Wal-Mart F1Q08 (Qtr End 4/30/07) Earnings Call Transcript

| About: Wal-Mart Stores, (WMT)
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Wal-Mart Stores, Inc. (NYSE:WMT)

F1Q08 Earnings Call

May 15, 2007 7:30 am ET


Carol Schumacher - Vice President, Investor Relations

H. Lee Scott, Jr. - President and CEO

Thomas M. Schoewe - Executive Vice President and Chief Financial Officer

Charles Holley - Executive Vice President and Treasurer

Eduardo Castro-Wright - President and Chief Executive Officer, Wal-Mart Stores

This call is the property of Wal-Mart Stores Inc. and is intended solely for use of Wal-Mart shareholders. It should not be reproduced in any way.

This call will contain statements that Wal-Mart believes are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and intended to enjoy the protection of Safe Harbor for forward-looking statements provided by that Act. These forward-looking statements generally are identified by the use of the word or phrases: expect, invest, may impact, opening, plan, will be, will continue, will enhance, will have, will reflect, and will take or a variation on one of those words or phrases in those statements, or by the use of words or phrases of similar import. Similarly, descriptions of our objectives, plans, goals, targets, or expectations are forward-looking statements.

These statements discuss, among other things, our anticipated U.S. comparable store sales for the current fiscal quarter and our anticipated earnings per share from continuing operations for the current fiscal quarter and for fiscal year 2008; our anticipated tax rate for fiscal year 2008; potential quarterly volatility in that tax rate and the factors that may impact that tax rate; our planned completion of the full rollout of our new associate scheduling system to all U.S. stores; our expectations for electronic product selection and presentation in supercenters and discount stores in the U.S.; our expectations regarding pressure on margins in our U.S. stores as a result of markdowns and higher inventory in soft lines; our expectation for merchandise mix during the second half of the year in our U.S. stores; our expectations regarding sales in certain categories in our U.S. stores; our expectations relating to inventory management in our U.S. stores; our expectation regarding steps to address issues relating to our gross margins in our U.S. stores; our expectations regarding the opening of stores in ASDA regional food distribution hubs during the fiscal year 2008; the expectations as to the availability of access to ASDA's online home grocery shopping in fiscal 2008; our expectations for the rate of growth of our capital expenditures in fiscal 2008; and our anticipated expansions of supercenters in Canada and investments in our Canadian supply chain infrastructure; our expectations for comparable store sales of Seiyu Ltd. for the current year and the anticipation and expectations of Wal-Mart and its management as to future occurrences and trends.

These forward-looking statements are subject to risks, uncertainties, and other factors domestically and internationally including the cost of goods, competitive pressures, inflation, consumer spending patterns and debt levels, currency exchange fluctuations, trade restrictions, changes in tariff and freight rate, fluctuations in the cost of gasoline, diesel fuel and other energy, transportation, utilities, labor and healthcare, accident costs, casualty and other insurance costs, interest rate fluctuations, capital market conditions, geopolitical conditions, weather conditions, storm-related damage to our facility, regulatory matters, and other risks.

We discuss certain of these matters more fully in our filings with the SEC including our most recent annual report on Form 10-K and the information on this call should be read in conjunction with that annual report on Form 10-K, and together with our other filings including current reports on Form 8-K we have made with the SEC through the date of this call.

We urge you to consider all of these risks, uncertainties, and other factors carefully in evaluating the forward-looking statements we make on this call. As a result of these factors, changes in fact, assumptions not being realized, or other circumstances, our actual results may differ materially from anticipated results expressed or implied in these forward-looking statements.

The forward-looking statements made in this call are made on and as of the date of this call and we undertake no obligation to update these forward-looking statements to reflect subsequent events or circumstance.

The comp store sales for our total U.S. operations and for our SAM'S CLUB segment discussed on this call exclude the impact of fuel sales at our SAM'S CLUB segment. That measure and our return on investment as discussed in this call may be considered non-GAAP financial measures. Reconciliations of those non-GAAP financial measures to the most directly comparable GAAP measures are available for review on the Investor Relations portion of our corporate website at www.walmartstores.com/investors.


