By Jennifer Yousfi
With the announcement of record fourth-quarter sales and earnings yesterday, Wal-Mart Stores Inc. (WMT) became the world's first $100 billion retailer.
"For the fourth quarter, we topped $100 billion in sales, the first time in history that any retailer has reached this milestone in a single quarter," Wal-Mart President and Chief Executive Officer in a statement.said
For the three months ended Jan. 31, net sales were $106.27 billion, an increase of 8.3% from the same period last year. Income from continuing operations for the quarter was $4.096 billion, an increase of 4% from operating income of $3.94 billion for the comparable quarter a year ago.
That strong fourth quarter capped a strong year for the Bentonville, Ark.-based Wal-Mart.
Net sales for all of fiscal 2008 were $374.53 billion, an 8.6% increase over the prior year. Income from continuing operations for the fiscal year ended Jan. 31 reached $12.88 billion, a jump of 5.8% from the prior year. Earnings from continuing operations on a fully diluted basis reached $3.16, an increase of 8.2% from per-share earnings of $2.92 from the year before.
Wal-Mart used the income from continuing operations because of a one-time charge of $32 million taken for the restructuring of its Japan operations.
The strong results are due in part to deeper price cuts on more items before the holiday season. In reaction to the faltering U.S. economy, Wal-Mart also kept discounts in place long after the holiday shopping season ended in the hope of enticing more gift-card redemptions.
Same store U.S. sales increased 1.7%, excluding fuel. While the gain is small, many of Wal-Mart's competitors actually suffered through same-store sales declines.
Trouble at Home
Founded in 1962 by Sam Walton, Wal-Mart was instrumental in the rise in popularity of so-called "big box" stores. Early in his career, Walton pioneered many of the techniques that would become hallmarks of Wal-Mart operating strategies. Walton stocked a wide variety of products, he kept later hours than his competition [especially during the holiday season] and he purchased goods at wholesale prices – passing the savings along to his customers.
Walton was shrewd: He understood that by giving up a little profit on each item that he'd more than make it up with volume, as price-conscious consumers became Wal-Mart devotees.
He was correct and Wal-Mart grew into a powerhouse.
There was a time when the world's largest retailer could set its own agenda. Marketing experts called it a "channel commander," because it could dictate the prices its suppliers could charge.
Retailers didn't always have that power. Once upon a time, suppliers dictated terms and retailers had to obey and pay what was asked – or risk not getting needed product.
But when Wal-Mart became so big, that dynamic reversed itself.
Back in the early part of the 1990s, in what is now regarded as a classic example of the market power that Wal-Mart was able to amass, consumer-products giant Rubbermaid Inc. found that rising oil prices was forcing up the cost of the "ingot" like plastic balls that served as the raw material for its giant plastic storage containers it sold to consumers under the Rubbermaid brand name.
Following standard industry procedure, Rubbermaid tried to pass those higher expenses along to Wal-Mart in the form of higher product prices.
But Wal-Mart, known for its "falling prices" philosophy, balked. And then it fought back. Not only did it refuse to pay the higher prices, it ordered Rubbermaid to find ways to cut the prices of its wares – even in the face of steeply rising raw materials prices.
When Rubbermaid refused, Wal-Mart slashed the amount of shelf space devoted to the Rubbermaid products, and gave the space to a little-known, privately held firm called Sterilite Corp., which had started life as a maker of plastic shoe heels that had the sad propensity to melt. So it switched to making plastic containers for the home.
Rubbermaid never recovered, and in 1999 it was forced to merge with Newell Inc. to form Newell Rubbermaid Inc. (NWL). According to an October 2004 edition of the TV news magazine show, Frontline – an episode entitled, "Is Wal-Mart Good for America?" the merger was an attempt by product producers to regain negotiating power against big retailers.
Rubbermaid remains the No. 1 maker of plastic storage containers. But having come out of nowhere, almost, Sterilite is today No. 2.
Little wonder the superstore whose arrival in a community was once a cause for celebration is just as frequently criticized or shunned.
Wal-Mart has been vilified in the press as a destroyer of Main Street for bankrupting local businesses. The company has received bad press for not paying higher wages or providing healthcare and has been fined for labor violations.
Even the image of being a low-cost, one-stop retailer has been turned against it, as rivals such as Target Corp. (TGT), Whole Foods Market Inc. (WFMI) and Walgreen Co. (WAG) have been more successful at specializing and cultivating favorable brand recognition. And Wal-Mart's wide selection now pales in comparison to the many offerings available for purchase through the Internet.
