Wal-Mart Finds Its Footing

The retailer's focus on inventory puts it at an improved position for the key holiday season.
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SAN FRANCISCO -- Wal-Mart's (WMT) - Get Report heavy emphasis on controlling inventory, along with strong sales in its grocery and pharmacy businesses, has given the retail giant some much-needed ground in a shaky retail environment.

Shares of Wal-Mart were jumping $2.83, or 6.5%, to $46.15 Tuesday afternoon after the company topped third-quarter earnings estimates and lifted its profit forecast for the year. That helped ease concerns about its position ahead of the holiday season, which is largely expected to be sluggish for retailers amid economic headwinds.

At the same time, no one is expecting stellar performance from Wal-Mart given that consumers -- particularly lower-income ones that are the company's base -- are reining in their purchases amid housing and credit turmoil. The best investors can hope for is that the Bentonville, Ark., giant ekes out some gains for the season, even if they turn out to be smaller than usual.

For the fourth quarter, Wal-Mart expects same-store sales to be flat to up 2%. The company projected earnings of 99 cents to $1.03 a share, offering some downside to analysts' target of $1.02.

It also predicted fiscal-year earnings from continuing operations of $3.13 to $3.17 a share, up from its prior view of $3.05 to $3.13 a share. Wall Street anticipates fiscal-year earnings of $3.09 a share.

Adrianne Shapira, an analyst for Goldman Sachs, said that Wal-Mart's tight inventory control in the third quarter has helped put it in a strong position for the holidays.

"Beginning in July and accelerating in August and September, Wal-Mart has been aggressively working down its inventory overages," Shapira wrote in her research. "We note this is a rare instance this holiday, as many retailers stand in contrast with inventories building as a result of unseasonable warmer weather."

Indeed, Wal-Mart executives on Tuesday said the company is growing its inventory at half the rate of its sales, a goal that it was unable to meet in the earlier part of the year.

In the third quarter, Wal-Mart's earnings climbed to $2.86 billion, or 70 cents a share, from $2.65 billion, or 63 cents a share, a year earlier. The results included a 1-cent-a-share tax-related gain.

The results were better than analysts' average estimate for a profit of 67 cents a share, according to Thomson Financial. Last month, Wal-Mart bumped up its third-quarter earnings per share estimate to a range of 66 cents to 69 cents from an earlier forecast of 62 cents to 65 cents

Wal-Mart's revenue rose to $91.95 billion from $84.47 billion a year earlier. Analysts projected revenue of $91.77 billion.

Same-store sales, or sales at stores open at least a year, inched up 1.5%.

The company's biggest division, Wal-Mart Stores U.S., saw operating income outpace sales growth amid improved expense controls. Operating profits jumped 11.1%, while sales climbed only 6.4%.

Mark Husson, an analyst for HSBC, notes that most of the gains came from Wal-Mart's grocery and pharmacy business, which make up about half the division's sales.

Third-quarter same-store sales for grocery, for instance, were up over 5%, while pharmacy same-store sales rose more than 8%. High-margin categories like apparel and home furnishings, on the other hand, continued to be a drag.

Shapira said Wal-Mart's current strategy at U.S. stores has been at its most cogent in the last few years, hinging on price, brand and store executions.

"These strategies have worked well across food, pharmacy and consumer electronics and the plan is to leverage these best practices to home and apparel going forward," she wrote. "While softlines have not been a core competency for Wal-Mart, we believe today's plan of attack is one that makes the most sense for today's more challenging macro backdrop."

In preparation for the holiday season, Wal-Mart has been aggressively slashing prices under the banner, "Save Money. Live Better." In early October, it began discounting toys, which are usually the biggest end-of-the-year sales drivers.

"During the Christmas and holiday season, our price leadership position will benefit both our customers and the Company," Chairman and CEO Lee Scott said Tuesday. "We have set the stage for a successful fourth quarter."