Sales at the big-box retailer outpace the industry, but Wal-Mart is struggling to stave off a decline in growth. Can high-margin apparel sales do the trick?
On Feb. 19, the world's largest retailer, Wal-Mart Stores (WMT), reported sales of $374.5 billion—more than a third of a trillion dollars—for its fiscal year ending Jan. 31, 2008. It's a stunning number. But a closer look at Wal-Mart's prospects shows the larger question for the discount giant is whether it can avoid having store-sales growth turn negative in the coming year, for the first time ever.
The numbers the behemoth has reported for its latest fiscal year already reveal evidence of a slowdown. Its Wal-Mart stores division eked out a sales increase of 1% in stores open at least one year, the smallest sales gain in company history. That follows a 1.9% gain in 2006. (Total revenue increased 8.4% for the latest quarter, to $107.4 billion; net income rose 4%, to $4.1 billion, or $1.02 a share.) At this pace, it's obvious Wal-Mart will have to fight flat or negative same-store sales growth in the coming year.
Outperforming Retail Chains
Burt Flickinger III, managing director of New York retail consultant Strategic Resource Group, has been a Wal-Mart shareholder for three decades. He says the company's sales growth rates aren't keeping up with the three indicators every retailer should beat: the inflation rate, which is currently just under 3%; the 1% rate of population growth in the country, and the increase in square footage, which grew 8.4% last year at Wal-Mart. "It's pathetic," says Flickinger.
Customers are giving Wal-Mart lower marks these days, as well. A yearly survey of customer satisfaction by the University of Michigan, released on Feb. 19, shows the retailer scored the lowest among 10 large discount and department-store chains. Wal-Mart's satisfaction rating this year was 68 on a scale of zero-to-100, down 5.6% from a year ago.
Granted, the company's sales increases of 0.5% in January and 2.4% in December, however small, looked good compared with the bloodbath in the retail sector as a whole. Store chains are being hammered across the board with declining sales, from the upscale Nordstrom (JWN) to discount department store Kohl's (KSS). And Wal-Mart's fourth-quarter same-store sales rose 1.7%, which beat Target. No wonder investors have bid up Wal-Mart's stock 6% since the beginning of the year, to more than 50.
The thinking on Wall Street is that Wal-Mart will outperform the rest of the industry because its low prices provide relief to Americans who are being pressured from higher credit-card bills, larger mortgage payments, and high energy costs at home and at the pump. And the big retailer is going all out to woo shoppers with low food prices, cheap drugs, and affordable electronics and staples. "Wal-Mart has continued its strategy of acquiring more margin dollars by selling more and higher-priced items like high-definition TVs," says Walter Loeb, president of Loeb Associates, a retail consultant in New York.
The problem is that whatever sales momentum there is at Wal-Mart is coming from the lowest-margin items at its stores—staples like food and $4 drugs. Indeed, company executives have said in the past they would rather take a hit on profits from these items to attract a large amount of shoppers into its stores who will then stock up on higher-margin goods like apparel. But that's not happening. Even gift cards, which are usually viewed as something people would use for goods to treat themselves, were being redeemed in January for basics like food. "Wal-Mart is the biggest food retailer, and people have to eat, which makes food noncyclical, so it tends to smooth their results," says Stephen Hoch, professor of marketing at the Wharton School of the University of Pennsylvania.
Uncertain Growth Strategy
Harried consumers shopping Wal-Mart's food aisles will help the company buy some time during this slowdown. But as the dust settles in the economy, will Wal-Mart be prepared to find new avenues for growth?
Figuring out a growth strategy has been a challenge. Almost all avenues, whether international or domestic, have run into roadblocks. Wal-Mart knows it has reached a saturation point in the U.S. market and that its fortunes lie abroad. The retailer plans to invest as much as $3.6 billion to open new stores overseas in the next two years, while at the same time paring its investment in building new U.S. stores to $5 billion from $7 billion.
