Wal-Mart Roars into 21st Century [News] February 15, 2000

Wal-Mart Roars into 21st Century

By Richard McCaffery (TMF Gibson)
February 15, 2000

Any chance Wal-Mart (NYSE: WMT) can be as successful in the next 30 years as it has been in the past 30?

It's a tough act to follow, but investors thinking the Wal-Mart secret is out, that the story's over, and that there's little chance for growth over the long term could be badly mistaken. Did anyone expect Wal-Mart's stock would soar about 40% over the last 52 weeks, from about $42 to $59?

The world's largest retailer this morning reported fiscal fourth quarter net income of $1.9 billion, up 23% from last year's mark of $1.6 billion. Earnings per share jumped 23% as well to $0.43 per share, compared to $0.35 per share a year ago, and a penny higher than analyst estimates, which were recently raised $0.02 per share because of strong sales in November and December. Comparable store sales increased 6.3%, with Wal-Mart discount stores growing 6.4% and Sam's Club units 6%.

For the year, Wal-Mart grew sales 20% to $165 billion (look again at those numbers), and net income (excluding an accounting change) grew 26% to $5.57 billion.

Still, shares fell more than $2 in early trading because the company said it would be difficult to reduce prices next year (a key part of the company's strategy) as a result of high fuel costs and higher labor costs, and that earnings comparisons will be tough because of last year's success.

Investors that panic on this news are off the beam, in my opinion. These are short-term concerns the company has plenty of experience managing. You think in more than 30 years of operations this is the first time Wal-Mart has faced tough comparisons?

Noteworthy in the company's fourth-quarter performance is the strength of its Supercenter concept, as well as growth of international operations. Investors should focus on these areas since this is where much of the growth will occur.

Start with the Supercenters, which are a combination of traditional Wal-Mart stores and full-size grocery stores. The company opened 157 Supercenters last year, giving it 721 nationwide. In the conference call, Wal-Mart officials said 1999 comparable store sales at Supercenters exceeded those of its discount stores, and hit double digit levels for the year.

Supercenter food sales jumped 34% for the quarter and almost 36% for the year. Finally, despite lower gross margins at Superstores because of food products, gross margins continued to improve and move closer to levels achieved at discount stores. Because of continued success, the company has accelerated its Supercenter roll out plan and expects to open 165 Supercenter locations in 2000.

Every company needs to reinvent its concept from time to time and Wal-Mart has become a master of the model, adding photo shops, pharmacies, groceries, and other categories to spur growth, attract customers, and put the heat on competitors in other categories.

On the international front, Wal-Mart opened or acquired 294 international units last year, and showed strong growth in Mexico, Puerto Rico, Canada, and the United Kingdom. Sales (including recent acquisitions) increased 164% for the quarter and 86% for the year, and company officials said earnings growth is beginning to outpace sales growth as international operators focus on costs. Operating profit from international operations almost doubled to $450 million, up from $235 million a year ago. For the year, operating profit grew 49% to $817 million.

Of course, it isn't perfect across the board overseas. Stores in Germany racked up bigger operating losses than expected as the company remodels and opens a new distribution center. In Latin America, economic issues including higher interest rates, inflation, and unemployment are making life tough, but sales started climbing again in the second half of the year.

The company has just started to scratch the surface in markets like Canada (166 stores), Brazil (14 stores), Argentina (13 stores), Mexico (442 stores), China (6 stores), as well as the U.K., Korea, and Germany. Currently, international revenues account for just 14% of total sales, up from 9% last year.

Although long-term debt stands at a whopping $14.1 billion, up from $6.9 billion a year ago, the company has shown it knows how to grow profits in excess of its cost of capital. Many investors are tentative, I believe, on whether Wal-Mart will be able to execute its concept as efficiently overseas, but continued growth in key markets and its financial strength are reassuring.

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