Wal-Mart cuts costs to profit but says consumers wary

CHICAGO Tue Aug 17, 2010 12:58pm EDT

A Wal-Mart cart is seen at the parking lot of a Wal-Mart market in Miami, Florida May18, 2010. REUTERS/Carlos Barria

A Wal-Mart cart is seen at the parking lot of a Wal-Mart market in Miami, Florida May18, 2010.

Credit: Reuters/Carlos Barria

CHICAGO (Reuters) - Wal-Mart Stores Inc (WMT.N) said it would focus on curbing expenses to boost profits this year as consumer sentiment remains soft, and signaled a move away from steep price cuts that have hurt its margins.

The world's largest retailer posted a higher-than-expected quarterly profit and raised its full-year earnings forecast on Tuesday, helped by cost cuts and international growth.

But in the United States, same-store sales fell for the fifth consecutive quarter, and the company said improving those results remained a top priority.

"In the things they control, I think they do have opportunity to get (back) some lost sales -- or sales they gave up," said Edward Jones analyst Matt Arnold.

Part of that strategy involves ending a series of "rollbacks", or steep price cuts, on thousands of items that did not end up boosting sales, company executives said. Instead it restored what it calls "everyday low prices" on a wider array of goods to lure shoppers.

"Our customer continues to be under pressure and even though we had some pretty dramatic price reductions, those reductions weren't enough to drive the impact we hoped for," Wal-Mart CFO Tom Schoewe said during a conference call with reporters.

Wal-Mart shares rose 2 percent to $51.44 as investors were reassured the company was taking steps to lift sales, boosting other retail shares and the wider stock market. Home Depot (HD.N) also reported a better-than-expected profit on Tuesday, and its shares rose 4.9 percent.

Wal-Mart's base of low-income shoppers are particularly vulnerable to high U.S. unemployment and rising gasoline prices. The weak economic recovery was underscored by new data showing that permits for future home construction fell to their lowest level in more than a year.

"The slow economic recovery will continue to affect our customers, and we expect they will remain cautious about spending," Wal-Mart Chief Executive Mike Duke said.

Wal-Mart said it will take time to see improvements in U.S. same-store sales and forecast a decline of 2 percent to an increase of 1 percent in that measure in the third quarter, compared with a 1.8 percent drop in the second quarter.

"We're confident that changes we're making will improve top line sales by the fourth quarter," Bill Simon, CEO of the U.S. Walmart division, said in a recorded message for investors.

SAVE MONEY, RAISE PROFITS

Wal-Mart's profit was $3.60 billion, or 97 cents a share, in the second quarter ended July 31. Analysts on average forecast 96 cents, according to Thomson Reuters I/B/E/S.

A year earlier, it posted a profit of $3.48 billion, or 89 cents a share.

Revenue rose 2.8 percent to $103.73 billion, below the average Wall Street forecast of $105.33 billion.

Wal-Mart also raised its full-year earnings forecast to $3.95 to $4.05 a share from a previous view of $3.90 to $4. Analysts had forecast $3.99 per share.

International sales rose 11 percent, helped by strength in Mexico and new store openings in Brazil and China. On a constant currency basis, sales in the unit rose 7.3 percent. Its Asda chain in Britain posted a fall in underlying sales for the second quarter in a row.

While sales are sluggish, Wal-Mart has cut costs throughout its supply chain and stores. But analysts question how much more it can extract costs from the system.

Wal-Mart has also faced problems of its own making, including an ill-fated move to remove hundreds of items from stores in the "Project Impact" overhaul announced in 2008.

In June, Wal-Mart named Simon as CEO of U.S. discount stores, replacing Eduardo Castro-Wright, who remained vice chairman of the company. Days later, the company announced the departure of the unit's chief merchandising officer.

Wal-Mart has also gone back to focusing on basics like T-shirts and socks in its apparel business, an area which has long been a drag on sales. Simon expects to see same-store sales improve in apparel in the fourth quarter.

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Comments (3)
langco wrote:
walmarts poor US sales confirm the depression in the country is growing worse.overseas sales held the companys profits up…

Aug 17, 2010 1:10pm EDT  --  Report as abuse
fromthecenter wrote:
Wal-mart cost cutting? I feel sorry for all those chinese mfg workers that they have been hiring/exploiting for the last 10 years. Although, they might be able to buy socks, unlike many of the American poor/lower middle class who’s jobs they are largely responsible for moving there.

You will never see me in a Wal-mart.

Aug 18, 2010 3:53am EDT  --  Report as abuse
Gotthardbahn wrote:
The only things I buy at Wal-mart are casual shoes, jeans and athletic socks. They actually carry shoes in my size (13) in a variety of styles and at a good price, too. Ditto for jeans. Anywhere else ya gotta be under 20 years of age or under 120 pounds. Or a girl. For a middle-aged regular guy, forget about it. And socks! The price simply can’t be beat.

But that’s it for Wal-mart. I go once, perhaps twice a year. Everything else I buy anywhere else.

Aug 18, 2010 10:15am EDT  --  Report as abuse
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