Wal-Mart Posts Its First Profit Drop in a Decade

Wal-Mart Stores In. has been enjoying a wave of profitability for years as the most popular neighborhood department store in the United States took its act global, becoming the world’s largest retailer. But Tuesday the company posted its first profit decline in a decade, after the company lost $863 million when it had to sell its stores in Germany to rival retailer Metro AG. Last month Wal-Mart said that it would be pulling out of Germany because it had never made a profit there and had dealt with nothing but losses since opening its first store there in 1998.

The departure from Germany came just two months after Wal-Mart pulled out of South Korea, which analysts said would allow the company to focus resources on more profitable markets, such as Latin America and China. The sales of German and South Korea stores are still pending, but Chief Executive Lee Scott said that sales at Wal-Mart stores in the U.S. have also been disappointing because of high gas and energy prices hitting customers where it hurts retailers the most—their pocketbooks.

Despite the announcement that Wal-Mart’s quarterly profit had fallen for the first time since 1996, Scott said that results were still in line with what the company expected. For the quarter that ended July 31, the company posted a net income of $2.08 billion, or 509 cents per share, down from $2.81 billion, or 67 cents per share, a year ago. Wal-Mart’s income from continuing operations grew by 4 cents per share compared to last year, and their international division outpaced the larger U.S. business operations.

Profits from international operations in 13 countries in Asia, Latin America, and Britain rose by 25%, while U.S. Wal-Mart stores rose only 4.2%. Scott said that he was "quite honestly disappointed by the sales performance of Wal-Mart U.S." In a prerecorded message, Scott said, "In the United States, customers tell us they are most concerned about gas prices. This has been consistent every month this quarter." Customers are making fewer trips to Wal-Mart stores to save on gas, but on average, they purchase larger amounts with each visit as a result.

Wal-Mart’s domestic profit margins are also struggling due to higher transportation costs and increased sales of lower-margin products, according to Chief Financial Officer Tom Schoewe. Food sales have grown faster than sales of general merchandise, which strains profits because groceries are less profitable than items like home furnishings, clothing, or electronics. The company’s stock fell 65 cents, or 1.4%, to $44.45 in late morning trading Tuesday on the New York Stock Exchange.

Rival retailer Target Stores said last week that its sales in stores that have been open at least a year rose 4.6% for the quarter.