Wal-Mart plans price cut expansion in slump

Published on 05/18/2010 at 02:28PM by Bruce Blythe

Wal-Mart Stores Inc. plans to expand price cuts on food and other grocery items as the world's biggest retailer tries to stop a sales slide that's reached four consecutive quarters.

New price reductions will include "deep rollbacks" on a basket of 22 grocery products at a discount of 30%, on average, from previous levels, Wal-Mart said in a statement today. The company didn't provide specific food categories.

High unemployment and rising gasoline prices continue to weigh on Wal-Mart's customers, and there is "overriding concern" over consumers' financial outlook, the company said.

"Our customers, particularly in the United States, are still concerned about their personal finances and unemployment, as well as higher fuel prices," Wal-Mart chief executive officer Mike Duke said in a separate earnings statement today. "Our commitment to reducing prices and managing expenses positions us well across the retail landscape."

Bentonville, Ark.-based Wal-Mart, the largest U.S. food retailer, ramped up its battle with traditional supermarkets earlier this year, launching a nationwide advertising campaign touting "rollbacks," or permanent price reductions, on most items.

The latest round of rollbacks probably won't be welcomed by Wal-Mart's fresh produce, meat and dairy suppliers, analysts say, as the retailer for years has used its size to squeeze lower prices from vendors.

"Vendors who deal with Wal-Mart get beat up so much, at the end of the day, their profit isn't as much," said Jeremy Diamond, who runs The Diamond Group, a Baltimore-based food industry consultant.

"There's not a lot of profit in the produce section as it is," Diamond said. "I could see Wal-Mart selling produce at a loss just to get customers in the store."

As the economy recovers, higher-income consumers are spending more at upscale retailers and specialty grocers, analysts say.

For Wal-Mart's core customers, high unemployment and rising gasoline prices continue to be the "most pressing issues," said Eduardo Castro-Wright, vice chairman of the company's U.S. operations, during a conference call.

Use of food stamps and other government assistance "increased significantly" in the previous quarter compared with a year earlier, Castro-Wright said during the call.

The company remains "somewhat cautious" about the current quarter, Castro-Wright said.

Wal-Mart said comparable store sales, a widely followed measure of retailer performance, fell 1.1% at U.S. stores (excluding gasoline) during the company's fiscal 2011 first quarter, compared with the same period a year earlier. The sales figure includes Sam's Club stores.

For the current quarter, Wal-Mart expects anywhere from a 2% decline to a 1% increase in comparable store sales, Castro-Wright said. Comparable store sales most-recently rose in Wal-Mart's fiscal 2010 first quarter.

Among specific food categories, deflation in fresh produce, dairy and meat began to moderate during the first quarter, Castro-Wright said. Produce posted comparable-store sales gains, he said.

Also today, Wal-Mart reported net income of $3.32 billion for the 13 weeks ended April 30, up 9.9% from $3.02 billion a year earlier. Net sales rose 6% to $99.1 billion, primarily on a surge in international revenue.

Per-share profit of 88 cents topped analyst expectations by about 3 cents, according to Thomson Reuters I/B/E/S. Wal-Mart shares rose $1.58, or 3%, to $54.31 in late trading today, and are up 1.6% this year.

Wal-Mart holds about 20% of the U.S. retail food market, according to analyst estimates. In Wal-Mart's fiscal 2010, the company had nearly $132 billion in revenue from groceries, excluding Sam's Club stores, according to recent government filings.