But with a possible U.S. recession looming, things might be turning around for Wal-Mart. With less discretionary income to spend, consumers might decide to forgo little luxuries such as organic fruit or name-brand drugs and return to Wal-Mart's low prices, analysts say.
"In this economic environment, if the consumer's shifting down in terms of the way they're spending their dollars, that benefits Wal-Mart," Peter Sorrentino, a senior portfolio manager at Cincinnati-based Huntington Asset Advisors, said in a Bloomberg Television interview.
After failed attempts at trying to compete against its more-fashionably positioned rivals, Wal-Mart is returning to its core strengths: It has discounted more and is keeping those prices lower for far longer.
At the same time, the store has refocused on customer service. And the efforts are starting to produce results.
"The price leadership strategy we put in place at the beginning of the year was exactly the right strategy for our customers around the world in a tough economic environment," said Scott, the company president and CEO said. "The combination of price leadership and improved customer service made the difference in the fourth quarter for our U.S. operations."
Indeed, in a volatile economy, Wal-Mart is "well positioned to succeed. We will continue to strengthen our price leadership around the world," Scott said.
Money Morning Investment Director Keith Fitz-Gerald often says: "Go global, or go home."
And like many of the Global Titans we often refer to, Wal-Mart has tried to move into faster growing international markets, but has yet to find wide success.
The retailer has run into a host of problems abroad ranging from governmental intervention to a lack of understanding of regional product preferences. Wal-Mart currently has a presence in 13 foreign countries, including Argentina, Brazil, Canada, China, Costa Rica, El Salvador, Guatemala, Honduras, Japan, Mexico, Nicaragua, Puerto Rico and the United Kingdom.
Despite a wave of protest from Indian retailers that came with the announcement of a joint venture with India conglomerate Bharti Enterprises, Wal-Mart hopes to make progress in India this year. Its first store location is slated to open in late 2008.
Bharti Enterprises is one of India's leading business groups with interests in telecom, agri-business, insurance and retailing.
Interestingly, the protests against Wal-Mart in India were reminiscent of those levied against the retailing giant in the United States by Main Street U.S.A. shopkeepers who understood that the many-aisled retailing juggernaut presaged their financial doom.
In India, according to a New York Times report, protesters chanted "Quit retail" – their deliberate echo of Gandhi's "Quit India" rallying cry, which inspired India to independence from British Colonial rule 60 years ago this month.
Dharmendra Kumar, of India FDI Watch, which organized the demonstrations against foreign direct investment in retailing, said large-scale retailing ran counter to Indian traditions.
"Our culture is not the wasteful consumption that we see in the first world," he told the newspaper. "This is the country where Gandhi taught people to live on minimum resources. These large retail companies will push us aggressively to consume more and more."
The Wal-Mart/Bharti partnership follows a previously established pattern of partnering with a local company to get the feel for the landscape before diving headfirst into a new foreign market.
"Wal-Mart will use the partnership to closely study India. This partnership will be critical, as the U.S. retail giant has failed in countries like China, Japan, South Korea and Germany," Paul Martin, a global sales manager for Planet Retail, told The Economic Times reported. "Also Bharti will probably be a senior partner which will help Wal-Mart learn in India."
In Japan, on of the countries Martin mentioned, Seiyu Ltd., a Wal-Mart subsidiary, is expected to post a $195.5 million loss for the year ended Dec. 31, The Wall Street Journal reported. Wal-Mart has had trouble adapting its low-cost, high-volume business model to the world's second-largest economy, where many Japanese consumers equate low costs with low quality.
Despite its many troubles, Wal-Mart does have some successful international expansion stories, most notably in Mexico and China. In fiscal 2007, sales for Wal-Mart International were $77.1 billion, a 30.2% increase over the prior year, and operating profit was $4.2 billion, an increase of 21.5% from the previous year. For fiscal year 2008, sales were $90.6 billion, an increase of 17.5% over 2007, well outpacing the 5.8% sales growth of Wal-Mart's domestic stores.
News and Related Story Links:
- The Wall Street Journal:
Wal-Mart Sees Bigger Net Loss At Japanese Unit Seiyu for 2007
- Wal-Mart Press Release:
Wal-Mart Reports January Sales
- MSN Money:
The end of the Wal-Mart era
- The New York Times:
Indians Protest Wal-Mart's Wholesale Entry
- The Economic Times:
Wal-Mart to benefit from retail JV with Bharti
- Calgary Herald:
Wal-Mart for the Nobel Prize? Not that crazy, really
- Money Morning:
Three of the Most Reliable Investment Indicators Signal Rougher Waters Ahead For Investors