Investors did not think much of Walmart’s fiscal fourth quarter and full years earning. Walmart’s stock fell 4% immediately after its announcement. The one exception is that US sales, which have been troubled for years, rose 2.4% on a same store basis in the quarter that ended January 30. It is the second quarter in a row of improvement. But, the same store sales have to be measured against profits. And Walmart’s US operating income was up only 1.5% in the final quarter of its year.
Walmart admitted the problem, and even the cause:
Operating income growth in the quarter was slower than the rate of sales growth, due primarily to a reduction in gross profit margin as a result of its price investment strategy.
The world’s largest retailer did not take the matter further or say what it meant to the company’s future. The likely answer is that as Walmart does more to keep customers from leaving for Target (NYSE: TGT), Costco (NASDAQ: COST), and an army of smaller retailers, Walmart will have to continue to squeeze margins to offer lower prices to consumers.
The Walmart domestic profit problem does not end with an ability to keep customers. It is worsened by a rapid increase in the cost of Chinese labor, and therefore the prices of consumer goods it exports. Walmart sources a huge amount of its inventory from China, and it cannot switch manufacturing facilities to bring production costs in line with what it has to charge for products in stores.
The Walmart domestic store problem is getting worse.
Douglas A. McIntyre