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Walmart starts fiscal year with record sales, profits

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BENTONVILLE, Ark. — Surging sales and operating profit at its international division helped Walmart overcome a sharper-than-expected drop in same-store sales at its U.S. stores, as first quarter net income exceeded both management’s and Wall Street’s forecasts.

Surging sales and operating profit at its international division helped Walmart overcome a sharper-than-expected drop in same-store sales at its U.S. stores, as first quarter net income exceeded both management’s and Wall Street’s forecasts.

Income from continuing operations attributable to Walmart for the three months ended April 30 climbed 9.7% to $3.32 billion, or 88 cents per diluted share. Walmart’s bottom line for the fiscal 2010 quarter includes an $8 million loss from discontinued operations. Consequently, consolidated net income attributable to Walmart in the most recent period rose 10% from $3.02 billion.

Earnings received a benefit from currency exchange rates of about 2 cents per share. Even backing that out, results beat management’s earnings estimate of 81 cents to 85 cents per share, as well as the consensus estimate of 85 cents per share among analysts surveyed by Thomson Reu­ters.

Net sales rose 6% to $99.10 billion, reflecting a currency exchange benefit of $2.5 billion. Consolidated domestic comparable-store sales declined 1.1% excluding fuel, but edged down 0.5% including the benefit of gasoline sales, which are carrying heftier prices than a year ago.

A 2.6% dip to $751 million in other income — largely Sam’s Club membership fees, along with tenant lease income and some other miscellaneous income categories — had a minimal impact on total revenues, which increased 5.9% to $99.85 billion.

Moving down the income statement, consolidated gross margin for the quarter contracted 8 basis points to 24.62%, but operating, selling and general and administrative expenses retreated 38 basis points to 19.4% of total revenue. The margin decline was due mainly to a change in mix between the company’s operating segments, according to executive vice president of finance and treasurer Charles Holley. Spurred by the decline in the expense ratio, operating income jumped 10.6% to $5.77 billion.

"Our strong results were driven by great expense management for the quarter," said Holley during a prerecorded conference call. "Expenses grew 3.9% on our 6% sales growth. We now have leveraged operating expenses for two consecutive quarters."

With net interest expense edging up 0.9% to $471 million, pretax income from continuing operations leapt 11.6% to $5.30 billion.

"Walmart kicked off the fiscal year with record first quarter net sales and earnings, and I’m pleased that earnings exceeded guidance," said president and chief executive officer Mike Duke in a statement. "Our customers, particularly in the United States, are still concerned about their personal finances and unemployment, as well as higher fuel prices. Our commitment to reducing prices and managing expenses positions us well across the retail landscape."

Operating income in the Walmart U.S. division (which includes discount stores, supercenters, Neighborhood Markets and four Marketside test outlets) gained 5.6% to $4.64 billion, outpacing a net sales increase of 1.1% to $62.32 billion. Comparable-store results in the company’s largest unit decreased 1.4%, in contrast to a 3.6% increase in the preceding year.

Management attributed the profit growth to structural changes in the organization that were implemented earlier in the year. The same-store sales decline, meanwhile, fell outside guidance issued in February of a range of minus 1% to plus 1%. Analysts, on average, had expected a 0.6% decrease.

According to vice chairman Eduardo Castro-Wright, the same-store sales drop was entirely due to decreased customer traffic, which countered a more than 200-basis-point increase in the average transaction. "There are a number of factors that affected sales and traffic — the economy, deflation, competitive environment and merchandise assortment," he said. "Rising gas prices and high unemployment levels continue to be the most pressing issues for our core customer."

Castro-Wright added that Walmart is feeling increased price competition, especially in consumables categories. In addition, he noted that the chain had finished “fine-tuning” its merchandise assortment strategy by adding back about 300 grocery items that had been deleted from its shelves. He further noted that food deflation began to moderate in such key categories as dairy, meat and produce in the quarter.

"Comps in health and wellness were solid," he added. "Our pharmacy business remains strong, and we continue to outperform the competition in this area. Maintenance and wellness categories, such as vitamins and adult nutrition, are generating consistently strong comps."

Walmart’s other domestic business, the Sam’s Club division, turned in a more robust performance. Operating income advanced 9.2% to $429 million on 4.6% lift in sales to $11.74 billion. Comparable-store sales edged up 0.7%, but climbed 3.9% when fuel sales are included, reflecting a 41% jump in the price of gasoline, year over year.

Sales of fresh foods, health and wellness, home and apparel all were strong during the quarter. According to Sam’s Club president and chief executive officer Brian Cornell, transactions in comparable-stores were up for the quarter, but traffic among Advantage and Business members (excluding fuel) was down.

With a weaker dollar driving favorable exchange rates, Walmart International returned to double-digit growth of both sales and profit. Operating income soared 27.8% to $1.10 billion, while sales vaulted 21.4% to $25.03 billion.

As of April 30, Walmart’s store base totaled 8,445 units, including 4,364 domestic and 4,081 international outlets.

The company’s Puerto Rico stores, formerly part of the international division, have been integrated into Walmart U.S.