Wal-Mart profits slide -- again

Discount competition and smaller margins continue to plague the retailer.

By InvestorPlace Feb 21, 2012 11:56AM

By Jeff Reeves

 

Wal-Mart Stores (WMT), the world’s largest retailer, just announced a big slide in profits, and shares slumped as a result. The reason? The king of low-cost retail is being forced to push prices even lower amid discount competition and penny-pinching consumer habits.

 

This is just the latest in a long line of disappointments for the big-box giant in recent years. You would think that amid weak spending, Wal-Mart would be king. But think again.

 

Here are the latest details: Fiscal-fourth-quarter profit fell 15%. The decline was due to price-matching to compete with smaller discount chains like Dollar General (DG) and Dollar Tree (DLTR), as well as costs related to advertising and other initiatives to boost sales. Profit margins were squeezed as a result.

 

The competition from smaller chains has been really weighing on Wal-Mart. Consider that Dollar General is up more than 90% since 2010 and Dollar Tree is up almost 180% in the same period. Meanwhile, Wal-Mart has squeaked out only about 12% returns -- less than half the 25% from the Dow Jones Industrials since Jan. 1, 2010.

 

On the plus side, profits did grow compared with the previous reporting period. And those profits even beat Wall Street estimates. But the loss of margins and the persistence of competition from smaller discount chains are obviously disturbing. And the Q4 slide comes after Wal-Mart’s third-quarter earnings fell by nearly 3%.

 

Another plus: WMT saw a bump in total sales, too. The company’s relaunch of layaway on toys and electronics during the holiday season helped there.

 

However, some observers are skeptical. Part of the revenue jump is attributed to acquisitions, not organic growth. Wal-Mart is looking beyond North America, with the purchase of Netto stores in the U.K. and Massmart in South Africa. Obviously, if you roll in reasonably large chains like this, you’re going to see a lift to headline revenue.

 

And though internationally Wal-Mart sales jumped 13% to $35.5 billion, currency exchange rates reduced that gain to just 8.5% -- another weight offsetting what would otherwise be decent performance.

 

Long story short: Wal-Mart hasn’t been connecting with American consumers. And while the company is seeing international strength, it’s not enough to entice Wall Street into supporting this stock.

 

It’s not for lack of trying. We just saw the launch of a new Wal-Mart packaging scheme to fight obesity and appeal to health-conscious consumers. In 2011, it refocused on its low-cost roots with a new ad campaign. And, of course, domestic same-store sales -- revenue at locations open for more than a year -- had declined in 9 out of the past 10 quarters before this report.

 

Perhaps recent efforts to compete with Dollar General and Dollar Tree will pay dividends in the long term. And perhaps international acquisitions will start to boost the bottom line soon.

 

But in the short term, investors aren’t very impressed. After languishing around $50 a share for the better part of two years, WMT rallied 15% in the past several months to set a new high and touch pre-recession stock values.

 

After Tuesday's report and resulting declines, however, it looks like Wal-Mart’s turnaround was short lived.

 

If you’re interested in the store’s troubles, check out these 5 very disturbing Wal-Mart headlines recently.


 

Jeff Reeves is the editor of InvestorPlace.com. Write him at editor@investorplace.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. Jeff Reeves holds a position in Alcoa, but no other publicly traded stocks.

 

 

 

 

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8Comments
Feb 21, 2012 4:47PM
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I love my Walmart...  Not always the best prices, but nearly...  I have one Rx, it's always filled quickly compared to Walgreens.  I think the drugs are so much cheaper there, that it attracts crowds.

 

As to small aisles, I have not seen that.  Walmart really only has Target as a competitor, and thats not serious competition...  Walmart has way more selection than Target or Meijer in my area.  Meijer has better pricing on some food stuffs. 

 

As with any retailer, there is always room for improvment.   Walmart does stock more made in the USA products than any other retailer.  All in all, if you don't like Walmart don't shop there.  Most people do, hence the number of people.  And if Walmarts profit  margins are down that means their PRICES are lower than the other guys...

Feb 21, 2012 3:51PM
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I only have my local Wal-Mart to go by, but I can find myriad reasons that the discount chain is having problems. 

1.  Long lines at the pharmacy with poor service.

2.  Poor service on the phone trying to reach the pharmacy.

3.  Poor service after reaching the pharmacy on the phone.

4.  The return to narrow (make that really narrow) aisles.

5.  Poor selection in ladies clothing and toys to name a few.

6.  Even poorer selection in the outdoor department.

 

Even with higher prices at Fred Meyer and Rite-Aid, I am going more often to those stores than being frustrated by Wal-Mart.

Feb 21, 2012 7:57PM
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nwaguy,

 

I have witnessed the same problem.  I have only been in a Walmart about 5 times because I was with someone at the time that wanted to go there.  On my last visit to Walmart, there were 2 lanes open and about 8 people in each line.  There was a manager who walked by me in line and I asked if there was anyone else that could open a register.  He said nope, and walked on.

 

The associates at Walmart are not very friendly either.  They almost act like you are putting them out by asking where something is.  I don't shop at Walmart either.  Way to go!!!  Keep it up and tell your friends.

Feb 21, 2012 7:13PM
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Maybe others like me got so annoyed at Walmart that they found better places to shop. Two evenings before Christmas I, along with about 15 other shoppers stood in line at our local Walmart because they had ONE checkout lane open. After seeing the line was not even moving, a lady behind me went to get a manager. The person she found told us that the other lanes were logged out and could not be quickly opened up. This shows me that it wasn't even because of a temporary problem, like another cashier having to run to the bathroom, it was planned to only have one lane opened with a store full of pre-holiday shoppers. When do they ever make use of the other 25 checkout lanes if not just before Christmas? Walmart showed me how much they value my business and time and I vowed I would not return, and I haven't.
Feb 21, 2012 3:40PM
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apparently msnbc only allows positive comments about WM. my whole reply was blocked

Feb 21, 2012 5:26PM
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Hoooray for all those who do not shop at Walmart!  Walmart is a predatory company who builds next to other stores and runs them out of town.  Walmart dose not have the most made in USA products.  They tout that  their products are made in USA but go look.  They used to put up signs right in the entrances of their stores "Made In USA" but they don't do that anymore.  Why, because more and more of their products are made over seas.  It is very hard to find anything anymore that is made in the United States.  Those of you who think that Walmart's merchandise is from USA are living in a cave or are in denial. 

 

I managed K-Mart stores for a long time and the amount of merchandise that came in from over seas is just appalling.  All big box stores order their merchandise from the same companies over seas.  Anyway, Walmart had it coming to them and I am glad to see it coming.

 

Keep boycotting Walmart!!!!!

Feb 21, 2012 3:41PM
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they duped the public with a slow bait and switch.
Feb 21, 2012 3:42PM
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no one makes money because of walmart, this will soon include walmart.

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