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Carol Schumacher

Welcome to the Wal-Mart Stores, Inc. first quarter earnings call for fiscal year 2008. This is Carol Schumacher, Vice President of Investor Relations. The replays of this call and related materials about this quarter are available on our website.

Here is our agenda for today's call. First up Lee Scott, Wal-Mart Stores President and CEO who will provide comments on the company's overall performance; Tom Schoewe, Executive Vice President and Chief Financial Officer, will get behind our financial results; Eduardo Castro-Wright, President and Chief Executive Officer of Wal-Mart Stores Division, will update results and direction for the U.S. operations; Charles Holley, Executive Vice President of Finance and Treasurer, will review the results of SAM'S CLUB and International; and, Tom will close with guidance for the second quarter of this fiscal year.

The store count and square footage updates through the first quarter are available on our website, www.walmartstores.com/investors. Also on the website you will find a new document explaining how we calculate ROI, or return on investment, as well as an update on our new metric used to monitor leverage, cash flow from operations to average debt. Tom will cover ROI later on the call.

Before we get started, I would like to let you know about a change to our internal management reporting that impacts the company's segment reporting. As you know, the company has three operating segments -- Wal-Mart Stores division, International, and SAM'S CLUB -- and measures the profit of its segments as segment operating income. As Tom noted during the fourth quarter fiscal 2007 earnings call, there are certain operating income items that have not been included historically in the operating income of the three operating segments.

We typically refer to these items as corporate overhead, but many of you do know this as our other segment. These other operating income items primarily consist of expenses for overhead functions such as legal and finance which are managed at the corporate level and are not included in the three operating segments. Since our segment reporting follows our internal management reporting, this other segment has also historically included unusual or infrequent income and expenses that are accounted for at the corporate level, rather than within the operating segments.

At the beginning of this fiscal year FY 2008 we revised the criteria used to measure the profit of our operating segments. The result of the new measurement criteria is to now include within each operating segment certain direct operating income items that had previously been accounted for at the corporate level and included in the other segment. As a result, all prior year measurements of segment profits have been restated for comparative purposes. This methodology is consistent with certain changes we've made to our internal management reporting.

As you know, FASB Interpretation Number 48, Accounting For Uncertain Tax Positions, better known as FIN-48 became effective this quarter. In connection with our implementation of FIN-48, we have reported a cumulative effect adjustment to the opening balance of retained earnings of $160 million, representing additional liabilities for unrecognized tax benefits as measured under this new standard.

Now let's get onto the news on Wal-Mart's first quarter of fiscal 2008.

Lee Scott

Thank you, Carol and welcome, everyone. Our start to fiscal 2008 resulted in net sales of almost $85.4 billion, an increase of more than 8% for Wal-Mart Stores Inc. Net income from continuing operations rose more than 6% from the prior year. Earnings per share from continuing operations for the quarter were $0.68 per share, up from $0.64 per share for last year's first quarter.

These are again record sales and earnings, but they were not where we would have expected to be, nor where we believe they should be. We increased sales and earnings per share from continuing operations and we kept expenses in check, which Tom will cover in more detail on this call. Quite honestly, we're not satisfied with our overall performance.

Let me touch now on each of our operating segments. International, which is now 23% of our total sales, had a great quarter. This remains our fastest-growing operations segment and is led by Vice Chairman Mike Duke. Sales were up 18.5% over last year and we are pleased with how the most recent acquisitions continue to be integrated into the Wal-Mart culture of delivering great value. Many of you may not be aware of the rising prices and heightened inflation concerns in Mexico. Our management team at WalMex clearly looks to the long-term when they launched an extensive rollback campaign on basic products like tortillas and produce intended to counteract inflation concerns. Charles will discuss later how this did have some slight impact on international's gross margin. But the end result was increased customer loyalty and a strengthening of our price leadership position in the Mexican market.

In the UK, the ASDA management team put in place last year an aggressive strategic business plan to broaden the appeal of its brand in local communities. Charles will provide more context for how ASDA has accelerated comparable store sales and traffic, but let me highlight one fact: since mid 2005, ASDA's tracking system shows that ASDA has gained approximately 1.5 million new customers, of which approximately half were in comp stores.