The company plans to open 80% of its new international stores in Canada, Mexico, and China. "What's new for us is that either we will win in every market or exit the market," said Mike Duke, chief executive officer of Wal-Mart International at an analysts' presentation a few months ago. The retailer currently operates about 7,000 stores worldwide, including 3,000 in 13 countries
Wednesday, February 20, 2008
HP's International Appeal
The tech giant delivered better-than-expected results as growth in China, India, and elsewhere could offset any impact of a U.S. slowdown
Blame it on Rio. And Moscow, Dehli, and Beijing. That's how Hewlett-Packard helped explain financial results that beat analysts' expectations. Growth in such markets as Brazil, Russia, India, and China is helping HP shrug off the effects of a slowdown in the U.S. and prompted the company to raise its sales forecast for the rest of the year.
Shares rallied in extended trading on signs that HP (HPQ) Chief Executive Mark Hurd is delivering the results investors want. HP, the world's largest technology company, said it expects revenue for the fiscal year that ends in October to be $113.5 billion to $114 billion, from a previous estimate of $111.5 billion. In the most recent fiscal year, HP posted revenues of $104.3 billion. "We had balanced growth and profitability across all regions and gained share in key market segments," Hurd said during a conference call with analysts. He said the company would also benefit from efforts to trim expenses. "We expect to remove significantly more cost this year than we did last year," Hurd said.
PC Model
The comments and forecast assuaged concerns that an economic slowdown in the U.S. will curb demand for computers and printers, and were a welcome contrast with results from other tech bellwethers, including Cisco (CSCO) and Apple (AAPL), which recently projected slower-than-expected revenue growth.
HP stock rose 5%, to $46.15, after the company released results for the quarter that ended Jan. 31. Net income rose 38%, to $2.1 billion, as revenue rose 13%, to $28.5 billion. Operating margin, a yardstick of profitability, widened 1.9 points, to 9.2%.
Of all of HP's businesses, the PC unit posted the strongest sales growth rate of 24%, to $10.8 billion. Still, the pace is down from a 30% rate of the previous quarter. Executives admitted that HP doesn't expect this year's revenue growth in its PC business, which is largely driven by laptop sales, to match the breakneck rate of last year and is adjusting its costs accordingly. "It's important to not get a business model built on those kinds of numbers," Hurd said.
Dell Effect
As in past quarters, the majority of HP's revenue came from outside the U.S., a fact that could help shield HP from what many forecasters say will be a domestic recession. In the most recent period, 69% of total revenue came from outside the U.S. HP's revenue from the Asia Pacific region, for instance, grew 22% from a year ago. In the four highest-profile emerging markets—Brazil, Russia, India, and China—combined revenue jumped 35%.
Regardless of HP's upbeat forecast, the Palo Alto (Calif.) company is still facing a range of potential stumbling blocks. For starters, the macroeconomic picture is threatening to squeeze corporate technology spending. Earlier in February, Forrester Research (FORR) lowered its outlook for 2008 U.S. technology spending, projecting that U.S. tech purchases will rise by about 2.8%, down from an earlier projection of 4.6%. Forrester is predicting tech spending globally will grow 6%, down from a previous forecast of 9%. The outlook for consumer spending, too, is shaky. Indeed, Hurd in the conference call noted that "at the end of the [most recent] quarter, we saw some more caution in the consumer segment than what we've seen in the past."
Some analysts have also said that chief rival Dell's (DELL) recent moves to increase retail distribution and improve product design could chip away at HP's PC sales this year. Dell is expected to report quarterly results Feb. 28.
HP's Soft(ware) Side
Some analysts were concerned by a slowdown in HP's printing business, which posted a total increase in unit shipments of just 1%, including a 2% decline in consumer printers. Analyst Shebly Seyrafi of Caris & Co. predicts that this year, the total increase in unit shipments will be "in the single digits," compared with an 11% rise last year. The slowing "is a red flag," says Seyrafi, since sales of highly profitable ink and toner are so closely associated with printer sales. HP notes that it's increasingly emphasizing selling high-end commercial printers, each of which consumes far more ink than a single conventional printer, a move that may help compensate for the slowing growth rate in the total number of printers sold.
