Wal-Mart Loses Its Way
Marc Lichtenfeld
05/15/07 - 01:21 PM EDT
There's wasn't much love going around for
Wal-Mart (WMT - Cramer's Take - Stockpickr) Tuesday after the retail giant reported a lackluster first quarter and said the second quarter doesn't look much better.
Wal-Mart's earnings for the period were
in line with forecasts, although revenue was below estimates. Additionally, the company projected second-quarter earnings of 75 cents to 79 cents a share, allowing for downside to Wall Street's estimate of 79 cents.
While CEO Lee Scott pointed out that revenue and earnings were at record levels, he admitted that "there was an opportunity to have done better."
Indeed. The company's sales remained sluggish, and the retailing giant appears to be trying to figure out what it wants to be, even though it's all grown up.
Shares of Wal-Mart recently were down a modest 18 cents to $47.66. The stock is trading at a historically low multiple of 16.5 times earnings, but now isn't the time to pile into the shares. There are certainly too many problems -- and too much confusion.
Identity Crisis
To its credit, Wal-Mart effectively kept a lid on costs in the first quarter. Gross margin declined just 6 basis points, despite an unfavorable sales mix toward lower-margin products.
Operating margin improved 9 basis points, though it was flat when one-time items were removed. The company also saw gains in labor productivity and only a slight increase in markdowns.
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What does Wal-Mart need to do to get back on track?
Answer Here |
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It's good Wal-Mart is able to keep its cost structure in check. Now, the company needs to figure out its focus.
Monday, the company said it would enhance its electronics offerings and brighten up stores in an effort to attract traffic. Wal-Mart already has launched remodeling initiatives and efforts to sell higher-margin products.
If successful, a pickup in electronics sales should boost margins, because that category tends to be more profitable than segments such as groceries and generic drugs.
And the latter group is exactly where Wal-Mart performed well this quarter. There's nothing wrong with selling lots of food and drugs. Many companies, such as
Safeway (SWY - Cramer's Take - Stockpickr) and
Kroger (KR - Cramer's Take - Stockpickr), are doing very well in that business. But for Wal-Mart to boost profits, it needs higher-margin merchandise to go out the door (and not through shrinkage, or stolen goods, which increased in the first quarter).
Despite the effort to promote higher-end goods, Scott said on a recorded earnings call, "We will be committed more than ever to price leadership."
To me, it's a bit of a disconnect to highlight high-margin, high-end goods one day, and then emphasize its low-cost value proposition the next. Sure, there may be room for both, but the messages are getting convoluted.
Wal-Mart is throwing everything at the wall and hoping something sticks. Four-dollar generic-drug-pricing stuck, because that is in line with Wal-Mart's typical modus operandi. Higher-end flat-panel TVs seem like a reach.
Shifting Sales Focus
As I
mentioned yesterday, I was closely watching Wal-Mart's international division. Sales in that segment grew 18.5% and represented 23% of total sales. That's up from 21% of total sales in 2006.
Sales at U.S. stores, meanwhile, climbed just 5.6%. Same-store sales for the quarter dropped 0.1% at Wal-Mart stores, compared with a 3.8% rise in the year-earlier period. In the second quarter, Wal-Mart expects comps in the U.S. to rise 1% to 2%.
Until the domestic issues are solved, the international segment cannot afford to slip up.
A mammoth company such as Wal-Mart will always have issues. Indeed, the company is facing its fair share of turmoil -- ranging from townsfolk trying to keep stores out of their area to managers in alleged trysts and spying. But very few of those issues actually affect sales.
What Wal-Mart needs to do is rediscover how to connect with its customers. Shoppers can enjoy a more pleasant experience at
Target (TGT - Cramer's Take - Stockpickr) and elsewhere. Thus, Wal-Mart customers have to be confident they will get extraordinary value for their basic needs, such as with the company's $4 drug program.
While everyone would like to save money on a 42-inch flat panel, I'm not sure that will serve the core customer, nor lead to much incremental business beyond the sale of that TV. Until Wal-Mart finds its way, don't expect a huge improvement in sales.
