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Wal-Mart Cuts Inventory to Boost Profits

Helped by continued deep cuts in stockpiles and rapid growth in its international operations, which offset sluggish sales in its core U.S. store base, Wal-Mart Stores Inc. pushed third-quarter profits up by 11.5% to $2.6 billion from $2.4 billion last year.

A disproportionate share of the earnings increase came not out of merchandising operations, but from savings generated as the world's largest retailer continued to cap its merchandise inventories — pushing the warehousing function upstream to suppliers.

Indeed, stockpiles grew only half as fast as overall sales during the quarter, by 6.2%, compared

to a 12.0% increase in sales.

Buoyed by acquisitions that boosted its overseas sales, the top line expanded by 12.0% to $83.5 billion from $74.6 billion a year ago. International results far outpaced U.S. results; sales abroad raced ahead by 33.7% to $19.2 billion, while sales in U.S. Wal-Mart stores moved ahead by 7.8% to $54.2 billion. But with its low-income consumer base still pressured by higher costs and a softening housing market, same-store sales in the United States. Wal-Mart stores were up a sluggish 1.5%. Sales in the Sam's Club business were muted as well, with overall sales up 1.9% to $10.2 billion, and comps up 1.8%.

Putting profits under some pressure, costs grew at a faster pace than margins. Measured as a percentage of sales, operating costs rose by 70 basis points, or seven-tenths of a percentage point, to 19.4% from 18.7% a year ago. Margins expanded, but at a slower rate than expenses, by 50 basis points, or five-tenths of a percentage point, to 23.7% from 23.2% a year ago.

Acting as a further slight drag, the retailer recorded a widening loss from its minority share in joint ventures, an $84 million deficit, compared with $73 million a year ago.

WAL-MART STORES INC.

Qtr. 10/31 (x000) 2006 2005 % change
a. Third-quarter results include $65 million in interest income, compared with $57 million during the same period a year ago; an $84 million loss from the company's share of a joint venture, up from $73 million last year; and a $53 million profit from discontinued operations, compared with a year-before loss of $73 million.
b. Nine-month results include $196 million in interest income, compared with $165 million last year; a loss of $254 million form its share in a joint venture, up from $209 million a year ago; and an $894 million loss from discontinued operations, compared with a prior-year loss of $147 million.
Sales $83,543,000 $74,596,000 12.0
Oper. income (EBIT) 4,465,000 4,098,000 9.0
Net income 2,647,000a 2,374,000a 11.5
Per share (diluted) 0.63 0.57 10.5
Average gross margin 23.7% 23.2%
SG&A expenses 19.4% 18.7%
Nine months
Sales $246,902,000 $220,527,000 12.0
Oper. income (EBIT) 14,065,000 12,820,000 9.7
Net income 7,345,000b 7,640,000b -3.9
Per share (diluted) 1.76 1.82 -3.3
Average gross margin 23.6% 23.2%
SG&A expenses 19.0% 18.5%


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