Wal-Mart Stores Inc. (WMT) joined the chorus of retailers saying
that economic conditions in the U.S. are making shoppers reluctant
to spend.
The nation's biggest retailer said the reticence is striking
hard at its low-income consumer base after mid-range retailers like
Macy's Inc. (M) and J.C. Penney Co. (JCP) said last week that their
own customers are being affected.
"Our core customer continues to be strained," Chief Financial
Officer Charles Holley said in a call with reporters. And while not
necessarily big stock market investors, Wal-Mart customers are
feeling some confidence sapped by the U.S. debt downgrade and the
market's wild ride. "The volatility in the headlines doesn't help
the customer," he said.
Wal-Mart is in fact seeing more customers on public assistance.
"They are really stretched right now," Holley said.
The situation puts Wal-Mart in a difficult spot, especially
since it said for the first time on Tuesday that it has seen
competitors narrowing their prices against its own. Being seen as
providing less bargains erodes Wal-Mart's credibility as the "low
cost leader," which could have reputational and business
ramifications for the nation's biggest retailer. "We're not as low
as we used to be," Holley said. The company plans steps like
improving its supply chain and being more productive to help bring
down prices, he said.
The problem is at U.S. Wal-Mart stores -- the company's biggest
unit -- where sales at stores open more than a year fell 0.9% in
the second quarter, their ninth straight drop and on the low end of
guidance for a 1% drop to a 1% rise. For the third quarter,
Wal-Mart expects same-store sales to be down by 1% to up by 1%. But
the company is "committed to having a positive comp by the end of
the year," Holley said.
"Wal-Mart U.S. came in a little light and still has work to do,"
said John Tomlinson, a director at ITG Investment Research. "They
have indicated the price gap between themselves and competitors has
narrowed, meaning it is not as advantageous for consumers to shop
at Wal-Mart. Given what Wal-Mart stands for, it is imperative they
have lower prices."
Admittedly, some of the siphoning of U.S. sales was a result of
the retailer's own operational missteps, like removing sought-after
merchandise from shelves. But while the company has made great
strides in righting those mistakes, customers still are a bit
reticent, because of the soft economy and apparent trips to rivals
like dollar stores.
During the quarter, the average amount bought at Wal-Mart U.S.
stores was up and customer traffic was down compared with a year
ago. Both traffic and average amount bought, on year-over-year
basis, improved sequentially each month in the period, the company
said. U.S. sales rose 1.8% for the quarter.
Wal-Mart U.S. Chief Bill Simon said in a pre-recorded call for
analysts that the company was "encouraged by the sales momentum we
have from the second quarter" and said that July same-store sales
were, in fact, up.
Grocery and health and wellness business, representing
two-thirds of sales, continued to deliver positive comps. The
hardlines and apparel businesses, which have had a tougher time,
"are improving," Simon said.
Wal-Mart's international operations fared well, with sales on a
constant currency basis up 7.1% for the second quarter. Mexico, the
U.K., Canada, Brazil and China had the largest sales increases
during the quarter, the company said.
Sam's Club, the retailer's wholesale club chain, remained a
standout, with sales rising 5% on a same-store basis and
comparable-store traffic and ticket, excluding fuel, both higher
than last year, allowing the business to deliver comparable-store
increases in nearly all categories, Wal-Mart said.
The quarter was a busy one for Wal-Mart, with the retailer
taking steps to improve every facet of its business. The
company-opened Wal-Mart Express, its first small concept stores in
the U.S., closed on the purchase of a majority stake in South
African retail chain Massmart and planned the revamping of its
online business, an effort that was completed in the current
quarter.
The measures are meant to boost every facet of Wal-Mart's
business. Wal-Mart is also said to be exploring a potential
acquisition of the Brazilian unit of French retailer Carrefour SA
(CRRFY, CA.FR), two years after a previous attempt to do so ended
in a disagreement over price.
The company raised its full-year earnings view to $4.41 to $4.51
a share from $4.35 to $4.50 and forecast current-quarter earnings
of 95 cents to $1 a share while analysts surveyed by Thomson
Reuters expect 97 cents.
For the quarter ended July 31, Wal-Mart reported a profit of
$3.8 billion, or $1.09 a share, up from $3.6 billion, or 97 cents a
share, a year earlier. It had projected earnings from continuing
operations of $1.05 to $1.10 in May.
Revenue rose 5.4% to $109.37 billion, topping the $108.36
billion expected by analysts polled by Thomson Reuters.
Operating margin fell to 5.8% from 6%.
Wal-Mart shares were up 3.1% to $51.54.
-By Karen Talley, Dow Jones Newswires; 212-416-2196;
karen.talley@dowjones.com