Wal-Mart profit rises 22 percent; sales decline for first time

NEW YORK -- After nearly 50 years of hammering competitors with discounts, Wal-Mart is getting a taste of its own medicine.

The world's largest retailer has seen sales at its U.S. Walmart stores fall for the first time, as price-cutting competitors lure away bargain-hunters. Department stores and dollar stores are muscling in on the company's discount turf.

And executives do not expect much improvement, forecasting sales at stores open at least a year will range from down 1 percent to up 1 percent.

"They're being squeezed from the top ... and from the bottom," said Michael Hicks, associate professor of economics at Ball State University who wrote a book about Wal-Mart's economic impact.

Overall, Wal-Mart's overseas growth and a concerted cost-cutting campaign pushed profit up 22 percent in the fourth quarter. Wal-Mart earned $4.63 billion, or $1.21 per share, up from $3.8 billion, or 96 cents per share, in the same quarter last year.

The 0.5 percent sales decline reported Thursday covered the three months ending Jan. 31 at the company's namesake stores. It was the first year-over-year quarterly decline since Wal-Mart Stores Inc. went public in 1969. And it was a remarkable stumble for an institution revered and reviled for its relentless expansion and economic power.

Department stores such as Macy's and Kohl's came into the holiday season ready to compete on price and saw sales rise as a result in December and January.

On the other end, discounters like Family Dollar Stores have added more groceries. And even Sears Holdings Corp.'s long-suffering Kmart has seen a rebound in sales. Target Corp., which has been increasing its food offerings and focusing on low prices in its advertising, is slated to report fourth-quarter results Tuesday.

Organic grocer Whole Foods Markets Inc., often known as "Whole Paycheck" for its high prices, even got into the price-cutting game, helping bring back customers who abandoned it in the recession.

Wal-Mart's own parade of holiday discounts had less effect, as the chain drew fewer shoppers who spent less per trip.

The weak U.S. sales underscored the financial pressures the company's customers continue to face and raised concerns about its ability to keep new and more affluent shoppers, who are seeing an abundance of cheap options.

The overall spending pie has shrunk as shoppers, worried about high unemployment and tight credit, have cut back their spending.

Wal-Mart officials said that deflation in such areas as electronics and groceries was the biggest factor in dampening sales, but the company's chief financial officer, Tom Schoewe, acknowledged "tough" competition this past holiday season from rivals.

The company also cited a massive store renovation program as keeping some customers away.

Schoewe said falling prices for food and electronics, which have helped to drag down revenue for the past three quarters, were worse than expected. Groceries make up about half of Wal-Mart's business.

The overall average price of flat-panel TVs, for example, fell to $545 in December, compared with $743 in the year-ago period, according to NPD Group Inc., a market research firm. Food deflation was fueled by falling meat, produce and dairy prices.

Still, the company's vice chairman who oversees the U.S. business said the discounter picked up market share in electronics. And if price decreases are excluded, Wal-Mart sold groceries at the same pace as its rivals.

But Wal-Mart also noted that shoppers have continued to scale back on discretionary items, resulting in disappointing sales of clothing and most home products.

Economists have been watching for signs of a consumer resurgence, but Wal-Mart said economic conditions are not getting much better for its customers. Emblematic of the strains are sharp increases in spending when paychecks or government payments are issued, indicating that people are waiting for those to be able to spend.

It's a crucial question, because recent economic reports have shown an expanding economy, but one that's depended on factories churning out goods for businesses with depleted stockpiles, rather than from consumer spending.

The overall economy expanded at an annual rate of 5.7 percent in the fourth quarter, but only about one-fourth of that growth came from consumers, who normally drive 70 percent of the economy.

Some shoppers say they are not depending on Wal-Mart for bargains anymore. Cicily Prestridge Strain always researches product prices before she buys them and finds that increasingly, Walmart stores cannot compete.

"Walmart does not have the bargains in clothing, electronics and toys that just shopping on the Internet can do if you're a savvy price shopper like me," said Strain, 39, a psychologist in Slidell, La.

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Associated Press writers Emily Fredrix and Mae Anderson in New York and Martin Crutsinger in Washington contributed to this story.