Wal-Mart holiday price cuts hit profits

WalMart Stores Inc’s price cuts hurt its fourthquarter profit reminding investors that steps the world’s largest retailer is taking to bring back shoppers do come at a cost.

WalMart’s quarterly profit and sales fell short of Wall Street expectations and its forecasts suggest that results in this quarter and fiscal year may again disappoint analysts.

Everything had the hint of conservatism in the guidance said ITG Investment Research senior hardline retail analyst John Tomlinson. People are contemplating bear case scenarios what they could mean for earnings growth.

Shares of WalMart fell 4 percent erasing most of the gains so far in 2012. The stock had been up about 29 percent since August as its U.S. sales turnaround plan was starting to show progress.

Sales at Walmart U.S. stores open at least a year or samestore sales rose 1.5 percent. While that was toward the higher end of WalMart’s forecast of a 0 to 2 percent increase it fell short of analysts’ average forecast of 1.8 percent tracked by Thomson .

Price cuts in the United States helped bring in more customers during the crucial holiday season. It was the second quarter in a row that Walmart U.S. samestore sales rose after nine consecutive quarterly declines but analysts were largely disappointed that samestore sales were only a hint better than the third quarter’s 1.3 percent rise.

Now fresh concerns include the impact rising gas prices will have on shoppers. WalMart is cutting costs and pushing those savings into lower prices a process that sometimes means margins will fall faster than expenses. Operating income growth at Walmart U.S. grew at a slower rate than sales.

While we believe WalMart’s renewed price focus represents the appropriate strategy Q4 results also demonstrate the limits to which the company can leverage this into profit growth said Bernstein Research analyst Colin McGranahan.

Walmart U.S. WalMart’s biggest division has been lowering prices and bringing back a wider variety of items to woo shoppers on limited budgets who started to shop at dollar stores and elsewhere. Traffic at its U.S. stores rose after six quarterly declines showing that such efforts lured shoppers.

Traffic was strongest in January showing that Walmart continued to bring in shoppers even after its heavily promoted layaway plan helped drive growth in October through December.

Competitors Dollar General and Family Dollar have not reported full holiday quarter results yet but samestore sales in their latest quarters outpaced the 1.5 percent rise at Walmart. Target Corp posted a 3.3 percent rise in samestore sales for the quarter earlier this month.

Shares of WalMart were down 2.50 or 4 percent at 59.98 at midafternoon after slipping as low as 59.68.

S&P Capital IQ equity analyst Joseph Agnese cut his rating on WalMart to buy from strong buy as he sees pressure on sales and margins from the pricing plans. He kept his 67 price target on the shares.

EXPECT MARGIN DECLINE

WalMart is optimistic that employment reports will continue to improve which could boost consumer confidence. But higher gas prices are pressuring shoppers’ limited budgets.

There is a new normal with customers Chief Financial Officer Charles Holley told reporters. Markets are more volatile gas prices are more volatile and so I think the customer is going to continue to look for ways to save money because they don’t know what’s around the corner.

Investors should expect margins to decline as the company looks for new ways to trim costs and cut prices Holley said.

In the past quickly rising gas prices led shoppers to cut back on trips to Walmart and they spent more during each visit. Higher gas prices also help dollar stores as shoppers can often reach those smaller shops by foot or by public transportation.

Walmart also still contends with a poor image among some shoppers who complain about the long checkout times among other issues.

Satisfaction with Walmart in the fourth quarter fell 4.1 percent while competitors such as Target and Sears saw their scores rise according to findings released on Tuesday by the American Customer Satisfaction Index. WalMart’s Sam’s Club warehouse chain saw its satisfaction score rise by 3.8 percent.

WalMart earned 5.19 billion or 1.51 per share from continuing operations attributable to the company up from 5.02 billion or 1.41 per share a year earlier.

Excluding about 7 cents per share from certain tax matters and real estate transactions WalMart earned 1.44 per share. The company had forecast a profit of 1.42 to 1.48 per share excluding the benefits. Analysts on average expected it to earn 1.45 per share according to Thomson IBES.

Sales rose 5.8 percent to 122.29 billion below the average analyst estimate of 124.21 billion.

WalMart forecast firstquarter earnings per share from continuing operations attributable to the company of 1.01 to 1.06 compared with a profit of 98 cents per share a year earlier which included a lift of 1 cent from multiple items.

The company expects firstquarter samestore sales to be flat to up 2 percent at Walmart U.S. and to rise 3 percent to 5 percent at Sam’s Club excluding sales of gasoline.

It forecast fiscal year earnings per share from continuing operations attributable to the company of 4.72 to 4.92.

Analysts on average forecast a profit per share of 1.05 for this quarter and 4.90 for the year.

WalMart’s international business grew at a faster clip than the larger Walmart U.S. Operating income at Walmart International rose 15.2 percent to nearly 2.31 billion while Walmart U.S. operating income rose 1.4 percent to 6.11 billion.

International results were mixed. Britain’s Asda saw sales growth slow from the third quarter. WalMart de Mexico or Walmex topped analysts’ expectations as it opened more stores.

On Monday WalMart said it was taking a controlling stake in Chinese ecommerce company Yihaodian.

Reporting by Jessica Wohl in Chicago Editing by Derek Caney and Richard Chang

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