Can Wal-Mart fix its sales slump?

Despite dramatic discounts, sales at the world's biggest retailer have fallen for the fifth straight quarter.

By TheStreet Staff Aug 17, 2010 12:19PM

business news from thestreetArrow © Cory Docken/JupiterimagesBy Jeanine Poggi, TheStreet

 

Wal-Mart (WMT) reported its fifth straight quarter of U.S. sales declines, leaving investors to ask how the discount behemoth plans to regain shoppers.

 

While the world's largest retailer forecasts between a 2% decline and a 1% increase for third-quarter same-store sales, exactly how it plans to return to positive sales territory remains unclear.

 

There's no denying that the aggressive rollbacks put in place during the quarter didn't generate the traffic Wal-Mart expected. Thus the company will return to its strategy of "everyday low prices."

 

During the second quarter, Wal-Mart's total revenue rose 2.8% to $103.73 billion, below expectations for $105.33 billion. Wal-Mart's U.S. same-store sales dropped 1.8%, at the low range of forecasts.

Chief financial officer Tom Schoewe said on a call with reporters that Wal-Mart customers are under such severe pressure that even dramatic discounts are not enough to entice spending.

 

So what is? "At the end of the day, it is a function of price and assortment," Schoewe said. "When we get the two right, that's when we are successful."

 

Wal-Mart, of course, hasn't gotten the two right for some time, though it appears to be taking steps to mitigate the issue. Wal-Mart is restocking some merchandise that it misguidedly cut under its "Project Impact" initiative. "We took too much out, and we are adjusting that," Schoewe said.

 

Still, problems loom for Wal-Mart's discretionary segments, especially apparel. "Apparel is not where we want it to be, but it is an opportunity for us," Schoewe said. Wal-Mart is now planning on "returning to its roots" with apparel basics like socks, underwear and T-shirts.

 

Improving its assortment, however, may prove difficult as Wal-Mart looks to replace chief merchandising officer John Fleming, who stepped down earlier this month after Bill Simon was named the new CEO. Schoewe said the company is looking at candidates internally and externally.

 

Regardless, a lot is riding on merchandise, which Schoewe said will be vital for the holiday season. "While it is a little early right now, the customer is conservative, and how exciting things are from a product standpoint will be key for the holiday season," he said.

 

To offset a weak top line, Wal-Mart is intently focused on curbing expenses. Management believes expense leverage will be enough to drive earnings and upped its full-year forecast to $3.95 to $4.05 a share.

 

Expense leverage has already been the glue to earnings, and in the second quarter profit rose 3.6% to $3.6 billion, or 97 cents a share, compared with $3.47 billion, or 89 cents, a year ago.

 

While Schoewe said the real issue is the macro environment and not the competition, investors will get a better picture of how true that is when rival Target (TGT) reports its second-quarter results Wednesday.

 

Target has been reporting increases in same-store sales month over month, and analysts are looking for a profit of 92 cents a share on revenue of $15.64 billion.

 

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