Fuel Prices Damp Wal-Mart Profit;
Outlook Is Pared 

KRIS HUDSON and JAMES COVERT / Wall Street Journal 17aug2005

[More on Wal-Mart]

Pleased to meet you. . . hope you guess my name. If you worked for Wal-Mart at any time since December 26, 1998, you may have legal claims in a class action sex discrimination lawsuit against Wal-Mart. Si Ud. desea información en Español sobre esta demanda de la acción de clase contra Wal-Mart, por favor llámenos al (800) 839-4372. Mindfully.org note: You know the country is in deep trouble when the status of our energy dependence is measured by the growth of Wal-Mart. Cool!

Wal-Mart Stores Inc.'s fiscal second-quarter profit rose 5.8%, its smallest three-month gain in nearly four years, and the discount retailer lowered its earnings forecast for the rest of the year because of rising energy prices.

But department-store chain J.C. Penney Co., also reporting results yesterday, posted a sharp second-quarter profit rise amid brisk sales of summer fashions. It said rising oil prices hadn't yet affected spending by its customers, who are generally more affluent than Wal-Mart shoppers, and the company raised its full-year profit forecast.

Wal-Mart's lackluster results underscore the growing pressure that rising gasoline prices are putting on the Bentonville, Ark., company's base of lower-income customers. Gasoline prices in the U.S. have risen by 67.5 cents a gallon in the past year, cutting into disposable income for shoppers.

"The only real economic concern I have is that oil prices will erase improvements in employment and real income for ... an important portion of our customer base," Chief Executive Lee Scott yesterday said on a recorded message. "So I anticipate we will face challenges as the year progresses."

Wal-Mart's results and a lower forecast for the world's largest retailer by sales pushed its share price down more than 3%, and helped depress the stock market as a whole. Wal-Mart was off $1.53 a share to $47.57 as of 4 p.m. New York Stock Exchange composite trading.

Wal-Mart's net for the three months ended July 31 rose to $2.81 billion, or 67 cents a share, from $2.65 billion, or 62 cents a share, a year earlier. Sales revenue climbed 10% to $76.81 billion from $69.72 billion. The 5.8% profit gain over last year's second quarter fell short of Wal-Mart's internal goal of posting earnings increases exceeding sales growth.

High gas prices aren't the only issue for Wal-Mart. In its recorded message, the company outlined at least $265 million in extra second-quarter expenses compared with a year earlier, including a $100 million jump in utility expenses and a $63 million increase in borrowing costs because of higher interest rates.

Also reducing profit growth in the quarter were a $30 million rise in transportation costs, a $36 million restructuring charge at its Asda unit in the United Kingdom and an unspecified charge tied to its Mexico operations, the company said.

Rising energy prices seem to have an impact more at Wal-Mart than at retailers serving more affluent shoppers. Target Corp., the Minneapolis-based discount retailer that focuses on better-heeled customers, last week posted a 14% jump in second-quarter revenue and a 50% increase in net income, excluding one-time gains and the earnings of discontinued operations. Target reported a 6.7% gain in same-store sales-or sales at stores open at least a year -- nearly double Wal-Mart's 3.5% increase for U.S. stores.

"Discounters like Wal-Mart continue to feel the brunt of the step up in gasoline prices," said Frank Badillo, senior economist at market-research firm Retail Forward. "But it doesn't necessarily mean that all of retailing is going to tank through back to school and the holidays."

Penney, of Plano, Texas, posted net income of $131 million, or 50 cents a share, for the quarter ended July 30. That compared with year-earlier net income of $1 million, which amounted to a loss of two cents per common share after paying dividends on preferred stock.

Sales rose 5.4% to $3.98 billion from $3.78 billion a year earlier. Same-store sales rose 4.2%, following a 6.9% increase a year earlier. Catalog and Internet sales rose 7.1%, compared with a 1.6% decline last year. The company boosted its full-year profit forecast to $3.35 a share from $2.96 to $3.08. On the Big Board, Penney was at $49.74, off $2.16, at 4 p.m.

Chief Executive Myron E. Ullman said Penney has been surprised by the sales strength amid high gas prices, but said, "We can't expect that to continue forever" if energy prices continue to climb.

In the case of Wal-Mart, the double blow of hampering its sales while boosting expenses dealt by rising energy prices spurred the retailer to lower its guidance on earnings per share for the fiscal year ending Jan. 31 to a range of $2.63 to $2.70 from $2.70 to $2.74. It set its initial estimate for third-quarter earnings at 55 to 59 cents per share.

In another change, Wal-Mart plans to stop reporting weekly sales figures as of Feb. 1, the start of its next fiscal year. Wal-Mart executives reason that the weekly figures are too susceptible to anomalies such as weather and thus don't convey longer-term trends. The company will continue its monthly reports of sales totals, same-store sales results and same-store sales projections.

"The bull case on the stock has been undermined," said Sanford C. Bernstein & Co. analyst Emme Kozloff, who rates the stock "market perform," meaning she expects it to fare similarly to the Standard & Poor's 500-Stock index. "It's difficult to see any catalyst to move the stock from current levels in the next two quarters."

Page A3