Wal-Mart hit by first profit fall in a decade

Wal-Mart hit by first profit fall in a decade
By Jonathan Birchall in New York
Copyright The Financial Times Limited 2006
Published: August 16 2006 03:00 | Last updated: August 16 2006 03:00


Wal-Mart, the world's largest retailer, reported its first quarterly fall in profits for 10 years yesterday, hit by a $863m loss from the planned sale of its 85 stores in Germany.

The retailer's second-quarter net income fell 26 per cent to $2.08bn, while its overall sales rose 11.3 per cent to $84.52bn.

Excluding its operations in both Germany and in South Korea, where it is also selling its 16 stores, Wal-Mart said its profits from continuing operations rose 4.6 per cent to $2.9bn, or 72 cents per share, in line with Wall Street's expectations.

But Lee Scott, chief executive, said the retailer had again felt the impact of higher fuel and utility prices on its customers in its core US stores. Sales at its US stores open at least a year rose 1.7 per cent during the quarter, compared with a 4.7 per cent increase in the same period last year.

"We are quite honestly disappointed with the sales performance of Wal-Mart US," he said. "Customers tell us that they're most concerned about gas prices."

Wal-Mart retained its forecast for earnings for the year at $2.88 to $2.95 per share, in contrast with Home Depot, the home improvement retailer, which yesterday warned that it expected full-year earnings at the low end of previous guidance, citing the impact of interest rates and fuel prices.

Bob Nardelli, Home Depot's chief executive, predicted a "challenging" second half.

Tom Schoewe, chief financial officer, said Wal-Mart had managed to achieve a slight increase in its gross margins during the quarter, as it kept labour costs flat, offsetting increased costs from higher utility bills for its stores and the costs of a continuing remodelling programme.

He also gave the first indication that Wal-Mart's year-old revamp of its marketing and merchandising, aimed at persuading customers who use its store for basic goods to "cross the aisle" to buy higher-margin goods, such as clothing and electronics, was beginning to have an impact on its performance.

"Most importantly we're seeing that market segmentation, better store design and improved merchandising are all paying off," he said. "Initial margins, driven by general merchandising, are expanding."

Mr Schoewe also highlighted the retailer's continued progress in reducing inventory, which for the second quarter in succession met the retailer's target of increasing inventory at less than half the rate of sales.

Wal-Mart said it "continued to see progress" at its lossmaking Seiyu stores in Japan, which again recorded positive sales growth and improved margins.

But it reported a decline in profit margins at its Asda unit in Britain, as it lowered prices to win market share. However, the company added that Asda's total sales were above plan.