Turning to SAM'S CLUB, the clubs continue to be very focused on delivering ways that members can save, whether it is the convenience store owner or a mother with five children. We are pleased that under Doug McMillan's leadership, SAM's again grew profits faster than sales. They've now done this for the past seven quarters.

Wal-Mart U.S. experienced a tremendous amount of change during this past year. We're in the second year of an ambitious three-year strategic plan that Eduardo Castro-Wright, President and CEO for Wal-Mart Stores Division, is leading to improve our business. While some points in the plan have not delivered the results yet that we would like to see, the core of that plan, improving our customer service and improving returns, is critical to continued success for our company.

Our core U.S. grocery business continues to do very well. Food and consumables are leading the way for our Wal-Mart supercenters. The $4 generic prescription program performed better than we had expected in delivering double-digit comps for our pharmacy at both Wal-Mart and SAM'S CLUB.

We know well the challenges in the United States. The top three concerns among discount store shoppers are all economics. Number 1 is money or income, number 2 is the cost of living and number 3, gas prices. Obviously saving money is important to our customers. You will see us be more committed than ever to price leadership.

Further, Wal-Mart U.S. is committed to winning back the gains we made last year in inventory management. To do that, we also must make sure that we have the right merchandise in stock, whether it is apparel or deodorant, for the customers in every community that we serve. We must deliver value regardless of weather and energy prices and our associates must be there when our customers are shopping.

We have some challenges for the rest of this fiscal year, but I am confident in the ability of the leadership team of this company to meet those head on and deliver better results. I look forward to seeing many of you at our shareholders meeting in Northwest Arkansas on June 1 and hearing your thoughts and questions about our business.

Tom will cover more details about the financial results.

Thomas Schoewe

Lee, thank you very much. We appreciate you for joining us to hear more news about Wal-Mart's first quarter of fiscal 2008. Let's get started at the highest level. To recap a little of what Lee has already said about the first quarter, total sales for the company were up 8.3%. In addition, U.S. comp store sales were 0.6% in the first quarter. Income from continuing operations increased 6.2%. Earnings per share from continuing operations were $0.68 and while the impact on consolidated net income was insignificant, operating income within the segments was impacted by two special items, one favorable and one unfavorable. All of the numbers I'll talk about right now are before tax.

First, the favorable item. We recorded a federal excise tax refund with interest of approximately $97 million related to prior sales of prepaid phone cards at both Wal-Mart stores and SAM'S CLUB. This favorably impacted operating income by $85 million; $46 million for the Wal-Mart segment and $39 million for the SAM'S CLUB segment, and interest by $12 million.

Now the unfavorable item. During the quarter we recorded a charge of approximately $83 million as a result of certain litigation. This charge is reported as additional operating expense, of which approximately $73 million is charged to the Wal-Mart Stores segment and remaining $10 million to SAM'S CLUB.

Before Eduardo Castro-Wright covers the details about the Wal-Mart U.S. results, let me touch on some of the key financial metrics from our consolidated financial statement, things like gross margin, expenses, inventory, membership and other income, and finally, net interest expense.

First, consolidated gross margin was down 8 basis points for the first quarter, primarily due to the U.S. stores. Operating expenses as a percentage of sales were up approximately 7 basis points over last year, but essentially flat to last year, excluding the charge for certain litigation. The fact that we kept SG&A expenses in check is positive given the challenges associated with leveraging a weak sales performance here in the United States.

Inventory management did not meet our expectations for the first quarter. Consolidated inventories were up 10.3% against the year-to-date sales increase of 8.3%. The soft sales environment negatively impacted our inventory performance during the first quarter. We continue to be focused on our internal goal of growing inventory at half the rate of the sales increase.

We continue to have a good report on membership and other income, up approximately 22% for the first quarter over last year. Among the highlights in this category:

First, SAM'S CLUB membership fee income improved again during the first quarter.

Second, financial services had a stellar performance with continued growth on all fronts. The basic money services led by money transfers, bill payments and check cashing all posted above plan growth. Our financial services operation serves more than 2 million customers each week.

