Retail Chains Rebound
Wal-Mart Stores Inc. and Home Depot Inc. lifted fiscal third-quarter profits, and J.C. Penney Co. rebounded from a loss, as the chains controlled costs and used low prices to attract shoppers in the slowing economy.
Net income rose 8.2% at No. 1 retailer Wal-Mart and 20% at Home Depot, the largest home-improvement chain.
At J.C. Penney, turnaround efforts helped generate a $31-million profit, compared with a $30-million loss in the year-ago quarter.
Each chain took a different approach to keep earnings afloat in the slowing economy. Wal-Mart added stores and cut prices to take customers from rivals.
Home Depot scaled back inventory and expansion plans to lower expenses.
J.C. Penney Chairman Allen Questrom revamped merchandise. All three stocks have performed better this year than the Standard & Poor’s 500 Index.
Retailers “have had a year to react to that slowdown and now, for the time being, they are a good place to be in a stock market that is otherwise still being characterized by earnings misses,” said analyst Daniel Popowics at Fifth Third Bank.
Home Depot’s stock jumped $2.88 to $44, while J.C. Penney rose $1.50 to $25.25. Wal-Mart shares fell 58 cents to $55 after the company said it probably would meet, not beat, fourth-quarter profit forecasts. All three companies trade on the New York Stock Exchange.
The Standard & Poor’s Retail Stores Composite Index, up 16.83 to 863.69, has risen 1% this year. The S&P; 500 has fallen 14% in the same period.
Among other chains reporting Tuesday, Williams-Sonoma Inc. said net income rose 65% on cost cuts, and Zale Corp. said an accounting change resulted in a profit. Excluding the change, the jewelry chain had a loss. At TJX Cos., parent of T.J. Maxx and Marshalls, lease liabilities lowered net income 31%.
At Bentonville, Ark.-based Wal-Mart, net income in the quarter ended Oct. 31 rose to $1.48 billion, or 33 cents a share, from $1.37 billion, or 31 cents, a year ago. Per-share profit matched the average estimate of analysts polled by Thomson Financial/First Call.
An expanded selection of groceries and steeper-than-usual discounts helped Wal-Mart increase sales 15% to $52.7 billion. Sales at stores open at least a year rose 6.7%, outpacing the industry’s composite gain each month of the quarter.
“Food retailing and basic commodities can be a very good business if you are turning your merchandise quickly,” Popowics said. “Wal-Mart can do that.”
The low margins on groceries and the discounts on other goods dragged its gross margin lower, though, as did the increased costs of utilities, insurance, store maintenance and medical benefits. Gross margin, the percentage of sales left after subtracting the cost of goods sold, fell to 21.52% from 21.85% in the year-ago quarter.
Analysts’ average fourth-quarter profit estimate is 48 cents, according to First Call.
Home Depot said net income rose to $778 million, or 33 cents a share, from $650 million, or 28cents, a year earlier. Sales in the quarter ended Oct. 28 rose 15% to $13.3 billion.
Chief Executive Bob Nardelli has demanded lower prices from suppliers in his cost-cutting efforts and relied on high-margin services such as tool rentals to boost profit.
Sales at stores open at least a year were unchanged, below the average analysts’ forecast for a 1% gain.
“Home Depot will hold up well relative to other retailers, but they are not immune” to a recession, said market strategist Phil Larkins of investment firm Legacy South Inc., which owns Home Depot shares. “With sales slowing, Home Depot has to keep the costs down.”
Per-share results at the Atlanta-based company met the average First Call forecast, and the retailer said it will meet the 28-cent average estimate in the fourth quarter.
Plano, Texas-based J.C. Penney had net income of 9 cents a share, matching forecasts. The year-ago loss was 30 cents. Sales in the quarter ended Oct. 27 rose 2.5% to $7.73 billion.
Questrom, who also is chief executive, has added Disney children’s clothing and Avon makeup to JCPenney stores to revive sales, while the company’s Eckerd drugstores filled more prescriptions.
“They are improving merchandising and injecting more fashion into it,” said Howard Hansen, portfolio manager at Lord Abbett & Co., which owns 1.8 million shares. “The department-store side of the business has some real momentum.”
The company said it earned 13cents before restructuring costs, matching the average First Call estimate.
