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VOL. 126 | NO. 38 | Thursday, February 24, 2011

Consumer Comeback Skips Wal-Mart's Aisles

ANNE D'INNOCENZIO | AP RETAIL WRITER

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NEW YORK (AP) – Wal-Mart is missing out on the consumer comeback.

The world's largest retailer failed to reverse an almost two-year slide in a key revenue measure in its fourth quarter, it said Tuesday, after all but promising in November it would do just that.

At Wal-Mart, fewer customers are coming in the door. At most other retailers, holiday shoppers spent more, and consumer confidence is now at its highest point in three years.

Wal-Mart's mistakes in merchandise and prices, along with financial stress on its lower-income customers, forced it to rely on international growth and cost-cutting to post a 27 percent increase in fourth-quarter net income.

Wal-Mart's 1.8 percent decline in revenue at U.S. discount stores open at least a year, its seventh straight quarterly drop, was worse than feared. That important measurement of a retailer's health excludes stores that open or close during the year.

For the past year, the discounter has seen customer counts decline as it lost shoppers to rivals like dollar stores for quick trips to buy milk and diapers.

Wal-Mart had hoped sweeping changes, from restoring thousands of products it stopped carrying and going back to offering low prices across the store, would help sales rise again.

It's now clear there won't be a quick fix.

"Wal-Mart's holiday season was lackluster compared to everyone else," said Ken Perkins, president of research firm RetailMetrics. "This might be a deeper hole to dig out than (Wal-Mart) had thought."

Wal-Mart's sprawling one-stop shopping format is facing challenges because shoppers are changing the way they buy. They're buying closer to when they need things and "are happy to make multiple trips" to smaller, more convenient stores to get the best value, UBS analyst Neil Currie said.

Wal-Mart's disappointing holiday report stood in contrast to positive reports Tuesday from Home Depot Inc., which posted its first yearly revenue increase since 2006, and Macy's Inc., whose 50 percent profit increase was helped by strong holiday sales and a tight hold on expenses.

Also Tuesday, The Conference Board said consumer confidence hit its highest level in three years in February as Americans feel more optimistic about their income prospects and the economy.

Wal-Mart's legendary cost-cutting ability has helped keep its profits rising. Its net income rose to $6.06 billion, or $1.70 per share, in the quarter ended Jan. 31, up from $4.76 billion, or $1.25 per share, a year earlier.

Excluding one-time items, earnings were $1.34 per share, topping expectations for $1.31 per share.

But since the second quarter of 2009, they've lagged other retailers' profit performance. Perkins predicts fourth-quarter profits for the retail industry will rise 13 percent, but excluding Wal-Mart, he forecasts growth of almost 16 percent.

Net sales, excluding membership and other income, increased 2.5 percent to $115.6 billion, short of analysts' projections of $117.52 billion.

U.S. revenue at stores open at least a year fell 1.1 percent, dragged down by a 1.8 percent drop at its namesake discount stores, which account for nearly two-thirds of its business. At Sam's Clubs, the measure rose 2.7 percent.

Over the past year, the company scrambled to add back thousands of products it had culled as part of a renovation of its stores. In recent months, it went back to emphasizing low prices across the store as opposed to splashy discounts on only some items.

Wal-Mart's funk contrasts with its position at the beginning of the recession in late 2007. Unlike most stores, Wal-Mart thrived. Its core customers – households making less than $70,000 a year – bought more. Affluent shoppers became price-conscious and discovered Wal-Mart's prices were hard to beat.

Now, dollar stores are in the driver's seat. Wal-Mart's CEO and President Mike Duke said in a recorded conference call Tuesday that that the company would push "with even greater urgency in opening small stores." Chief Financial Officer Charles Holley said it plans 30 to 40 smaller stores one-sixth thes size of a typical Wal-Mart, half of them Neighborhood Market stores.

Wal-Mart is also working with suppliers to develop products in smaller sizes to cater to cash-strapped shoppers who want to buy only what they need.

At its U.S. discount stores, electronics sales were weak because of falling prices. So were clothing and home furnishings. Food, which accounts for half of Wal-Mart's business, posted gains in the low single digits, and health and wellness products had increases.

But for the "consumables" category besides food, including basic household items like paper goods and shampoo, the company suffered low single-digit declines.

Holley said that the company has restored grocery items it had cut by the fourth quarter, but for general merchandise items like clothing, it would take the rest of the year. Late last year, company executives had said that would be finished by spring.

Wal-Mart's international business, which accounts for 26 percent of company revenue, remained a bright spot, and it expects growth in emerging markets to speed up.

Wal-Mart expects first-quarter earnings per share between 91 and 96 cents. Analysts expected 96 cents per share, according to FactSet. The company also forecast that earnings for the year would be between $4.35 and $4.50 per share. Analysts expect $4.45 per share.

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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RECORD TOTALS DAY WEEK YEAR
PROPERTY SALES 54 266 12,031
MORTGAGES 111 406 15,756
FORECLOSURE NOTICES 27 107 3,130
BUILDING PERMITS 0 606 28,832
BANKRUPTCIES 73 364 11,671
BUSINESS LICENSES 17 119 4,274
UTILITY CONNECTIONS 121 549 17,732
MARRIAGE LICENSES 23 104 3,668

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