By Karen Talley
Wal-Mart Stores Inc. was able to control expenses enough to help offset rising product costs and interest expenses in the fiscal first quarter, but the retail behemoth continues to lean on overseas growth as U.S. sales slip.
Overall, first-quarter profit rose 3% but same-store sales at the U.S. stores, by far Wal-Mart's biggest unit, fell for the eighth straight quarter.
The company is trying to gain traction with efforts that include bringing more merchandise back into stores and reemphasizing an "every day low price" strategy but executives say there's a reluctance by consumers to shop. Shopper traffic slowed in the quarter, Wal-Mart said, blaming rising gasoline prices and continued high unemployment, which are sapping confidence from lower-income customers.
"Despite improvements in some areas of the economy, core Wal-Mart U.S. customers are still stretched," Chief Executive Mike Duke said on a conference call.
Same-store sales in the U.S. dropped 1.1% in the first quarter. For the current quarter, Wal-Mart is forecasting that U.S. same-store sales will be in the range of a 1% increase to a 1% drop, reflecting continued uncertainty about customers. (Same-store sales measure sales at stores open at least a year, a standard industry metric.)
Bill Simon, head of Wal-Mart's U.S. operation, said that progress is being made domestically, with groceries showing low single-digit percentage growth for the quarter.
Chief Financial Officer Charles Holley, in the call with reporters, declined to estimate when the retailer might return to positive U.S. same-store sales. Mr. Holley did say Wal-Mart should be better positioned as the year progresses, with its low prices resonating even more as merchandise inflation increases and the retailer finishes restocking its own shelves with general merchandise that was removed as part of an ill-received streamlining effort.
Wal-Mart said inventory grew by 9.5%, an amount the retailer itself saw as high. Mr. Holly said, "We know we could be more efficient" and that by the end of the year inventory increases should be more in line with sales growth.
The company has opened several Wal-Mart Express stores as pilots in rural and urban areas in the U.S., with the goal of having 15 to 20 stores by the end of the year. The new format's size averages just 15,000 square feet and offers fresh foods and general merchandise, a way to complement existing mammoth-sized Wal-Marts and go up against dollar stores that have been taking business from the retailer.
At the same time, Wal-Mart is delaying the conversion of Wal-Mart discount stores to giant supercenters. Mr. Holley said that while the company is still "very bullish" on the giant stores, "We just want to make sure we have the assortment right and the layout of the stores right."
Wal-Mart also operates Sam's Club warehouse clubs in the U.S., with the unit's sales gains coming in well above estimates, while 7% operating-income growth led the company's divisions.
While seeing mixed performance in the U.S., Wa-Mart is enjoying strong growth in its international business. In the first quarter, "all of our markets had encouraging comparable-store sales results," with Mexico, China, and Chile having the highest comps, said Doug McMillon, head of international operations.
On Monday, Wal-Mart threatened to walk away from a proposed $2.4 billion acquisition of South African retailer Massmart if conditions are imposed following recommendations by the country's Competition Commission. The deal is important for Wal-Mart as it seeks a foothold to tap into Africa's growing consumer class.
For the quarter ended April 30, Wal-Mart posted a profit of $3.4 billion, or 97 cents a share, up from $3.3 billion, or 87 cents a share, a year earlier. Discontinued operations cut the latest result by a penny. In February, the company had forecast a profit of 91 cents to 96 cents a share. Profit growth occurred on lower overhead and income taxes while earnings per share increased more markedly thanks to share buybacks reducing stock outstanding some 7%.
Overall revenue rose 4.4% to $104.19 billion. International sales jumped 12%, and were up 6.2% in constant currencies, as operating earnings increased 1.2%. U.S. sales edged up 0.6%. For the current quarter, Wal-Mart projected earnings from continuing operations of $1.05 to $1.10, bracketing the average Street estimate.
Gross margin, or sales minus the cost of goods sold, fell 30 basis points to 24.4%.
