Wal-Mart Earnings Surge

The company beats first-quarter estimates and guides the year higher.
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Updated from 7:43 a.m. EDT

Wal-Mart

's

(WMT) - Get Report

first-quarter earnings came in better than Wall Street expected, boosted by strong sales in its higher-margin clothes category. The company remained sanguine about the rest of the year, save for nagging concerns about higher energy prices.

Net income was $2.17 billion, or 50 cents a share, in the quarter ended April 30, which compares with a profit of $1.86 billion, or 42 cents a share, in the year-ago quarter. The retail giant said earnings from continuing operations was $2.21 billion, or 50 cents a share, compared with $1.89 billion, or 41 cents a share, in the year-earlier period. On that basis, analysts had been expecting earnings of 49 cents a share in the latest quarter.

The world's biggest retailer cited the improving economy, but warned higher energy costs could keep consumers at home in the second half while creating price pressure in its general merchandise category. Nevertheless, the firm issued earnings guidance that was toward the high end of estimates: 60 cents to 62 cents a share for the quarter and $2.35 to $2.39 a share for the year.

The company also reiterated that May and second-quarter same-store sales are expected to be up 4% to 6%.

Within Wal-Mart specifically, a turnaround in apparel sales helped boost the overall performance, while expense management continued to be a challenge.

"I started the year with an optimistic view, and I still feel that way," said Chief Executive Lee Scott on the call. He estimated that higher gas prices took away about $7 a week from customer disposable spending, but he expects the growth in employment will lessen that impact.

The company said deflation in its general merchandise business was reduced in the latest quarter because of higher commodity and raw material costs. Wal-Mart also said food inflation is higher, "but still modest."

For the year, the company sees utility costs rising 5% due to the rise in gas prices.

Shares of the Bentonville, Ark.-based company were moving up 69 cents, or 1.3%, at $55.75 in Thursday premarket trading.

Sales in the latest quarter jumped 14.2% to $64.76 billion. By division, Sam's Club had a 10.5% increase in sales to $8.64 billion, while Wal-Mart store sales rose 12.8% to $43.57 billion. U.S. same-store sales rose 6.4% in the latest quarter, reflecting a 5.9% increase at Wal-Mart stores and an 8.8% rise at Sam's Club.

Operating profit at Wal-Mart stores increased 13.4% to $3.12 billion, while Sam's Club operating profit spiked 30.9% to $204 million. The company's international segment had a 46.6% jump in operating profit to $563 million.

The company noted that its results from continuing operations excluded the sale of its McLane stores, which were sold to

Berkshire Hathaway

(BRKA)

in May 2003. Additionally, Wal-Mart said the quarter's comparisons with the prior year are not entirely exact due to a change its method of accounting for allowances and supplier reimbursement.

Expense issues continued to plague Wal-Mart. Total costs rose 32 basis points, the company said, impacted by wage increases, gas price inflation and increased costs of healthcare and accident costs.

"Expense management is obviously a tremendous area of opportunity for us," the company said. "Store labor costs were not managed as well as they should have been."

Wal-Mart said better gross margins resulted from better performance in apparel and from reduced costs related to its global sourcing initiative. Gross margin increased 27 basis points, in all.

Wal-Mart said it opened three new discount stores and 11 new supercenters in the quarter, and expanded or relocated 51 stores. It also opened three new neighborhood markets. Internationally, 128 new stores were added in the quarter, with one store relocated or expanded.

In 2004, the company plans to open 40 to 45 new discount stores, 230 to 240 supercenters, 30 to 35 new Sam's Clubs, 20 to 25 new neighborhood markets and 130 to 140 new international units. In all, total square footage should increase by 8%.