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Wal-Mart, Home Depot 4Q
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February 20, 2001: 1:07 p.m. ET
Wal-Mart tops forecast on 10% sales gain; Home Depot matches estimates
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NEW YORK (CNNfn) - Two of the nation's biggest retailers, Wal-Mart Stores Inc. and Home Depot, reported mixed fourth-quarter results Tuesday, but both were hurt by sluggish holiday sales and a slowing U.S. economy.
The bellwether companies' results leave investors wondering whether recent rate cuts by the Federal Reserve, and an expected one in March, are in time to turn the economy around and restore consumer confidence.
Wal-Mart, the world's largest retailer and a component of the Dow Jones industrial average, said net earnings rose to $2 billion, or 45 cents a share, in the quarter ended Jan. 31, from $1.9 billion, or 43 cents a share, a year earlier. Analysts had expected earnings of 44 cents a share, according to First Call, which tracks Wall Street forecasts.
Sales grew 10 percent to $56.6 billion, the Bentonville, Ark.-based company said. Sales at stores open at least a year, a closely watched figure known as comparable- or same-store sales, increased 3.1 percent in the quarter.
 "In a challenging retail environment, I am pleased to report our first year with net earnings in excess of $6 billion and our first-ever quarter with earnings over $2 billion," CEO Lee Scott said.
However, Wal-Mart was forced to offer deep discounts during the sluggish holiday selling season, which hurt profit margins. The company managed to beat expectations by lowering its tax liability and maintaining the number of outstanding shares, Robertson Stephens retail analyst Bill Dreher said.
"As far as core operations, there wasn't much of an upside there," Dreher said, adding that the company still manages to do a better-than-average job of keeping costs in line, helping it perform better than most others in a weaker retail environment.
He sees a tough first-quarter ahead for Wal-Mart as it enacts most of its expansion plans for the year, with a possible improvement by the second half. However Wal-Mart's size and management make it a bellwether by which many investors gauge consumer activity.
"Even Wal-Mart, with their superior systems, their ability to analyze information, being able to predict sales down to the SKU and generate customer profiles, doesn't have good visibility of what's going on in 2001, which makes us concerned about the guys who don't have that ability," Dreher said.
Going forward, Wal-Mart said it remains comfortable with first-quarter expectations of 32 cents a share. The company expects first-half earnings growth in the single digits and second-half earnings in the double-digits, Chief Financial Officer Tom Schoewe said in a pre-recorded conference call.
Wal-Mart also said it plans $9 billion in capital expenditures in 2001 and will add 8 percent to its retail square footage.
Some of the company's greatest growth came in its food business, which grew 9 percent in the quarter, compared with an industry growth rate of just 1-to-2 percent, Bear Stearns Retail Analyst Deborah Weinswig told CNNfn's "In the Money" Tuesday.
Home Depot matches lowered forecasts
Home Depot (HD: Research, Estimates), another Dow component, said fourth-quarter earnings fell to $465 million, or 20 cents a share, from $578 million, or 25 cents a share, a year earlier. The results were in line with analysts' lowered expectations, according to First Call.
Sales rose 14 percent to $10.5 billion in the quarter, the nation's biggest home improvement retailer said, though sales at stores open at least a year were flat.
The Atlanta-based company also said it is comfortable with Wall Street forecasts of 26 cents a share for the first quarter.
Home Depot blamed flat same-store sales in the quarter on declining lumber and building materials prices, reaching an eight-year low in the period, and tough comparisons with strong Y2K-related demand a year earlier.
"The uncertainty of the current economy continues to put tremendous pressure on consumer spending," CEO Robert Nardelli said. "However we are confident of our ability to control operating expenses while rolling out major innovative merchandising and customer service programs and opening 200 new stores during the coming year."
The company plans to double appliance sales in the current year and improve customer service, among other initiatives.
Home Depot twice warned that slumping lumber and building materials prices would cause it to miss fourth-quarter earnings targets. In its latest warning on Jan. 19, the company revised fourth-quarter expectations to 20 cents a share from 24 cents a share.
Tough retailing environment
Retailers had a tough time in 2000 as consumer spending declined in the face of an economic slowdown, high energy prices and severe weather. December sales, which include the all-important holiday season, grew just 2.7 percent. And most of those sales did not translate into higher profitability as retailers ran big discount sales, which cut into profits.
Although Wal-Mart has benefited from more cost-conscious consumers, Home Depot has suffered as homeowners put off big renovation projects and lumber prices plummeted.
Sales improved in January, but that's mainly because of huge clearance sales, which typically mean little in the way of profitability because of the thin margins.
And analysts remain skeptical on the outlook for the first half of 2001.
"The first half is going to be a very, very difficult one, and at this moment it's going to be impossible to say how the second half is going to be," said Kurt Barnard, president of Barnard's Retail Trend Report in Upper Montclair, N.J. "The second half is likely to be better than the first, but remember, most retailers are coming off a very weak Christmas and that puts tremendous pressure on gross margins."
Barnard thinks the Fed's decision to lower interest rates twice in January is not likely to have much effect on retail profits at least until the second half. Even if the Fed chooses to slash rates again at its next meeting on March 31, he believes it will take some time for the effects to trickle down to Main Street.
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On Monday, Wal-Mart and Home Depot, along with Kohl's Corp., agreed to purchase the rights to 35 former Bradlees stores in the Northeast. Bradlees closed its doors after filing for bankruptcy in December.
Wal-Mart (WMT: Research, Estimates) shares gained $1.57 to $53.93 in Tuesday afternoon trading. Home Depot shares climbed $1.66 to $44.66. Both stocks are among the 30 in the Dow Jones industrial average. 
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