HP's services business grew 11%, to $4.4 billion, while its software unit also increased 11%, to $666 million. Indeed, HP's financial performance is increasingly dependent on its ability to sell high-margin software and services, areas that are newer to the company than PCs, printers, and other hardware.
But HP's skills in selling software and services aren't as developed as its strength in hardware, some say. "It takes a different kind of salesforce," says David Cearley, vice-president at research firm Gartner (IT). "As HP moves to selling more (nonhardware products), it'll need a retraining of its salesforce, and that'll be a major undertaking for HP."
At least for now, gains in overseas markets may ensure a smooth transition.
Lee is a correspondent in BusinessWeek's Silicon Valley bureau
Blame it on Rio. And Moscow, Dehli, and Beijing. That's how Hewlett-Packard helped explain financial results that beat analysts' expectations. Growth in such markets as Brazil, Russia, India, and China is helping HP shrug off the effects of a slowdown in the U.S. and prompted the company to raise its sales forecast for the rest of the year.
Shares rallied in extended trading on signs that HP (HPQ) Chief Executive Mark Hurd is delivering the results investors want. HP, the world's largest technology company, said it expects revenue for the fiscal year that ends in October to be $113.5 billion to $114 billion, from a previous estimate of $111.5 billion. In the most recent fiscal year, HP posted revenues of $104.3 billion. "We had balanced growth and profitability across all regions and gained share in key market segments," Hurd said during a conference call with analysts. He said the company would also benefit from efforts to trim expenses. "We expect to remove significantly more cost this year than we did last year," Hurd said.
PC Model
The comments and forecast assuaged concerns that an economic slowdown in the U.S. will curb demand for computers and printers, and were a welcome contrast with results from other tech bellwethers, including Cisco (CSCO) and Apple (AAPL), which recently projected slower-than-expected revenue growth.
HP stock rose 5%, to $46.15, after the company released results for the quarter that ended Jan. 31. Net income rose 38%, to $2.1 billion, as revenue rose 13%, to $28.5 billion. Operating margin, a yardstick of profitability, widened 1.9 points, to 9.2%.
Of all of HP's businesses, the PC unit posted the strongest sales growth rate of 24%, to $10.8 billion. Still, the pace is down from a 30% rate of the previous quarter. Executives admitted that HP doesn't expect this year's revenue growth in its PC business, which is largely driven by laptop sales, to match the breakneck rate of last year and is adjusting its costs accordingly. "It's important to not get a business model built on those kinds of numbers," Hurd said.
Dell Effect
As in past quarters, the majority of HP's revenue came from outside the U.S., a fact that could help shield HP from what many forecasters say will be a domestic recession. In the most recent period, 69% of total revenue came from outside the U.S. HP's revenue from the Asia Pacific region, for instance, grew 22% from a year ago. In the four highest-profile emerging markets—Brazil, Russia, India, and China—combined revenue jumped 35%.
Regardless of HP's upbeat forecast, the Palo Alto (Calif.) company is still facing a range of potential stumbling blocks. For starters, the macroeconomic picture is threatening to squeeze corporate technology spending. Earlier in February, Forrester Research (FORR) lowered its outlook for 2008 U.S. technology spending, projecting that U.S. tech purchases will rise by about 2.8%, down from an earlier projection of 4.6%. Forrester is predicting tech spending globally will grow 6%, down from a previous forecast of 9%. The outlook for consumer spending, too, is shaky. Indeed, Hurd in the conference call noted that "at the end of the [most recent] quarter, we saw some more caution in the consumer segment than what we've seen in the past."
Some analysts have also said that chief rival Dell's (DELL) recent moves to increase retail distribution and improve product design could chip away at HP's PC sales this year. Dell is expected to report quarterly results Feb. 28.
