Walmart's 3Q 2011 Earnings Indicate U.S. Economy May Rebound
NEW YORK — Wal-Mart got an early Christmas gift: Its strategy of offering the lowest prices and shoppers' favorite goods is starting to bear fruit just in time for the holiday shopping season.
Wal-Mart Stores Inc. on Tuesday reported its first quarterly gain in revenue at stores opened at least a year after nine consecutive quarters of declines at its branded U.S. business. It did this by hammering its message of low prices across the store and restocking the brands and products that people care most about.
That the world's largest retailer is turning a corner is a positive sign for the retail industry and the U.S. economy as a whole. Its core low-income shoppers have been particularly hard hit by joblessness and the other challenges of the nation's weak economy. The results indicate that those most hurt by the economic downturn are willing to spend if you offer them rock-bottom pricing.
"The plan is working," Mike Duke, CEO of Wal-Mart, said on Tuesday. "Customers are responding favorably."
It's been a long road for Wal-Mart, which in recent years has been battered by a combination of the bad economy and its own bad decisions that caused U.S. customers to flee to competitors.
U.S. shoppers could no longer depend on the company for the cheapest goods because it had strayed away from offering everyday low prices on all products to just doing so on select items. Additionally, shoppers no longer viewed Wal-Mart as the place for their one-stop shopping needs as the company scaled back on plus-size clothing, crafts and other popular items in an attempt to de-clutter its stores.
Recently, Wal-Mart has been working to reclaim its reputation as the lowest-price leader by going back to the "everyday" low pricing strategy that its founder, Sam Walton, pioneered. The company, based in Bentonville, Ark., also has restocked thousands of popular products it got rid of, including adding items that are popular in specific regions. In Phoenix, for example, shoppers now find pool supplies and lawn and garden items year-round.
Wal-Mart's strategy appears to be working. In the three-month period ended Oct. 31, Wal-Mart's U.S. namesake division's revenue at stores opened at least a year – an indicator of a retailer's health – rose 1.3 percent. That's above Wall Street estimates for a 0.3 percent increase and reverses nine straight quarters of declines in the measure, its longest streak ever.
Wal-Mart said the gains were fueled by an increase in the average amount customers were spending per visit. Sales of food and health and wellness products, sporting goods, and crafts were particularly brisk.
"Wal-Mart is getting its groove back," said Brian Sozzi, an independent research analyst. "They're taking the fight back to dollar stores, Amazon and others. They're much more aggressive."
Still, Wal-Mart's aggressive strategy comes at a cost. The retailer is lowering its prices at a time when many of its suppliers – consumer products companies and others – are raising theirs to cover their rising costs for the materials they use to produce, package and transport their goods. That's eating away at its margins.
In fact, Wal-Mart said that all three of its business areas – Wal-Mart U.S. division, Sam's Club and its international division – had a decline in profit margins in the three-month period ended October 31 because of the impact of its low price focus and inflationary pressures.
That's in part why Wal-Mart executives are setting a cautiously optimistic tone. They know the retailer's core low-income customer is still reeling from the economic downturn, and it's likely to take ever more profit-busting incentives to keep them shopping.
"Our core customer was still impacted by high unemployment and continued uncertainty over the economy, leading to declining consumer confidence," said Bill Simon, president of Wal-Mart's U.S. division. "We believe it will be more difficult than ever to afford holiday meals for their families."
Still, Wal-Mart's U.S. namesake business is particularly important to the company because it accounts for 62 percent of its total revenue. As a result, the company is upping the ante for the holiday shopping season, a critical period for many retailers that roughly runs from November through December.
Through its Christmas Price Guarantee program, shoppers who buy something at its store between Nov. 1 and Dec. 25, but find the identical product elsewhere for less, can get a gift card in the amount of the difference.
Wal-Mart also offering more ways to help shoppers pay for their gifts. Wal-Mart brought back layaway for the holiday season for toys and electronics, starting Oct. 17. And its new holiday credit offer allows customers who buy gifts this month and next month interest-free financing for six months, provided they make monthly minimum payments.
Additionally, the retailer is starting its Black Friday specials at 10 p.m. on Thanksgiving, two hours earlier than many of its competitors like Kohl's Corp., Target Corp. and Macy's..
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ANNE D'INNOCENZIO 11/15/11 06:46 PM ET Associated Press