Performance figures keep climbing - Wall-Mart The Category King: A New Era of Excellence

DSN Retailing Today, June 9, 2003 by Mike Troy

One constant of the economy, be it weak or strong, is Wal-Mart's ability to pile on sales and profits.

This was especially true during the robust economic times of a few years ago, when WalMart's sales and earnings grew at a rate the company acknowledged at the time as unsustainable. Sales increased nearly 17% to $137.6 billion and profits increased 25.6% to $4.4 billion in 1998. And the following year, sales increased 20% to $165 billion and profits grew 21% to $5.3 billion. The economy has cooled considerably since the late '90s for a wide variety of reasons and so has Wal-Mart's rate of growth. Even so, the shcer magnitude of the numbers is impressive. Wal-Mart's sales last year increased by $26.7 billion, or 12.3%, to $244.5 billion. Profits grew at a rate faster than sales and increased 20.5% to approximately $8 billion. The sales growth resulted from a 5.1% same-store sales increase and the addition of 45 million square feet of new selling space that included 192 supercenters, 43 discount stores, 25 Sam's Clubs, 115 international units and 18 Neighborhood Markets.

Economic weakness has persisted this year, but during the first quarter Wal-Mart's sales and profit growth has continued. Sales increased 9.7% to $56.7 billion while net income grew 14% to nearly $1.8 billion on a soft 2.2% same-store sales increase.

"Given the lackluster sales, we are encouraged by the bottom line result and management's unchanged full year guidance," Merrill Lynch analyst Dan Barry said of WalMart's first quarter results.

Wal-Mart executives have indicated they are comfortable with analysts' estimates for full year earnings per share of $2 to $2.05. Last year, Wal-Mart's earnings per share were $1.81.

The deceleration in Wal-Mart's financial performance in the recent past has not concerned analysts because the company has managed to outperform many other retailers, not to mention other large multinational corporations against whom it is now often compared. In fact, the slowdown in consumer spending has resulted in a herd-thinning effect, leaving Wal-Mart in an even better position to post strong results should economic growth rebound.

"We believe that Wal-Mart remains well positioned to grow earnings approximately 12% in 2003 as it continues to benefit from weakness at Kmart and gain market share from other channels of retail," according to analyst Deborah Weinswig with Citigroup Smith Barney. "Also, initiatives such as global sourcing and store of the community, which serves to tailor the product mix to local markets and leads to high sales productivity, are driving better buying and top-line growth in a tough retail environment."

If Wal-Mart is to achieve its full year profit target, it needs consumers to start spending more money. The consensus among retailers since before the war with Iraq was that the economy would strengthen during the second half of the year. That view still holds now that the war is over. In Wal-Mart's case, it also faces easy comparisons against last year's third and fourth quarters.

Despite this view, Goldman Sachs analyst George Strachan believes the likelihood of a strong rebound in consumer spending is low. "We continue to see consumer liquidity constrained by sub-par real wage growth, diminishing cash-out refinancing opportunities and declining net fiscal stimulus from the government sector," according to Strachan.

Another concern facing Wal-Mart during the second quarter is the company's inventory level. Inventories uncharacteristically grew at a rate faster than sales during the first quarter, leading to concerns that Wal-Mart would have to mark down seasonal merchandise if warmer weather didn't come. Most analysts gave Wal-Mart a pass on the increased inventory issue and believe it will be resolved.

"Given the cooler weather in April, we believe Wal-Mart now has heavier-than-planned inventories of apparel and seasonal goods, and higher markdowns may be required in the second quarter unless sales improve meaningfully in May," according to Mark Miller with William Blair & Company. "Ultimately, we consider this to be a one-quarter issue and believe it is likely that earnings per share growth will accelerate again in the second half of the year.

While there are a few concerns over Wal-Mart's performance-namely increased first quarter inventories, Sam's Club and ongoing losses in Germany, and some disagreement among analysts over the timing of an economic recovery and the value of Wal-Mart's share price-one thing all agree on is that Wal-Mart will continue growing.

"We believe that Wal-Mart has the highest level of sales and earnings visibility in retailing due to its continued aggressive rollout of the supercenter format," noted Lehman Brothers analysts Robert Drbul.

Based largely on the proven ability of supercenters to gain market share and the overall growth potential of international operations, Wal-Mart is forecast to add another $24 billion in sales volume this fiscal year. Excluding the recently divested McLane wholesale distribution business, Wal-Mart's sales this year are projected to increase to $253.8 billion from $229.6 billion last year. Within five years, or by the end of 2007, WalMart's sales are forecast to be $370.6 billion, with profits totaling $14.5 billion. And although it is difficult to comprehend because of its size, those estimates could prove conservative as they are undoubtedly colored by current economic conditions and don't reflect the likelihood of international acquisitions or possible entry into new business categories beyond the scope of WalMart's current offering.