HP's Soft(ware) Side
Some analysts were concerned by a slowdown in HP's printing business, which posted a total increase in unit shipments of just 1%, including a 2% decline in consumer printers. Analyst Shebly Seyrafi of Caris & Co. predicts that this year, the total increase in unit shipments will be "in the single digits," compared with an 11% rise last year. The slowing "is a red flag," says Seyrafi, since sales of highly profitable ink and toner are so closely associated with printer sales. HP notes that it's increasingly emphasizing selling high-end commercial printers, each of which consumes far more ink than a single conventional printer, a move that may help compensate for the slowing growth rate in the total number of printers sold.
HP's services business grew 11%, to $4.4 billion, while its software unit also increased 11%, to $666 million. Indeed, HP's financial performance is increasingly dependent on its ability to sell high-margin software and services, areas that are newer to the company than PCs, printers, and other hardware.
But HP's skills in selling software and services aren't as developed as its strength in hardware, some say. "It takes a different kind of salesforce," says David Cearley, vice-president at research firm Gartner (IT). "As HP moves to selling more (nonhardware products), it'll need a retraining of its salesforce, and that'll be a major undertaking for HP."
At least for now, gains in overseas markets may ensure a smooth transition.
Lee is a correspondent in BusinessWeek's Silicon Valley bureau
Microsoft readies Yahoo proxy battle
SEATTLE - Microsoft Corp. is getting ready to take its bid for Yahoo right to the Web portal's shareholders, even as analysts wait for a higher offer.
ADVERTISEMENT
Separately, Yahoo Inc. adopted new severance packages that protect employees in the event of a Microsoft takeover.
Microsoft has hired proxy solicitation group Innisfree M&A Inc. to help oust Yahoo's 10-member board, all of whom are up for re-election this year.
A source close to the deal who is not authorized to speak publicly about it said Tuesday that Microsoft could spend $20 million to $30 million on that effort.
That's much less than the $1.4 billion each $1 uptick in Microsoft's bid would cost. Microsoft's offer two weeks ago was originally worth about $44.6 billion, or $31 a share. Based on Microsoft's closing share price Tuesday, the offer is now worth about $40 billion.
The Redmond, Wash.-based software maker's board plans to authorize a proxy battle this week, according to The New York Times DealBook blog. It has until March 14 to nominate a slate of directors for Yahoo. Microsoft and its advisers declined to comment.
Election results would be announced at Yahoo's annual meeting. Last year's was held in June.
Microsoft also may simultaneously circumvent Sunnyvale, Calif.-based Yahoo's management and ask shareholders to sell their stock to Microsoft directly.
So far, Microsoft has given no signs it will raise its bid, even though a person familiar with earlier talks between the two companies said Microsoft was willing to pay at least $40 per share for Yahoo a year ago. That person spoke on condition of anonymity because the offer was never made public.
In an interview with The Associated Press Monday, Microsoft Chairman Bill Gates said the software maker was not talking to Yahoo about raising its bid.
Analysts, however, still believe there's wiggle room.
"I don't think what they're saying now precludes" a higher offer, said Sanford C. Bernstein & Co. analyst Charles DiBona.
DiBona also said he thinks Microsoft would prefer not to go hostile but will if no progress has been made by the March deadline.
Yahoo reiterated Tuesday that its board is "carefully and thoroughly evaluating all of the company's strategic alternatives."
The Web portal and search company's new severance plans — to take effect if Microsoft succeeds in its takeover bid — cover Yahoo's top executives and all full-time employees. The plans are designed to keep workers on board even if the company changes hands. They also could make it harder for Microsoft to move Yahoo staff to Redmond and raise the overall cost of integrating the two companies.
In an e-mail to employees last Friday, Yahoo Chief Executive Jerry Yang wrote that the severance plans "shouldn't be construed as any indication that a change in control might or might not take place."
The company said in a Securities and Exchange Commission filing Tuesday that workers who lose their jobs without "cause" or quit "for good reason," as Yahoo defines it, would continue to receive their salary and medical benefits for four to 24 months, plus reimbursement for "outplacement services" for two years.
