Weak 3Q for most; Wal-Mart below par - Walt-Mart Stores Inc

Discount Store News, Dec 4, 1995

NATIONWIDE DSN REPORT - With the third quarter ending on a sour sales note in October, discounters reported generally poor results, capped by wider-than-expected losses at Kmart.

Kmart reported an operating loss of $79 million on a 2.5% sales gain, compared to an operating profit of $149 million in the third quarter of '94. Kmart also posted a net loss equal to 15 cents per share, compared to the 11 cents per share most analysts were predicting.

Kmart said operating results for the third quarter were affected by the aggressive clearance of discontinued inventory, continued promotional activity, liquidating closed stores, shifts in the merchandise mix (toward consumables), high shrinkage and a new inventory system. It also blamed weak performances at Builders Square and Kmart Canada. (Kmart was expected to announce in November the sale of its Canadian subsidiary, but had taken no action at press time.)

The company's gross margin fell to 21.2% of sales from 24.4% in '94, and chairman Floyd Hall acknowledged that low margins remain a problem.

The disappointing results plagued a number of retailers. Wal-Mart reported comparatively weak results (the lowest comp store gains in analysts' memory) and a "modest" gain in operating profits of 9.1%. Its net income rose 4.1%, or one cent per share, for the quarter.

"Given the difficult retail environment and low inflation, our earnings growth was below historic levels," said Wal-Mart president and ceo David Glass.

Moreover, the average ticket declined, even though customer traffic levels remain high, said Jay Fitzsimmons, vp of finance for Wal-Mart.

Dayton Hudson doesn't disclose actual quarterly operating results for Target but described them as "moderate," compared to "strong" for the same period last year. The Target results were insufficient to overcome profit declines for its department stores and its Mervyn's division, since total corporate operating profits plunged 34.9%.

Still, results at Wal-Mart and Target look good compared to the 56% slump in net income for Toys "R" Us; an operating loss of $15 million for Venture; an increased operating loss of $7 million for Ames; an operating loss of $10.9 million for Burlington Coat Factory; an operating loss of $8 million for the Borders Group; a net loss of $2.3 million for Clothestime; and sharp declines in operating profits for Hi/Lo Automotive, Filene's Basement, Ross Stores and The Men's Wearhouse.

As usual, the exceptions to the operating profits trend stood out. Staples reported a thumping 84% gain in third quarter operating profits; OfficeMax, a 45.2% gain; BJ's Wholesale Club, up 25.2%; Dollar General, up 21.2%; and Consolidated Stores, up 17.0%.

And as usual, the weather took part of the blame.

At Ames, results were affected by the impact of warm weather on fall and winter merchandise, ceo Joe Ettore said, as well as "a continuing industrywide weakness in apparel."

Third quarter U.S. sales at Toys "R" Us "reflect a week retail climate," ceo Michael Goldstein said, as well as a decline in sales of Power Rangers, last year's hit toy.

It was a "difficult quarter," said George Strahan, retail analyst for Goldman Sachs, New York. "There wasn't much leveraging of sales" the bottom line.

Wal-Mart, Kmart and Target were pumping out a lot of low-margin commodity goods that had expense implications, he added.