Wal-Mart rethinks overseas strategy, nixes planned stores
Wal-Mart will slow its growth in China and Brazil in an effort to make current stores more profitable.
Wal-Mart Stores Inc. reported a 5.7 percent increase in second-quarter net income and raised its outlook for the year as the world's largest retailer continues to woo back frugal shoppers by re-emphasizing that it has the lowest prices on everything from clothes to electronics.
But Wal-Mart said Thursday that its total revenue came in short of Wall Street estimates, and the discounter announced that it would delay store expansion plans in Mexico, its largest international division, as it deals with bribery charges there. Investors, who had sent the stock up 25 percent since mid-May, pushed shares down more than 3 percent on the news.
Wal-Mart is considered an economic bellwether because the retailer accounts nearly 10 percent of nonautomotive retail spending in the U.S. The company said its customers are still being squeezed by economic problems in the U.S. and abroad. In the U.S., Wal-Mart's low-income shoppers are still having trouble stretching their dollars to the next payday, and that financial duress escalated overseas in the latest quarter. The company said what's helped it is a focus on low prices.
"I don't think the economy is helping us," Charles Holley, Wal-Mart's chief financial officer told reporters during a conference call. "Our customer is still very concerned about employment."
Still, Wal-Mart's results offer optimism that the company's namesake U.S. business has turned a corner. Wal-Mart, which thrived during the U.S. recession as more well-off people started shopping at its stores here, had begun to struggle as the retailer's core low-income customers were hit hard by joblessness and other challenges in a slow economic recovery.
Adding to that, Wal-Mart's U.S. stores, which account for 60 percent of the company's revenue, had turned off shoppers by veering away from its "everyday low prices" strategy and focusing more on temporarily slashing prices on select items. It also got rid of popular merchandise in an effort to de-clutter the stores.
Wal-Mart last year began adding back 10,000 products and refocused on keeping prices low throughout the store, backing the strategy with TV campaigns. It has done that by cutting expenses and passing some of the savings on to customers. As a result, revenue at Wal-Mart's U.S. division rose 3.8 percent to $67.35 billion in the latest quarter.
Revenue at stores open at least a year — considered a key measure of a retailer's health because it excludes the impact from stores that open and close during the year — rose 2.2 percent in the division, excluding fuel. The figure, which beat the 2.1 percent Wall Street estimate, marks the fourth consecutive quarterly gain for the division after it experienced nine straight quarters of declines.
Customer traffic increased for the third straight quarter, too. The increase was 0.4 percent but that translated to serving another 80,000 additional customers every day during the latest quarter, says Bill Simon, president of Wal-Mart's U.S. namesake division.
Wal-Mart enjoyed sales gains in nearly every merchandise category except for consumer electronics, which continues to post declines because of deflationary pressures in gadgets. Wal-Mart's return to clothing basics like underwear, jeans and socks continues to pay off. So far this season, key back-to-school clothing categories have enjoyed a 7 percent sales increase.
For the overall U.S. business, revenue at stores opened at least a year rose 2.5 percent, including a 4.7 percent increase at the company Sam's Club warehouses. Analysts had expected 2.6 percent.
Wal-Mart's international business, which produces more than a quarter of its revenue, has remained strong. The company's international sector increased 6.4 percent to $32.01 billion in the quarter. Even in the United Kingdom, which is struggling with a weak economy, Wal-Mart has seen shoppers flocking to its stores because of its low prices. It says it gained market share in the period.
Wal-Mart aims to make its overseas operations more profitable, particularly in China and Brazil. Wal-Mart said Thursday that it's slowing store expansion in China. During the first quarter, it announced it was slowing store expansion in Brazil. Holley said that this would allow the team to improve its everyday low price strategy.
In Mexico, Wal-Mart said it's delaying the expansion of some of its stores in Mexico by as much as 90 days. The delay, the company said, is due to additional steps its Mexico division is taking in the real estate process. These steps include reinforcing documentation that backs real estate projects. In addition, some stores that are set to open in Mexico the latter half of December have been moved into January 2013 to allow its operations team to focus on the Christmas season.
The delay in Mexico come four months after reports surfaced that the retailer allegedly failed to notify law enforcement after finding evidence that officials authorized millions of dollars in bribes in Mexico to speed building permits and gain other favors. The company has said it has launched its own internal investigation into the bribery matter and is working with government officials in the U.S. and Mexico. Wal-Mart has also been overhauling its compliance program.
In the latest blow, two U.S. congressmen who are doing their own investigation — Reps. Henry Waxman and Elijah Cummings — made public this week letters to Wal-Mart's CEO Mike Duke suggesting the company may have had problems with money laundering and tax evasion. Walmex, Wal-Mart's Mexico division, said in a statement that "it has no knowledge that (it) is being investigated by Mexican authorities concerning these issues."
Overall, Wal-Mart reported net income of $4.02 billion, or $1.19 per share, for the quarter ended July 31. That compares with $3.80 billion, or $1.09 per share, a year ago. Revenue excluding membership fees at Sam's Club rose 4.5 percent to $113.53 billion. Analysts had expected earnings of $1.17 per share on revenue of $114.63 billion.
The company said it expects third-quarter net income between $1.04 per share and $1.09 per share. Analysts had expected $1.05. For the full year, the company now forecasts earnings per share to be in the range of $4.83 to $4.93. That is up from Wal-Mart's original forecast of $4.72 to $4.92 per share. Analysts had expected $4.93.
Shares fell $2.45 to $72.00 in mid-day trading Thursday. Investors, who pushed Wal-Mart's stock down right after the allegations surfaced in late April, had sent shares up 25 percent since mid-May.