Wal-Mart Stores Inc.'s business offers valuable insight into how Americans are reacting in the slow economic recovery: they will spend, but only if they believe they're getting the lowest prices.
The world's largest retailer guaranteed the lowest prices on merchandise this past holiday season. As a result, bargain-hungry shoppers flocked to Wal-Mart in the fourth quarter, helping it to record its first increase in store traffic in at least two years. But the company's margins suffered.
"Core customers remain cautious about their finances," said Mike Duke, Wal-Mart's president and chief executive, in a statement.
The new consumer behavior is likely to have an impact on companies of all shapes and sizes as they struggle with how to lure shoppers in with low prices without cutting them so much that it erodes profits. Wal-Mart, which draws nearly 10 percent of all nonautomotive spending in the U.S., highlights the compromise companies have to make when they focus on rock-bottom pricing in the still-weak economy.
Wal-Mart has struggled since the recession as its core low-income customers at its U.S. namesake business have been hard hit by joblessness and other challenges. Meanwhile, the business, which accounts for 62 percent of the company's revenue, had veered away from its low-price strategy.
In the third quarter of last year, Wal-Mart reversed a string of quarterly sales declines at stores open at least a year _ an indicator of a retailer's health. Wal-Mart ended the slump that lasted for more than two years in part by refocusing on offering low prices throughout the store, instead of temporarily slashing prices on select items.
In the fourth quarter, Wal-Mart continued the trend. It posted its second consecutive quarterly gain in revenue at stores opened at least a year at its namesake Wal-Mart stores in the U.S.
Wal-Mart said Tuesday that revenue at stores open at least a year at its U.S. namesake business rose 1.5 percent in the quarter, slightly below the 1.6 percent gain analysts polled by FactSet had expected. Overall, it's U.S. business had a 2.1 percent increase in revenue at stores opened at least a year, including a 5.4 percent rise at Sam's Clubs.
Net sales, excluding membership fees from its Sam's Club division, rose 5.9 percent to $122.28 billion. Analysts had been expecting revenue of $123.9 billion.
While sales rose, margins fell. Overall gross margin was 24.3 percent in the quarter, down from 23.9 percent in the year-ago quarter.
The discounter, based in Bentonville, Ark., said net income was $5.16 billion, or $1.50 per share in the three months ended Jan. 31. That compares with $6.05 billion, or $1.70 per share, in the year ago period.
Excluding certain tax matters and real estate transactions, Wal-Mart recorded $1.44 per share in the latest quarter. The year-ago results included benefits from discontinued operations; excluding those benefits, earning were $1.41 per share. Analysts were expecting earnings per share of $1.46.
"They're working extremely hard just to see improving sales," said Brian Sozzi, chief equities analyst at NBG, an independent research firm. "But it's coming at the expense of profits on each sale. Just imagine if they weren't doing this."
Reclaiming its reputation as the lowest-price leader is critical for Wal-Mart to sustain the upward sales trend. So, going forward, Wal-Mart officials say the company will keep looking for ways to cut prices.
"You can expect us to invest even more in lower prices," Duke, Wal-Mart's CEO, said.
For the current quarter, Wal-Mart expects revenue at stores opened at least a year to be flat to up 2 percent. For the year, it expects earnings per share to be $4.72 per share to $4.92 per share. Analysts had expected $4.90 per share.
During a media call with reporters Tuesday, Charles Holley, chief financial officer, said that January has the best performance in the quarter, reflecting the sales momentum the discounter is enjoying.
"I do think there's a new normal with customers," Holley he said during a call with reporters Tuesday. "The markets are more volatile. Gas prices are more volatile. Customers are looking for new ways to save money because they don't know around the corner."