Wal-Mart Fourth-Quarter Profit Trails Estimates as Low Prices Hurt Margins

Wal-Mart Stores Inc. (WMT), the world’s largest retailer, reported fourth-quarter profit that trailed analysts’ estimates as an emphasis on low prices hurt margins. The shares tumbled the most in six months.

Net income for the quarter ended Jan. 31 fell 15 percent to $5.16 billion, or $1.50 a share, from $6.06 billion, or $1.70, a year earlier, the Bentonville, Arkansas-based retailer said today in a statement. Excluding some items, profit was $1.44, trailing the $1.45 average estimate of 24 analysts surveyed by Bloomberg.

Chief Executive Officer Mike Duke is working to contain Wal-Mart’s costs and last quarter started pulling the company’s greeters from store lobbies to help with customer-service tasks. The retailer is seeking to keep prices low as its low-income shoppers suffer from persistent unemployment.

“It’s not the most inspiring result, but they’re in a better place than they were 12 months ago,” Natalie Berg, global research director for Planet Retail in London, said in an interview. “Going back to basics is a winning strategy, but it will take some time.”

The earnings miss was Wal-Mart’s second in a row. The company’s profit hasn’t trailed analysts’ estimates for two consecutive quarters since at least the first quarter of its fiscal 2006, according to data compiled by Bloomberg.

Wal-Mart fell 3.9 percent to $60.07 at the close in New York, the biggest decline since Aug. 10. The shares gained 11 percent last year.

Wal-Mart Sales

Sales at U.S. Wal-Mart stores open at least a year rose 1.5 percent, the second gain in the past 10 quarters. The average estimate of six analysts was for a 1.8 percent gain.

Total revenue increased 5.9 percent to $123.2 billion. Gross profit as a portion of sales narrowed to 24.3 percent, a 0.4 percentage point decrease from a year earlier.

Chief Financial Officer Charles Holley said that there will continue to be pressure on margins as the company works to wring out costs and offer low prices.

“We may see margins come down more than expenses in some quarters and expenses come down more than margins in other quarters,” Holley said on a conference call with journalists. “We’re not going to match expense reduction with margin reduction.”

Margins at Wal-Mart’s biggest business, the U.S. stores division, are likely to disappoint investors, said Colin McGranahan, an analyst with Sanford C. Bernstein & Co. in New York. Sales at the U.S. stores rose 2.4 percent while operating income increased 1.4 percent.

‘Not That Impressive’

“It’s just not that impressive,” McGranahan said.

Wal-Mart’s guidance for fiscal 2013 also is disappointing, McGranahan said. The company said earnings per share will be $4.72 to $4.92. The average of analysts’ estimates compiled by Bloomberg was $4.90.

Comparable-store sales including fuel for the Sam’s Club warehouse membership unit rose 6.8 percent, topping analysts’ average estimate of 5.5 percent. The company said last month that Brian Cornell would step down as the unit’s CEO and be replaced by Rosalind Brewer, who most recently was president of Wal-Mart’s U.S. East business.

Sales at the company’s international operations rose 13 percent to $35.5 billion. Operating income for the unit increased 15 percent to $2.31 billion.

Job Security

Holley said Wal-Mart’s core customer still is under pressure from high unemployment and tight household budgets.

Job security is still the number one thing they worry about,” he said.

Food prices are the second-biggest concern among Wal-Mart customers, and fuel costs are number three, he said. Wal-Mart’s food business was hit by 400 basis points of inflation and passed less than half of that on to customers, he said.

To contact the reporter on this story: David Welch in Detroit at dwelch12@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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