Last, recycling income. The company's sustainability efforts are clearly paying off.

Interest expense was up 6.5%. If we remove the interest component of the excise tax gain, net interest expense would have grown by an additional 3.3 percentage points. This is actually pretty good performance considering the headwind with our higher inventory levels and the associated debt levels.

Our tax rate for the quarter was 34.4%. The tax rate for fiscal year 2008 is forecasted to be between 34% and 35%, although we expect to see some quarterly volatility. Factors which may impact our annual rate include changes in our assessment of certain tax matters and the mix of international versus domestic income.

Payables as a percentage of inventories for the company were 78%, and that is slightly down when compared to the 79% we reported last year. Debt to total capitalization was 41.3% at the end of the first quarter this fiscal year. This is slightly below the 41.9% rate at the same time last year.

During the first quarter, we repurchased approximately $1 billion of our stock, which represented about 20 million shares. Under our current $10 billion share repurchase program, we still have the authority to repurchase approximately $3.3 billion of additional stock.

As you know, we are focused on driving returns across our operating segment and the company. Our return on investment, or ROI, is calculated both with and without the acquisitions of Seiyu in Japan; CARHCO, now referred to as Wal-Mart Central America; Sonae, now referred to as Southern Brazil; and recently the TrustMart operations in China. ROI from continuing operations for the trailing 12 months ended April 30, 2007 is 19.5% and compares to 20.5% that we reported in the same period last year.ROI without the impact of the acquisitions I just mentioned is 20.4% for the 12 months ended April 30, 2007. This compares to 21% last year. The calculation and explanation of the ROI metric is posted on our website at www.walmartstores.com/investors.

Last, let's review capital spending. Our cash-flow statement reflects payments for property, plant and equipment of approximately $3.2 billion during the first quarter. Our actual spending shows a decrease of approximately 2% from last year. Our forecast for capital spending for fiscal year 2008 continues to be at or less than our square footage growth. Simply, we expect CapEx growth to be lower than our sales growth. Our current real estate review process ensures that we apply stringent guidelines for returns on future projects.

With that, I would like to now turn it over to Eduardo Castro-Wright, who will share with us what's going on in Wal-Mart U.S.

Eduardo Castro-Wright

Thanks, Tom. I have three agenda items to cover. First, the progress report on our three-year roadmap to improve growth and return on investment; second, a discussion on sales; and last, some brief financial details for this first quarter for the Wal-Mart Stores U.S. Division.

Let me update you on our roadmap to improve Wal-Mart Stores U.S. Organizationally we made some major changes within the senior management team as we named several executives to new key management roles.

Joe Simon, now Chief Operating Officer of Wal-Mart Stores; John Fleming, Chief Merchandising Officer; Stephen Quinn, Chief Marketing Officer; Pat Curran, Executive Vice President of People; Raul Vazquez, President and CEO of Walmart.com; and Michael Fong, Chief Financial Officer of the Wal-Mart Stores. While this senior leadership team has great depth and is focused on improving the customer experience, everyone is in a new role.

We had a number of initiatives in the first quarter to help us deliver improvements. Let me touch on this. During the first quarter we continued to see increases in labor productivity. We are already seeing the benefits of having implemented the new front-end scheduling system throughout the chain. Our goal is to ensure that we match our associates' schedules to customer traffic. We plan to finish the full rollout of the new scheduling system to all departments in all U.S. stores by the end of the year.

Let me point out that our research validates significant improvements in our customers' experience because of the scheduling system. We have surveys from more than 700 stores that look at the rate of matching scheduling to customer traffic. When we match cashier staffing to customer traffic, 85% or more of the time these stores comped 2X better in March and April than stores that did not.

For example, the region covering Metropolitan New York continues to show improving customer satisfaction scores with shopping experience showing an 8.5% improvement this year over last year, and a 15% improvement in low price perception year over year. In addition, our work toward improving the customer experience includes significant progress in the development of new merchandising systems. These are designed to facilitate application of the new space optimization and modular planning tools. Why are these important? Because these tools, along with the continued work on our customer segmentation research, allows us to improve the way we merchandise our stores community by community.

