Wal-Mart to profit from price cuts

Wal-Mart Stores Inc, the world's largest retailer, may report today that first-quarter profit rose after discounts lured Target Corp and Macy's Inc customers coping with record gasoline prices.

Net income may have increased 5.2 percent to $2.97 billion, or 75 cents a share, according to the average estimate of 11 analysts surveyed by Bloomberg News. Revenue probably increased 7.1 percent to $9.26 billion.

Chief Executive Officer H. Lee Scott ordered price cuts of as much as 30 percent on groceries, drugs and electronics products, helping Wal-Mart boost sales faster than Target, Macy's and Sears Holdings Corp. Wal-Mart shares are up 20 percent this year, the biggest gain among the 30 stocks in the Dow Jones Industrial Average.

"Consumers are paying more attention to value, and that's absolutely Wal-Mart's sweet spot," said Lauri Brunner, a Minneapolis-based analyst for Thrivent Asset Management, which owned 1.5 million Wal-Mart shares through March among its $73.2 billion in assets. "They are taking market share from Target."

Scott, 59, wasn't available for an interview, said John Simley, a spokesman for Bentonville, Arkansas-based Wal-Mart.

The retailer said last month it expects to earn 74 cents to 76 cents a share in the first quarter. It increased its earlier projection from 70 cents to 74 cents after marking down less merchandise for clearance sales, helping to widen profit margins.

Targeting rebates

Wal-Mart shares rose 2 cents to $57.18 on Friday. Sustaining the year-to-date pace for all of 2008 would result in the best performance by the stock in nine years. Wal-Mart is the second-biggest gainer in the 40-company Standard & Poor's 500 Consumer Staples Index after chewing gum maker Wm Wrigley Jr Co, which Mars Inc agreed to buy for $23 billion last month.

Twenty of 28 analysts monitored by Bloomberg recommend Wal-Mart shares. Seven say hold and one says sell.

Gasoline prices reached a record $3.67 a gallon on Thursday, according to AAA. Job losses, falling home values and higher food prices also are squeezing consumers.

Price cuts by Wal-Mart in late April target US taxpayers who are receiving $117 billion in tax rebate checks. The retailer is cashing the checks for free and reducing shampoo, cereal and luncheon meat prices to compete with incentives by grocery chains Kroger Co and Supervalu Inc and Family Dollar Stores Inc, a discount retailer.

Slow growth

"We see a strain on the consumer," said Jane Thompson, Wal-Mart's president of financial services. "We're trying to step it up."

Wal-Mart said on Thursday it's too early to gauge whether sales will benefit from the government payments. According to a Bloomberg News survey of economists, the rebates won't prevent the US economy from stagnating in the second quarter.

The economy will grow at a 0.1 percent annual rate from April to June, the least since the 2001 recession, according to the median estimate of 54 economists surveyed from May 2 to May 8.

Household spending may rise at a 0.5 percent pace, half the first quarter's gain and the smallest increase in 17 years.

Wal-Mart is "perfectly positioned for this environment", said Joseph Feldman, managing director of Telsey Advisory Group, an independent research firm in New York.

"They do such a good job with the basics that you need every day that they're driving a lot of traffic into their stores," Feldman said.

Target, Macy's, Sears

A week ago, Wal-Mart expanded its $4-a-month drug offering with three-month prescriptions for $10, forcing Target to respond with similar discounts.

Comparable-store sales at Minneapolis-based Target rose 3.1 percent in April, below its projection and less than Wal-Mart's gain of 3.2 percent.

Macy's, which doesn't report monthly sales, said in February that quarterly same-store sales dropped 2 percent. Sears also posted a quarterly drop, with sales at Sears outlets open at least a year falling 4 percent and at Kmart stores declining 5.2 percent.

Wal-Mart will keep winning sales from "higher-end and lower-end retailers", Michael Exstein, a Credit Suisse analyst in New York, wrote in a May 8 note to clients. He rates the stock as "outperform".

Agencies

(China Daily 05/13/2008 page16)