Wal-Mart Still Strong [News] August 9, 2000

Wal-Mart Still Strong

Wal-Mart didn't impress the Street with its second-quarter numbers. Lowered guidance for the next quarter probably hurt the stock, but the cause isn't relevant to the business. The company continued to perform quite well, especially in its supercenter and international divisions, which are two key growth drivers. Look for Wal-Mart to stay king of retail for a long time to come.

By Brian Lund (TMF Tardior)
August 9, 2000

What? Wal-Mart (NYSE: WMT) only met expectations for the second quarter and guided estimates for the next quarter lower by two cents? This must mean that the world's biggest retailer has reached the limit of its growth, right?

Er, no. The Dow and Now-50 component continues to grow by leaps and bounds.

  • Total company sales increased 20% over the year-ago quarter.
  • Wal-Mart stores realized 11% sales growth on 5.2% comparable-store sales (comps).
  • Sam's Club sales grew 8% on 6% comps.
  • International sales soared 101%, or 27% net of acquired businesses.

    Wal-Mart has a history of simply astounding revenue growth. In 1999, the company managed to surpass its five-year annual sales growth, ramping up 20% -- from $139 billion to $167 billion. If you think it's easy to add $28 billion in sales in a year, then you're wasting your time in your current job. Apply immediately to be CEO at Kmart (NYSE: KM), which announced last month that it would close 72 stores. Wal-Mart has stores in all of those markets, and plans to take over most of Kmart's lost business.

    To continue its torrid level of growth, Wal-Mart is counting on two drivers: Expanded domestic supercenters and international stores.

    Supercenters see strong growth
    The supercenters combine the traditional discount store with a full supermarket, including fresh produce, deli, bakery, and frozen foods. The point is not only to grab market share in the supermarket business, but also to increase traffic in the discount stores through "one-stop shopping."

    It appears to be working. Food sales rose 35% this quarter on comps close to double digits. Furthermore, general merchandise sales at supercenters were higher than the average discount stores, with higher comps. Wal-Mart is gaining food market share in these areas. As Wal-Mart continues to remodel its stores, food sales should increase as a percent of total sales, meaning lower gross margins but higher sales per ticket.

    International growth bumpy but positive
    International growth was also strong in the second quarter. Sales growth in Canada hit 17% on double digit comps. Wal-Mart now holds 42% market share among Canadian department and discount stores. Comps in Argentina turned from negative double digits to positive single digits this quarter.

    German expansion continues to trouble the company, however. Remodeling, transition, and inventory expenses have not run according to expectations. Sales momentum is good, with comps hitting 20% in remodeled stores and 10% overall. It's good that Wal-Mart knows what the problem areas are and is addressing them.

    Lowered guidance not relevant
    So if the growth drivers are good, why the lowered guidance? It's an accounting matter. The company has changed the way that it books sales for layaway items. Previously, they have booked revenue when customers placed items on layaway. Now they have to book that revenue when the item is delivered. I for one am happy to see the company change to this more conservative method.

    Though Wal-Mart made the change earlier in the year, analysts hadn't factored it into their estimates. Management reckons it will reduce earnings per share by 1.5 to two cents. The cause sounds legitimate, but it may be that Wal-Mart just wants to get back on the estimate-beating bus. If back-to-school shopping goes well and boosts traffic (which was a bit low this quarter), look for Wal-Mart to beat the Street in the third quarter. In either case, the change does not reflect any problems in Wal-Mart's business.

    Wal-Mart is priced to perform, but today's sell-off seems uncalled for. The second-quarter numbers show few signs of weakness in this retailing powerhouse.

    Your Turn:
    Speak your piece and hear what other Wal-Mart fans have to say about today's earnings on the Wal-Mart discussion board.

    Related Links:
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  • Fool News, 7/25/00: Kmart's Closing Some Stores
  • Fool News, 5/4/00: April Ain't Cruel for Wal-Mart
  • Fool's Den, 3/14/00: Q&A on Wal-Mart
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  • Fool News, 2/15/00: Wal-Mart Roars Into the 21st Century
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