Last week you heard about our April comparable store sales performance. You can see weather negatively impacted comps in many of our categories. We were very disappointed with our soft performance in the quarter with comps that were about flat. Comps continue to be pressured by softer traffic.

Having said that, there are some positives. Of our six business categories, half performed at or above plan in the first quarter. Groceries driven by food, health and wellness driven by pharmacy, and entertainment. However, the strength in these categories was not enough to offset the soft performance in apparel and home during the first quarter and the impact of weather on hard lines. Home and apparel were impacted by colder weather as most of the retail industry experienced.

Supercenter food sales grew by more than 13.4% in the first quarter of the year and supercenter food comp sales were in the mid single-digits. The Neighborhood Markets, part of our Wal-Mart segment, had strong sales performance this quarter and also had comparable store sales figures in the mid single-digits. We continue to be pleased with Neighborhood Markets.

Our pharmacy area continues to see benefits from the $4 generic prescription program. Comps in the prescription area continue to run in the mid-teens.

Also, we are pleased with the results we're seeing from the completed electronics special projects. We're seeing improved sales performance in the completed stores of between 50 and 150 basis points. Just yesterday, Wal-Mart announced that many of the best-known and new electronic brands will be available in U.S. stores this week. The change includes new products with great value prices. Some of the brands will be carried for the first time by Wal-Mart. The new brands are Samsung, Skype, Visio, and Philips. The selection will be larger for the most popular digital, communications and home entertainment items. New signage and pictures will enhance the presentation of these brands. Wal-Mart also stepped up its training for associates serving in the electronics department.

We are currently testing a new version of our home pilot in 10 markets. I am optimistic about this trial because initial customer reaction is very positive; however, it is too early to know what the impact will be on comparable store sales. As previously indicated, our businesses in home and apparel, our higher margin categories, have been underperforming. This did add pressure to our gross margins during the first quarter. We will continue to see pressure on margins because of markdowns and higher inventory in our soft lines. We hope to see improvements in this area by the back-to-school season. The season really kicks off for our customers in July.

In the meantime, we're ready for spring and summer with core items like T-shirts and jeans, merchandise mix for the second half of this year will reflect the preferences of our broad customer base community by community. This month we already are seeing the same kind of lift in the hard lines area that we saw with more favorable weather at the end of March. I believe we will continue to see a pickup in demand for things like lawn and garden products, sporting goods, and seasonal merchandise.

As you can see, we have a lot going on. However, we still have to translate the activities and new processes into a three-year roadmap to improve financial performance.

So let's recap the financial results for the first quarter for Wal-Mart Stores. Let's start with operating income, which was up 1.8% on a 5.6% sales increase for the first quarter. The benefit from the refund of the excise tax was offset by the charge for certain litigation. The net impact of these two items was a reduction in operating income of approximately 5 basis points as a percent of sales.

Gross margin in the Wal-Mart segment decreased by 12 basis points during the first quarter. We saw pressure on gross margins during the quarter from increased markdowns, higher inventory, and higher shrinkage. We are concerned about shrinkage and are investigating the cause and are taking steps to correct it.

Our initial margins on general merchandise increased from last year's first quarter and markdowns as a percent of sales were up only slightly from the same quarter last year. Due to the sales shortfall and in spite of labor productivity gains, we were not able to leverage our cost structure. Total expense as percentage of sales rose 29 basis points when compared to the first quarter last year. Also, this had a negative impact on our ability to grow inventory at [half the rate] of sales. Inventory in the Wal-Mart segment increased by 9% on a 5.6% sales increase for the first quarter.

I am hopeful that this gives you a best view of the short-term initiatives that we faced and that our three-year roadmap provides you with confidence that we have a solid plan to improve sales and returns.

Charles will now report on SAM'S CLUB and International.

Charles Holley

Thanks, Eduardo. I'll start with some of the recent developments of SAM'S CLUB as well as share more on the club's performance. Overall sales for SAM'S grew by 5.6% during the quarter to $10.3 billion. First-quarter comp club sales, excluding fuel operations, increased by 4.7% over the prior year quarter. Membership fees have fully cycled the $5 increase that took effect in January 2006. Membership revenue in the first quarter was on plan and grew at a faster pace than top line sales volume. We continue to focus on building membership, both business and advantage at all of our clubs.

