When will Wal-Mart rebound?

The retailer just posted its seventh straight decline in US same-store sales, and its stock is falling.

By TheStreet Staff Feb 22, 2011 3:00PM

Image: Retail sales (© Image Source/Corbis/Corbis)By Jeanine Poggi, TheStreet

 

Wal-Mart's (WMT) U.S. sales fell for the seventh consecutive quarter, leaving Wall Street wondering just when the company's sales will finally rebound.

 

The stock is taking a hit as a result, with shares falling 3.9% to $53.24 in afternoon trading.

 

During the fourth quarter, the discount giant posted a 27% jump in earnings to $6.06 million, or $1.70 a share, as cost cutting and overseas momentum offset weak domestic sales. Excluding one-time items, Wal-Mart actually earned $1.34 a share, better than the $1.31 a share Wall Street predicted.


But Wal-Mart's total revenue grew only 2.4% to $116.3 billion, short of analysts' estimates of $117.52 billion. Overall, same-store sales fell 1.1%. Namesake discount stores reported a 1.8% decline in comparable sales, significantly worse that the 0.8% drop analysts predicted.

Wal-Mart's U.S. sales account for nearly two-thirds of the total business.

 

"Some of the pricing and merchandising issues in Wal-Mart ran deeper than we initially expected, and they require a response that will take time to see results," CEO and president Mike Duke said.

 

Wal-Mart saw weakness across much of its U.S. business, including electronics, consumables and clothing, though it posted a gain in its food business and health and wellness products.

 

The company told analysts in November that it expected the holiday period to end its losing streak, forecasting U.S. comparable sales between down 1% to up 2%. This time, however, it did not give any indication of when the tide will change.

 

"Management seemed to back off the possibility of U.S. Wal-Mart comping positive in fiscal 2012 despite easy comparisons," Wall Street Strategies analyst Brian Sozzi wrote in a note. "Declines are basically becoming entrenched. Expectations have been lowered, and that is welcome following the giddy third-quarter earnings call, but it ultimately underscores the severity of the pricing and merchandising challenges facing the world's largest retailer. Things do not change overnight for a company the size of Wal-Mart."

Wal-Mart's declining U.S. sales are a factor of macro-economic concerns and the result of several internal gaffes.

 

As part of its Project Impact initiative, Wal-Mart removed merchandise that it deemed unprofitable from its shelves, a move that received significant backlash from loyal shoppers. The company is restocking some of these items, but it has yet to reinvigorate shoppers.

 

The company also discontinued its Action Alley, wide aisles filled with clearance merchandise. The company is reviving the aisles.

 

Wal-Mart announced earlier in the month that it finally hired a new chief merchandising officer after postponing the search last fall. The retailer selected Duncan Mac Naughton to fill the role left vacant by John Fleming in August.

 

It will now be Mac Naughton's job to facilitate the speedy return of sought-out goods and to help revive Wal-Mart's ailing discretionary category, specifically in apparel.

 

But Wal-Mart now has another headwind to contend with: rising cotton costs.

 

Citi identified Wal-Mart as one of the companies that will be most affected by price inflation.

 

The discounter has only 30% direct sourcing, which means it has less control over supplier price hikes, according to a report released by the firm and published by Business Insider.

 

Wal-Mart's core business of selling basics to lower-income shoppers also puts it at more of a risk, according to Citi.

 

The company noted in its fourth-quarter statement that it is consolidating suppliers to improve purchasing power in an effort to offset rising inflation in raw materials.

 

Wal-Mart is raising questions about its first quarter, issuing guidance that could leave the retailer short of Wall Street's estimates. The company expects to earn between 91 cents and 96 cents a share, while analysts are calling for a profit of 96 cents.

 

For the full year, management predicts profit will fall in the range of $4.35 to $4.50 a share, ahead of analysts' outlook of $3.67.

 

Given all of this, when do you think Wal-Mart's U.S. sales will rebound? Take our poll and see what TheStreet readers are saying.

 

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