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Retail's Summer Swoon Has Even Wal-Mart on the Run

Katherine Hobson

Investors expect more from Wal-Mart (WMT).

That could explain why recent weeks have seen the superstore retailer's shares take a pounding along with lesser rivals, amid concerns of slow summer sales. In fact, the speculation got so bad that on the last day of July, Wal-Mart shares fell more than 6% amid rumors that the Behemoth from Bentonville would miss earnings estimates.

Not likely. This is Wal-Mart we're talking about. This is the world's biggest retailer. Wal-Mart doesn't miss. "Management has made it pretty clear that Wal-Mart is extremely comfortable with 36 cents a share," says Emme Kozloff, analyst with Sanford Bernstein, referring to the consensus of analysts surveyed by First Call/Thomson Financial. (Kozloff rates Wal-Mart an outperform, her highest rating, and her firm hasn't done recent underwriting for Wal-Mart.)

High Hurdles

But if Wal-Mart isn't likely to miss when it reports second-quarter earnings on Wednesday, nor is it likely to take a zip gun to estimates as it has in the past. Take a look at the powder burns: In fiscal 1999, Wal-Mart's earnings growth beat beginning-of-the-quarter guidance by some 9 percentage points, notes Bill Dreher, research analyst with Robertson Stephens. (His firm hasn't done recent underwriting for the company.) In 1998, earnings beat guidance by a smaller but still impressive 6 points, Dreher says.

So, as happens with companies that beat their numbers like clockwork, maybe Wal-Mart's just being held to a higher standard now. "There's a valid concern that the upside is not there the way it has been for two years," says Dreher, who rates the shares a long-term attractive because of their steep valuation (42 times earnings, at last check). If Wal-Mart's shares zoomed 43% in the second half of last year on the strength of those EPS grand slams, well, then, the stock might just sputter this time around if the company just touches estimates (indeed, its shares are down 20% so far this year). Dreher figures quarterly earnings growth will be about 15%, in line with the company's guidance.

That's why everyone's likely to listen to the tone of the company's conference call to see exactly how optimistic those Arkansans are about consumer demand over the next few quarters. Already, there are signs of a more conservative stance. In July, sales at stores open at least a year rose 6.5%, roughly in line with the company's plans. While sales growth didn't match the 9.6% gain during July 1999, it was respectable compared with the suffering experienced by some other retailers. But the company didn't provide final sales guidance for August, and instead gave a rough range of 4% to 6% (down from its 6%-to-8% range for July). "They are typically very concrete as to what the guidance will be," says Dreher.

Discounting Derby

That's not to say that there's likely to be much disappointment with the fundamentals in Wal-Mart's report. The company has avoided the kind of discounting derby engaged in by its competition this summer. A late Easter, weird weather swings, a consumer made reluctant by the seesawing stock market and higher interest rates combined to produce several months of disappointing sales for most retailers, leaving them with tons of extra stuff to put on sale during July and August. Wal-Mart looks to have escaped the worst of it. Its stock was up 1 1/8, or 2%, at 56 1/4 Tuesday.

"They've had very good luck with apparel," says Kozloff. Recent store visits showed that Wal-Mart's shelves and racks weren't stuffed to the gills with marked-down summer merchandise. Kmart (KM), meantime, still has lots of summer stuff left, while Target (TGT) is better, but not as clean as Wal-Mart, says Kozloff.

Any other retailer would probably love to roll out the kind of earnings news that Wal-Mart is likely to report Wednesday. But unfortunately, this isn't any other retailer: This is Wal-Mart, and it has only its own stellar track record to blame if it meets estimates but sees its shares fall anyway.