ASSOCIATED PRESS
Published August 16, 2006

Wal-Mart Stores Inc. posted its first profit decline in a decade Tuesday as the world's largest retailer paid a hefty price for closing its loss-making German stores while high energy prices hit its sales and costs at home.

CEO Lee Scott said sales were disappointing at Wal-Mart's U.S. stores, its largest division. Customers were making fewer shopping trips to save gas, while Wal-Mart's bills for fuel and utilities were up, he said.

"In the United States, customers tell us they are most concerned about gas prices," Scott said in a prerecorded message. "This has been consistent every month this quarter."

Results were in line with expectations and the company reiterated its guidance for the year.

But analysts questioned whether a third-quarter forecast on the low end of expectations meant the company could meet its target for the year. Wal-Mart's stock fell 55 cents, or 1.2 percent, to close at $44.55 on the New York Stock Exchange.

The company forecast third-quarter earnings between 59 and 63 cents per share, compared with the average analyst estimate of 63 cents. It reiterated a full-year forecast of $2.88 to $2.95 per share, while analysts were predicting $2.92 per share.

"The quality of the quarter itself is kind of moderate. It does not look nearly as good as what we've seen from some of their peers as far as earnings and sales growth," said David Heupel, a portfolio manager for Thrivent Investment Management, with $2.5-billion in assets. The large-cap growth fund within Thrivent that Heupel manages sold its Wal-Mart shares this year.

Heupel said the tepid third-quarter forecast meant Wal-Mart will have to do very well in the fourth quarter - the holiday season that is traditionally the strongest period for retailers - to make the full-year target.

"What they're up against at this point is not only a hard place in the economy for their consumers, but also the fact that they just can't grow at the same rates as in the past," said Patricia Edwards, a portfolio manager and retail analyst at Wentworth, Hauser & Violich in Seattle, which manages $8.2-billion in assets and holds 51,000 Wal-Mart shares.

For the quarter ended July 31, Wal-Mart posted net income of $2.08-billion, or 50 cents per share, down from $2.81-billion, or 67 cents per share, a year ago. That includes an $863-million charge for the sale of its German stores to Metro AG. Revenue rose 11 percent to $85.4-billion from $76.7-billion.

The last time Wal-Mart saw quarterly profit fall was in 1996.

Wal-Mart pulled out of Germany in July and South Korea two months earlier after racking up losses there. It said it would focus resources on expanding in more profitable markets like China and Latin America.

Excluding the German and South Korean operations, the sales of which are pending, Wal-Mart's income from continuing operations grew 5 percent to $2.98-billion, or 72 cents per share, from $2.85-billion, or 68 cents per share, a year ago.

[Last modified August 15, 2006, 23:12:28]