SAM'S CLUB also leveraged expenses during the first quarter. The club operations team did a good job of keeping costs down with a particular focus on non payroll-related expenses. This in turn allowed us to lower gross margin rates slightly and pass further savings on to our members.

SAM'S is not without challenges and the management team is working hard to improve performance in some key areas. One of those is inventory management which is not currently at the standards we expect. With continued focus, we anticipate that inventory turns will improve as the year progresses.

SAM'S CLUB grew profits faster than sales, continuing the trend of the last seven quarters. Operating income for the quarter was $363 million, a 19.8% increase over the prior year quarter. Factoring out the net positive benefit of special items that Tom previously discussed -- the excise tax refund and litigation charge -- profits still grew faster than sales at 10.6%.

Now let's move to International. International sales from continuing operations for the first quarter were $19.6 billion and represented 23% of total company sales. That is an 18.5% increase over the prior year. Our strongest sales performances in the quarter came from Mexico, United Kingdom, Brazil, China, and Argentina. The first quarter impact of currency valuation on sales was a benefit of $622 million driven primarily by strengthening in the British pound, partially offset by a weakening of the Mexican peso.

Operating income for the first quarter was ahead of plan at $903 million. That is up 19.3% over the prior year. Gross margin was down slightly versus the first quarter of last year, largely as a result of a rollback pricing campaign in Mexico that Lee mentioned earlier in the call. Mexico's campaign was partially offset by gross margin improvement in the UK.

Operating expenses as a percentage of sales were slightly down from the first quarter of fiscal 2007. Other income as a percentage of sales increased in the first quarter largely because of real estate development activities at ASDA. The slight decline in gross margin was offset by the other income increase, leading to operating income as a percentage of sales that was up slightly from the first quarter of last year. There was an insignificant impact from currency on the first quarter operating income.

Now let's discuss highlights by country. We are excited about the strong start to fiscal 2008 at our ASDA operations. The UK team has delivered increasing results over the previous 12 months. For the quarter, sales were up in the low double-digits, driven primarily by traffic. Let me reiterate what Lee said earlier. Since mid-2005, ASDA's tracking system shows that ASDA has attracted around 1.5 million new customers, of which approximately half were in comp stores.

Comp sales continue to strengthen with mid single-digit growth for the fourth consecutive quarter during which comp sales had accelerated. Food, general merchandise, and George apparel all had improved comp performances for the quarter. Operating income was ahead of plan and grew faster than sales, reflecting an ongoing cost reduction program including initiatives to reduce energy consumption.

The acceleration in comp sales and traffic is an outcome of a strategic business plan that was designed to broaden the appeal of the ASDA brand through three horizons.

First, improved execution in all phases of customer service;

Second, differentiation with competitors;

Finally, development of new channels and formats.

The first horizon involved ASDA improving core business metrics. We are pleased to note in stock improvement and an almost 30% reduction in customers needing to queue at the checkout. On pricing, ASDA is consistently the price leader in the UK as reported by a number of independent surveys such as the Grocer Magazine survey. Further, ASDA has launched a more aggressive closing and general merchandise pricing strategy under the banner of Why Pay More?

The second horizon was focused on differentiation. Food service and George departments are being remodeled and private-label product development continues aggressively on schedule, particularly in the areas of increased consumer interests such as healthy, organic and premium food ranges. A refocused marketing program is reinforcing ASDA's points of difference and building on ASDA's reputation as a commonsense retailer. ASDA is also leading the way in local sourcing, working with more than 3,000 local vendors, shipping through ten award-winning regional food distribution hubs with another five opening this year.

The final horizon is around future growth platforms. Upgrading the ASDA.com proposition has included the launch of online furniture and electronics offerings with encouraging results and the extension of the grocery home shopping service. By the end of this year, every ASDA customer will have access to our online grocery home shopping service. In addition, we remain excited about the performance of ASDA Living with two new stores opening this quarter.

