Interest Weighs on Wal-Mart

The retailing giant's 2006 forecast disappoints after acquisitions lead to higher debt and interest costs.
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Updated from 7:22 a.m. EST

Wal-Mart

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reported earnings Tuesday that beat Wall Street's reduced expectations for its holiday quarter, but the retailing giant warned that 2006 profits could be weighed down by higher interest costs stemming from acquisitions.

The company said its fourth-quarter net income rose 13% to $3.59 billion, or 86 cents a share, from $3.16 billion, or 75 cents a share, a year earlier.

Excluding a one-time tax benefit of 2 cents a share, Wal-Mart earned 84 cents a share. Analysts on Wall Street were forecasting earnings of 83 cents a share, on average, according to Thomson First Call.

Wall Street's expectations were lowered after the holiday, when the Bentonville, Ark., retailer warned of disappointing sales in December and guided its earnings to the low-end of its projected range of 82 cents to 86 cents a share.

"It looks like their performance in January was a real rebound after December raised some concerns about the quarter," says Ken Perkins, president of market research firm Retail Metrics. "Wal-Mart's January comp showed that their holiday sales really spilled over into that month because of the large amount of gift card sales and the warmer weather."

Wal-Mart posted a 4.7% gain in comps, or same-store sales, in January after recording a somewhat disappointing 2.2% increase in December.

On the top line, Wal-Mart's total sales rose 8.6% to $89.27 billion from last year's $82.22 billion. Those results fell short of expectations on Wall Street, where analysts were expecting sales of $90.4 billion. Sales at the company's flagship Wal-Mart stores rose 8.6% to $60.22 billion, while sales at its Sam's Club outlets rose 6.8% to $10.66 billion. Overseas, sales increased 9.6% to $18.4 billion.

Same-store sales, or sales at stores open at least a year, were up 3.1% for the quarter, consisting of a 2.7% increase at Wal-Mart Stores and a 5.1% increase at Sam's Club.

Wal-Mart was cautious in its guidance. It forecast first-quarter earnings of 58 cents to 62 cents a share, compared with Wall Street's estimate for earnings of 62 cents a share. For the full year, the company anticipates earnings of $2.88 to $2.95 a share -- well below analysts' average estimate of $2.98 a share.

"That's concerning," Perkins says of the guidance. "They're being conservative here, looking ahead and seeing that things might be slowing down."

The retailer's chief financial officer, Tom Schoewe, said in a prerecorded call that increased interest costs, boosted by higher interest rates and debt used to fund recent acquisitions, could reduce full-year earnings by as much as 8 cents a share. He also said Wal-Mart expects to increase its capital spending by about 15% this year, with 75% of that increase for "growing the business." It also plans to remodel about 1,800 stores over the next 18 months.

Wal-Mart finds itself struggling to win customers from

Target

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, its smaller rival that has been beating the company on a same-store sales basis in recent years with a trendier product assortment.

"We want our merchandise to appeal to a broad range of customers who are already shopping our stores," said Wal-Mart President and Chief Executive Lee Scott in a statement. "We want customers to shop Wal-Mart for all their needs, from consumables to electronics, home decor and apparel."

Wal-Mart shares recently were down 24 cents to $45.86.