Wal-Mart: Squeezing Out a Profit Despite Soft Sales

By Simon Avery

Economists tell us that a full-fledged economic recovery needs to be driven by consumers. So how are individual shoppers really thinking today? One way to read that sentiment is to parse results of the world’s largest retailer. On Thursday morning, Wal-Mart (WMT) released third-quarter results, surpassing expectations on the Street.

It seems the company managed to increase profit by about 3% and sales by 1%, largely by squeezing out even more savings, rather than from any up tick in consumer spending. Same store sales, a critical retail metric, actually declined slightly in the quarter.

“They’re managing around their soft sales,” is how Howard Davidowitz, who runs a retail consulting and investment banking firm, described the results to Bloomberg’s Chris Burritt.

Wal-Mart shares traded up 49 cents at $53.46 in late morning trading on Thursday.

Senior management said economic conditions are tough and customers remain concerned. So Wal-Mart is focused on minimizing inventories, getting more people into its stores by advertising and offering price specials, and cutting costs even further.

That’s not exactly a ringing endorsement of the retail environment going into the year’s biggest shopping season. In fact, for the current quarter, Wal-Mart’s forecast is at the low end of analysts’ expectations. The company said it expected fourth-quarter profit to range between $1.08 and $1.12 a share, compared with consensus estimates of $1.12 a share.

It is a testament, however, to Wal-Mart’s ability to run a smart operation in rough times. The company made headlines last quarter in a tit-for-tat price war on books with Amazon.com (AMZN), the world’s largest online retailer. By the end of the skirmish, Wal-Mart had lowered the price on its ten top-sellers to just $8.99.

Why would such a smart retailer engage Amazon at this moment when it’s trying to squeeze an extra penny out of everything? Because it wants to kill its smaller rivals, not necessarily Amazon. James Surowiecki - who has a true talent for analyzing financial issues without using numbers - explains it best in a New Yorker article this week. “Wal-Mart and Amazon have figured out how to fight a price war and win: make sure someone else takes the blows,” he says.

Comments

[bottoms-up:]

I'm not sure about other SA readers, but my local WalMart has turned into a semi-dollar store. You can really see "inventory control" at work. Some of the walls have row after row of lawn chairs or coolers.

The large variety of goods seems to have disappeared.

One thing about WalMart (Target, etc): It remains to be seen how the box store model, based on cheap credit and equally cheap foreign goods from places like China, will play out in the future. Size has its advantages, but it also has a downside if you have too much floor space for too few goods.

As the price of oil rises, shipping goods from China to the USA also increases - when oil was up at $150.00/bbl you could really see it hitting places like WalMart.

I think there is only so much blood you can get from a stone, and WalMart is really squeezing that stone.

Nov 13 10:44 AM

[dividend_gr...:]

Actually, 150 dollar oil would hurt its competitors far more.

Last year, Wal-Mart was one of the few stocks that had actually gone up.

Nov 13 12:07 PM

[cyclingscholar:]

Until we get state, local, and the federal government to call off the anti-WalMart, Union card-check luddites, WalMart will continue to post record sales, profits, margins, and EPS...and go nowhere in price, as it has stagnated since 2000.

Nov 13 03:41 PM