Wal-Mart holiday price cuts hit profits

Wal-Mart Stores Inc's price cuts hurt its fourth-quarter profit, reminding investors that steps the world's largest retailer is taking to bring back shoppers do come at a cost.

Wal-Mart's quarterly profit and sales fell short of Wall Street expectations and its forecasts suggest that results in this quarter and fiscal year may again disappoint analysts.

"Everything had the hint of conservatism in the guidance," said ITG Investment Research senior hardline retail analyst John Tomlinson. "People are contemplating bear case scenarios, what they could mean for earnings growth."

Shares of Wal-Mart fell 4 per cent, erasing most of the gains so far in 2012. The stock had been up about 29 per cent since August as its US sales turnaround plan was starting to show progress.

Sales at Walmart US stores open at least a year, or same-store sales, rose 1.5 per cent. While that was toward the higher end of Wal-Mart's forecast of a 0 to 2 per cent increase, it fell short of analysts' average forecast of 1.8 per cent tracked by Thomson Reuters.

Price cuts in the United States helped bring in more customers during the crucial holiday season. It was the second quarter in a row that Walmart US same-store sales rose after nine consecutive quarterly declines, but analysts were largely disappointed that same-store sales were only a hint better than the third quarter's 1.3 per cent rise.

Now, fresh concerns include the impact rising gas prices will have on shoppers. Wal-Mart is cutting costs and pushing those savings into lower prices, a process that sometimes means margins will fall faster than expenses. Operating income growth at Walmart US grew at a slower rate than sales.

" While we believe (Wal-Mart's) renewed price focus represents the appropriate strategy, Q4 results also demonstrate the limits to which the company can leverage this into profit growth ," said Bernstein Research analyst Colin McGranahan.

Walmart US, Wal-Mart's biggest division, has been lowering prices and bringing back a wider variety of items to woo shoppers on limited budgets who started to shop at dollar stores and elsewhere. Traffic at its US stores rose after six quarterly declines, showing that such efforts lured shoppers.

Traffic was strongest in January, showing that Walmart continued to bring in shoppers even after its heavily promoted layaway plan helped drive growth in October through December.

Competitors Dollar General and Family Dollar have not reported full holiday quarter results yet, but same-store sales in their latest quarters outpaced the 1.5 per cent rise at Walmart. Target Corp posted a 3.3 per cent rise in same-store sales for the quarter earlier this month.

S&P Capital IQ equity analyst Joseph Agnese cut his rating on Wal-Mart to "buy" from "strong buy," as he sees pressure on sales and margins from the pricing plans. He kept his $67 price target on the shares.

Wal-Mart is optimistic that employment reports will continue to improve, which could boost consumer confidence. But higher gas prices are pressuring shoppers' limited budgets.

"There is a new normal with customers," Chief Financial Officer Charles Holley told reporters. "Markets are more volatile, gas prices are more volatile and so I think the customer is going to continue to look for ways to save money because they don't know what's around the corner."

Investors should expect margins to decline as the company looks for new ways to trim costs and cut prices, Holley said.

In the past, quickly rising gas prices led shoppers to cut back on trips to Walmart and they spent more during each visit. Higher gas prices also help dollar stores, as shoppers can often reach those smaller shops by foot or by public transportation.

Walmart also still contends with a poor image among some shoppers who complain about the long checkout times, among other issues.

Satisfaction with Walmart in the fourth quarter fell 4.1 per cent, while competitors such as Target and Sears saw their scores rise, according to findings released on Tuesday by the American Customer Satisfaction Index. Wal-Mart's Sam's Club warehouse chain saw its satisfaction score rise by 3.8 per cent.

Wal-Mart earned $5.19 billion, or $1.51 per share from continuing operations attributable to the company, up from $5.02bn, or $1.41 per share, a year earlier.

Excluding about 7 cents per share from certain tax matters and real estate transactions, Wal-Mart earned $1.44 per share. The company had forecast a profit of $1.42 to $1.48 per share, excluding the benefits. Analysts, on average, expected it to earn $1.45 per share, according to Thomson Reuters I/B/E/S.

Sales rose 5.8 per cent to $122.29bn, below the average analyst estimate of $124.21bn.

Wal-Mart forecast first-quarter earnings per share from continuing operations attributable to the company of $1.01 to $1.06, compared with a profit of 98 cents per share a year earlier, which included a lift of 1 cent from multiple items.

The company expects first-quarter same-store sales to be flat to up 2 per cent at Walmart US and to rise 3 per cent to 5 per cent at Sam's Club, excluding sales of gasoline.

It forecast fiscal year earnings per share from continuing operations attributable to the company of $4.72 to $4.92.

Analysts on average forecast a profit per share of $1.05 for this quarter and $4.90 for the year.

Wal-Mart's international business grew at a faster clip than the larger Walmart US Operating income at Walmart International rose 15.2 per cent to nearly $2.31bn, while Walmart US operating income rose 1.4 per cent to $6.11bn.

International results were mixed. Britain's Asda saw sales growth slow from the third quarter. Wal-Mart de Mexico, or Walmex, topped analysts' expectations as it opened more stores.

On Monday, Wal-Mart said it was taking a controlling stake in Chinese e-commerce company Yihaodian.