Tuesday, August 22, 2006

Wal-Mart's got issues

Wal-Mart's got issues
By Marcus Kabel
Associated Press Writer
August 21, 2006






Bentonville, Ark. — Wal-Mart Stores Inc. is fighting battles on multiple fronts after posting its first quarterly profit decline in 10 years, and analysts question whether the world's largest retailer can regain the feverish growth rates of its past.

Wal-Mart's woes range from high energy prices, which hit its lower-income customer base and its own costs, to setbacks in its international strategy, to public relations stumbles like last week's sudden resignation of civil rights icon Andrew Young as its public ambassador.

Young quit as head of a pro-Wal-Mart advocacy group after he was quoted in the Los Angeles Sentinel newspaper as saying inner-city stores that overcharged black customers were run by "Jews, then it was Koreans and now it's Arabs." Wal-Mart, which has made repeated public commitments this year to diversity, said Young's comments did not reflect its views.

On the plus side, analysts say, Wal-Mart has ambitious programs to stock trendier products, remodel most of its more than 2,000 Supercenter stores and tighten its grip on the costs of inventory, labor and energy.



Outcome still uncertain
Combined with an ongoing public relations offensive to counter critics who claim its pay and benefits are skimpy, Wal-Mart is juggling a lot of balls at once and analysts say the outcome is still up in the air.

"I think they're in so much transition right now that it's hard to measure whether or not they're making progress," said Patricia Edwards, portfolio manager and retail analyst at Wentworth, Hauser & Violich in Seattle, which manages $8.2 billion in assets and holds 51,000 Wal-Mart shares. "It is a lot to handle."

George Whalen of Retail Management Consultants in San Marcos, Calif., said Wal-Mart has a track record of handling multiple tasks: "When you get to be the biggest in the world, you fight battles on every front sometimes."

Second-quarter results showed the first profit decline in a decade on the cost of selling its loss-making business in Germany. It quit another loss-maker, South Korea, in May but still operates in 13 countries in Asia, Latin America and Britain and intends to keep expanding, especially in China.



Gas prices hurting?
But the quarter's sales and profit growth also slowed at Wal-Mart's U.S. stores, its biggest division, as high fuel prices kept customers away, cut their spending power and drove up Wal-Mart's own costs for a fleet of 7,000 trucks.

Some analysts question whether Wal-Mart can regain previous growth rates that made it a darling of Wall Street in the 1990s.

After precipitous gains in the 1980s and 1990s, the stock peaked at around $70 in January 2000 before losing steam. It has lost another 3 percent this year to current levels around $45.

Wal-Mart's earnings per share rose more than 16 percent per year on average over the past 10 years and sales grew by annual rates between 12 percent and 20 percent. But all that has slowed, with earnings per share up about 11 percent last year and sales up just 9.5 percent.

Robert Buchanan, head of retail analysis at A.G. Edwards & Sons, said a target of 10 percent growth in annual earnings per share is more realistic from now on, considering Wal-Mart's size. In a research note, he wrote that "the 'law of large numbers' has set in."



Edwards said that with nearly 4,000 stores in the U.S., Wal-Mart can only maintain past growth rates by acquiring more companies overseas or "building a Wal-Mart on every other street corner in China."

"They are the 900-pound gorilla. The 900-pound gorilla cannot grow as fast as the little company from the Ozarks," Edwards said.



More stores on the way
Some analysts are more bullish, and Wal-Mart has said it plans to open more than 1,500 stores in the United States in the coming years.

Sandra J. Skrovan, who heads a Wal-Mart research program at consultant Retail Forward Inc. in Columbus, Ohio, said Wal-Mart is well-positioned to weather the current gas crunch, even if prices don't decline. Its Supercenters, which combine a full grocery section with general merchandise, offer a one-stop shop and customers will continue to come in for food even if they postpone buying home electronics or clothes.



Changes, such as adding organic foods, trendier clothes and electronics, are meant to compete with rivals like Target Corp. and Best Buy.






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