In spite of overall softness in the retail sector, Wal-Mart Stores (WMT) raised its third-quarter outlook, even though September's sales were short of original estimates.
The thought was the store would bring a profit of between 66 cents and 69 cents a share, up from the first estimate of between 62 to 65 cents a share.
Chief Financial Officer Tom Schoewe revealed the reason for the change in guidance: "For the first two months of the quarter we have seen improvement in initial margin and expense leverage at the Wal-Mart stores, which is driving this change."
As far as same-store sales go, the retail giant is still growing slower, only able to achieve a 1.4 percent increase for the five weeks ending October 5. Wall Street had an estimate of 1.8 percent as the target growth percentage. Overall company sales increased at a healthy 9.7 percent over last year, finishing at $34.4 billion.
When you consider the warm weather cutting in on winter clothing sales, and the large number of toy recalls from Mattel (MAT), it isn't too bad of a performance.
What's really driving the margins' success is the company's decision to slow down growth and refocus its energies on its core strategy of low prices.
As analyst at Rochdale Securities, Jaison Blair says, "They've slowed growth and changed the way they allocate capital. What we've seen is that when we've studied large-scale, national-retail growth companies is that when they pull back on growth, what you see in the next 12 to 24 months is an expansion of margins and return on invested capital. You create favorable conditions for margin expansion."
Wal-Mart is smartly positioning themselves for when the consumers' concerns about inflation and energy prices subside, and should be ready to perform strongly when that happens.
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