A Yahoo spokeswoman would not say what might constitute good reason.
Departing employees' stock options would also vest faster than scheduled under the new plans.
Microsoft has said it will offer significant retention packages to Yahoo engineers and other key employees, including some executives. The software maker has not said how many jobs could be cut if the companies combined.
Yahoo's board spurned Microsoft's bid last week, saying it "substantially undervalues" Yahoo's assets.
Microsoft fired back that its offer was "full and fair," and that it would "pursue all necessary steps" to get the deal done.
Shares of Microsoft slipped 14 cents to close at $28.17, while Yahoo's stock fell 65 cents, or 2.2 percent, to close at $29.01.
-yahoo tech news
ADVERTISEMENT
Separately, Yahoo Inc. adopted new severance packages that protect employees in the event of a Microsoft takeover.
Microsoft has hired proxy solicitation group Innisfree M&A Inc. to help oust Yahoo's 10-member board, all of whom are up for re-election this year.
A source close to the deal who is not authorized to speak publicly about it said Tuesday that Microsoft could spend $20 million to $30 million on that effort.
That's much less than the $1.4 billion each $1 uptick in Microsoft's bid would cost. Microsoft's offer two weeks ago was originally worth about $44.6 billion, or $31 a share. Based on Microsoft's closing share price Tuesday, the offer is now worth about $40 billion.
The Redmond, Wash.-based software maker's board plans to authorize a proxy battle this week, according to The New York Times DealBook blog. It has until March 14 to nominate a slate of directors for Yahoo. Microsoft and its advisers declined to comment.
Election results would be announced at Yahoo's annual meeting. Last year's was held in June.
Microsoft also may simultaneously circumvent Sunnyvale, Calif.-based Yahoo's management and ask shareholders to sell their stock to Microsoft directly.
So far, Microsoft has given no signs it will raise its bid, even though a person familiar with earlier talks between the two companies said Microsoft was willing to pay at least $40 per share for Yahoo a year ago. That person spoke on condition of anonymity because the offer was never made public.
In an interview with The Associated Press Monday, Microsoft Chairman Bill Gates said the software maker was not talking to Yahoo about raising its bid.
Analysts, however, still believe there's wiggle room.
"I don't think what they're saying now precludes" a higher offer, said Sanford C. Bernstein & Co. analyst Charles DiBona.
DiBona also said he thinks Microsoft would prefer not to go hostile but will if no progress has been made by the March deadline.
Yahoo reiterated Tuesday that its board is "carefully and thoroughly evaluating all of the company's strategic alternatives."
The Web portal and search company's new severance plans — to take effect if Microsoft succeeds in its takeover bid — cover Yahoo's top executives and all full-time employees. The plans are designed to keep workers on board even if the company changes hands. They also could make it harder for Microsoft to move Yahoo staff to Redmond and raise the overall cost of integrating the two companies.
In an e-mail to employees last Friday, Yahoo Chief Executive Jerry Yang wrote that the severance plans "shouldn't be construed as any indication that a change in control might or might not take place."
The company said in a Securities and Exchange Commission filing Tuesday that workers who lose their jobs without "cause" or quit "for good reason," as Yahoo defines it, would continue to receive their salary and medical benefits for four to 24 months, plus reimbursement for "outplacement services" for two years.
A Yahoo spokeswoman would not say what might constitute good reason.
Departing employees' stock options would also vest faster than scheduled under the new plans.
Microsoft has said it will offer significant retention packages to Yahoo engineers and other key employees, including some executives. The software maker has not said how many jobs could be cut if the companies combined.
Yahoo's board spurned Microsoft's bid last week, saying it "substantially undervalues" Yahoo's assets.
Microsoft fired back that its offer was "full and fair," and that it would "pursue all necessary steps" to get the deal done.
Shares of Microsoft slipped 14 cents to close at $28.17, while Yahoo's stock fell 65 cents, or 2.2 percent, to close at $29.01.
-yahoo tech news
Subscribe to:
Comments (Atom)
