Those everyday low prices took a bite out of its sales, but Wal-Mart Stores (WMT) still managed to post a winning third quarter. Profits were up thanks to cost-cutting, even as falling prices for food and electronics shrank sales receipts.

Wal-Mart managed to beat Wall Street's expectations with income of $3.25 billion, or 84 cents per share, better than analysts' forecasts of 81 cents. Income for the quarter ended Oct. 31 was up 3.5% above the same time last year, and sales were up 1.1%, but comparable-store sales were down 0.8%.

Management had expected better sales growth and blamed the lower numbers on deflation in the food and electronics aisles. Analysts had been warning that Wal-Mart's low-price strategy would take its toll on earnings.

Comparable tickets -- sales per customer -- at Wal-Mart's U.S. stores were down due to lower prices, particularly in fresh grocery categories such as meat and dairy and in electronics, including flat-panel TVs, said Vice Chairman Eduardo Castro-Wright. He noted that Wal-Mart sold 25% more flat-panel TVs during the quarter than last year, but prices were 20% below what they were a year ago. And grocery prices have deflated by some 6% year-over-year, which took sales down by three percentage points, he said.

"Our continued increase in [comparable] customer traffic indicates the strength of our underlying business. However, comp ticket was down for the period, driven by price deflation that was well beyond what we had expected," he said. But CEO Michael Duke noted Wal-Mart U.S. still managed to rack up a 7% increase in operating income -- despite a mere 1.2% increase in sales -- thanks to cost and inventory controls.

A More Optimistic Forecast

Wal-Mart's Sam's Club warehouse clubs also got hit by deflation in gas prices, which turned what would have been a 6.3% increase in same-store sales down to a 4.1% gain. Sam's Club also faced the same price deflation in food and electronics, both of which are strong categories for the chain, said president Brian Cornell.

Even while it forecast that fourth-quarter sales will be somewhere between 1% below last year's to 1% ahead, Wal-Mart still increased its profit forecast for the fourth quarter and the year. Chief Financial Officer Thomas Schoewe said the company now expects fourth-quarter earnings per share between $1.08 and $1.12, and full-year earnings between $3.57 and $3.61. That compares to the forecast of $3.50 to $3.60 it had expected at the end of the second quarter.

"We believe no other retailer is as well positioned to succeed this holiday season as Wal-Mart," he said.

Wal-Mart's units all reported sales per labor hour were down and wage growth was less than sales growth, which means labor costs are down. While advertising spending is up, other expenses were lower, as well. "The productivity loop is back at Wal-Mart," said Duke.

Still Adding Millions of Square Feet

Management vowed to continue pushing low prices. The strategy has worked to help Wal-Mart gain market share and will continue to work when the economy recovers, the executives maintained. Duke noted that Wal-Mart has added more than 13 million square feet of retail space this quarter, and more than half of that in the U.S., despite the economic slump.

"When the recession is behind us," said Duke, "we believe people will continue to shop with a new instinct for value, and they will find it at Wal-Mart." How's that for a brave prediction?


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