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Wal-Mart Hits A Speed Bump

Hit hard by a loss on the sale of its lagging German retail operation, then further hamstrung by weakening same-store sales as its core low-income customer base is squeezed by rising gas prices and credit-card interest rates, Wal-Mart Stores reported its first earnings decline in a decade; its second-quarter profits slumped 25.7%, to $2.1 billion from $2.8 billion last year.

Taking the bite out of the bottom line, the world's largest retailer rang up a one-time loss of $863 million on the sale of the faltering German business. At the same time, Wal-Mart has also cut a deal to sell off another of its offshore units, its South Korean retail business.

But even without the loss from the German operation, Wal-Mart hit a major speed bump as higher gas prices and interest rates put the bite on cash-strapped consumers who can least afford it, and operating profits rose a slender 7.9% during the second quarter, to $5.1 billion from $4.7 billion last year.

Income from continuing operations rose just 4.6%, to $3.0 billion from $2.9 billion a year ago. And swollen by the losses out of Germany, the retailer recorded a $901 million loss from discontinued operations, compared with a $48 million loss the year before.

Overall sales, including Wal-Mart U.S., Sam's Clubs and international, rose 11.3%, to $84.5 billion from $75.4 billion a year ago, with the greatest growth coming from offshore operations, which climbed higher by almost a third, rising 31.9%, to $18.7 billion from $14.2 billion. Driving international growth were three acquisitions that took place since the second quarter of 2006: an additional stake in Japan-based Seiyu Ltd., of which Wal-Mart now owns about 53%; the purchase of Sonae Distribuicao Brasil, known as Southern Brazil; and a majority stake in Central American Retail Holding Company.

Sales in U.S. Wal-Mart Stores rose at a slower pace of 6.9%, to $55.4 billion, while Sam's sales grew by 5.0%, to $10.5 billion, in both cases fueled largely by continued unit expansion. Same-store U.S. Wal-Mart sales grew at a sluggish pace of 1.5%, while Sam's grew its comps at a faster pace of 2.6%.

Wal-Mart Stores Inc.

Qtr. 7/31 (x000) 2006 2005 % change
a. Second-quarter results include income from continuing operations of $3.0 billion, up 4.6% from $2.9 billion during the same period a year ago; a $901 million loss from discontinued operations, compared with a $48 million loss the year before; and a $91 million loss on the company's stake in a joint venture, compared with a $68 million loss the prior year.
b. Six-month results include income from continuing operations of $5.6 billion, up 5.2% from the preceding year; a $947 million loss from discontinued operations, compared with a $99 million loss the year before; and a $170 million loss from a joint venture, compared with a $136 million year-before loss.
Sales $84,524,000 $75,932,000 11.3
Oper. income (EBIT) 5,104,000 4,730,000 7.9
Net income 2,083,000a 2,805,000a -25.7
Per share (diluted) 0.50 0.67 -25.4
Average gross margin 23.6% 23.5%
SG&A expenses 18.6% 18.3%
Six months
Sales 163,359,000 145,931,000 11.9
Oper. income (EBIT) 9,600,000 8,722,000 10.1
Net income 4,698,000b 5,266,000b -10.8
Per share (diluted) 1.13 1.25 -9.6
Average gross margin 23.6% 23.3%
SG&A expenses 18.8% 18.4%


Second-Quarter Segment Results

Sales 2006 2005 % change
Wal-Mart Stores $55,389,000 $51,809,000 6.9
Sam's Club 10,472,000 9,969,000 5.0
International 18,663,000 14,154,000 31.9
Operating Income 2005 2004 % change
Wal-Mart Stores 4,159,000 3,992,000 4.2
Sam's Club 402,000 371,000 8.4
International 997,000 799,000 24.8


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