US retail woes

With the US consumer up to his eyeballs in debt and paying gas prices not seen since Katrina it seems he has little left for his favourite pastime of consuming.

US retail bellwether WalMart Stores Inc. (WMT) posted 1Q07 profit of $2.83 billion up 8% from a year ago in line with analysts forecasts on slightly lower than anticipated sales of $86.41 billion. This doesn't sound too bad and it isn't, especially when compared to some other retailers that have reported profit declines this quarter (read below for Home Depot and Limited Brands profit drops). However a closer look at the numbers paints a less than rosy picture of the company's US operations. Management pointed out the exceptional growth in International operations with sales up 19% in the quarter and which now account for 23% of total sales. Some back of the envelope calculations reveals the following:


Management stated that profit growth from International operations outstripped sales growth. From this we can conclude that Wal-Mart's domestic profit growth was less than the 5.7% in domestic sales growth. Thus Wal-mart's bottom line profit growth was at best 5% for domestic operations. Wal-mart also revealed that all important same stores sales growth for the quarter was an anemic 0.6% for US stores. Remember that Wal-mart is in the midst of a US$10 billion buyback (currently $3.3 billion left to go) that is lending support to earnings per share. Looking ahead the company forecasts 2Q07 earnings in the range of 75 - 79 cents a share against market consensus of 79 cents. If April's sales decline (Wal-marts biggest in 28 years) was anything to go by the company could well be hitting the bottom of that range.

Elsewhere Limited Brands Inc. (LTD) slashed its 1Q07 earnings forecast by 50% on Tuesday and said that it is selling two-thirds of its Express stores division to a private-equity group in a cash deal valued at $548 million, while it looks at "strategic options" for its namesake stores. Due to report on May 23rd the company restated its first-quarter profit projection in the range of 12 cents to 14 cents a share from an initial range of 25 cents to 28 cents a share, as sales and margins stumbled at all its divisions, but particularly at the Victoria's Secret chain. Looking forward the company expects 2Q07 to "continue to be challenging"

Home Depot (HD) is feeling the pinch from the faltering US housing market posting a 30% decrease in 1Q07 profit. For the full year the company expects to come in at the low end of their already low forecast profit growth range of between 4% - 9%.