We're delighted that the progress ASDA has made in improving the customer proposition has translated into market share gains. For the 12 weeks ending March 25th, ASDA recorded its highest ever market share at 11.9% according to the latest TNS Data, and has been the fastest-growing major food retailer within the UK for each of the last four months.

Now let's turn to Wal-Mart Mexico. Wal-Mart Mexico had another great quarter, continuing positive trends from recent quarters. After inflation, first-quarter operating income in Mexico grew faster than sales when compared to the first quarter of last year. This occurred despite expenses related to the bank operation and the cost of a coupon program with the Mexico City government. Total sales for the quarter were up 14.1% in real terms, adjusted for inflation. The real comp store sales increase during the quarter was 5.9%. We continue to see very consistent growth among all formats in Mexico.

The main driver of the sales increase continues to be customer count, with a 15% total increase during in the quarter. Average ticket was down slightly due to a large rollback campaign on basic products. Our management team in Mexico clearly looks to the long term, approaching this rollback campaign as an investment that will result in increased customer loyalty and a strengthening our price position in the Mexican market.

The first quarter operating expenses in Mexico grew 12% in real terms, reflecting leverage of the sales increase. This leverage was driven mainly by associate productivity. As has been the case for some time, we are pleased to note that as we continue to add units in Mexico, our returns continue to increase.

In Canada, total sales in Canadian dollars increased in the mid single-digits for the first quarter while comp sales grew in the low single-digits. Sales were adversely affected by the late arrival of spring this season and a slower than anticipated sell through of seasonal merchandise. Canadian sales were strongest in food, consumables, automotive and vision.

As previously mentioned, we continue to see positive results in our new Canadian supercenters both in terms of customer traffic and ticket, and are pleased with how the Canadian customer continues to embrace this concept. We will continue to expand the number of supercenters both through new and expanded stores as well as invest in the supply chain infrastructure to support this growth throughout the upcoming year.

Brazil comps were in the upper single-digits for the quarter. Our total country operations in Brazil were ahead of plan in sales and operating income. We continue to be pleased with the performance of our two recent acquisitions in the Northeast and the South, both of which are growing sales above our initial expectations and delivering financial results ahead of plan.

Argentina continues to deliver a strong performance with comps in real terms up in the high teens for the quarter. In February, we launched a new store format in Argentina named Changomas. This format is similar to a Mexican bodega and provides the customers a place to buy everything a family needs at the best price and with better proximity than hypermarkets. This format is focused on an underserved customer segment which represents 70% of the country's population. Following its opening, the first Changomas store has delivered an excellent performance with sales well above initial plans.

First quarter sales in Puerto Rico were up slightly over last year while operating income was ahead of plan. Comp sales were slightly below last year, impacted by a continuing trend of lower consumption. Wal-Mart Central America continues to deliver positive results. Sales in real terms in the region grew in the low double digits over the first quarter of fiscal 2007. Real comps were positive in the low single-digits. Operating income in Central America was ahead of plan for the first quarter.

Turning now to Asia, in Japan we continue to be pleased with the performance of our remodeled stores. We completed an additional seven remodels during the quarter against a full year plan of 70. The first quarter operating income was essentially flat to plan while comp sales were a negative 0.7%. However, Seiyu's forecast for comps for the full year is a positive 1.7%. Gross margin was flat to last year.

Wal-Mart China's comps grew in the mid double-digits for the first quarter during which we also opened ten new stores. Sales were only slightly off plan due to temporary delays in store openings. We are excited about our recent investment in 101 TrustMart stores which operate in 34 cities throughout China. This investment is an important step in bringing additional scale to our China retail operations.

Now Tom will update our guidance for the second quarter of fiscal 2008.

Thomas Schoewe

Thanks, Charles. For the second quarter, we expect a comparable store sales increase for the U.S. to be between 1% and 2%. We expect earnings per share from continuing operations for the second quarter to come in between $0.75 and $0.79 per share. As always, we will be available to answer your questions. We would like to thank you for your interest in Wal-Mart and from all of us here, thanks and have just a great day.


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