Walmart

On one hand, the world's largest company turned in another strong performance in its 2005 fiscal year. It added $29 billion in sales, finishing the year with a top line of $285.22 billion. Net income exceeded $10 billion for the first time, increasing nearly 16% and outpacing net sales growth of 11.3%--always a high priority for Wal-Mart management.

But in typical fashion, management was more concerned about what could have been achieved and was not.

"I'm pleased with our results but not satisfied," president and chief executive officer Lee Scott told analysts during Wal-Mart's fourth quarter conference call. "We left a lot on the table and have our share of opportunities ... sales in the Wal-Mart [Stores] division started strong but slowed in the second half.

"We were not aggressive enough in our merchandise plans and underbought in several key categories, particularly at the mid- and premium-price points. Although this resulted in lower markdowns and better inventory levels, the lack of sales resulted in greater expense pressures. We would have been better off if we had traded lower markdowns for sales, and we will be more aggressive on our merchandise planning this year."

Despite the self-criticism, the year yielded a number of impressive achievements. The fourth quarter saw the retailer grow its gross margin for the 13th time in the last 14 quarters--without increasing prices, as executives are quick to point out.

"Our continued improvement in gross margin for the quarter was the result of, No. 1, the benefits of global sourcing two, fewer markdowns and finally, lower inventory shrinkage," explained chief financial officer Tom Schoewe.

For the full fiscal year, gross margin was up 0.4 point to 22.9%. But, as Schoewe pointed out, below-plan sales in the fourth quarter combined with higher costs--particularly in store labor, utilities and health care--drove up the operating expense ratio 0.5 point to 18% of sales.

The real culprit, and the source of concern among some analysts, was the relatively weaker comparable-store sales growth, especially in the second half of the year. Domestic comparable-store results for fiscal 2005, including both the Wal-Mart Stores division (which encompasses discount stores, Supercenters and Neighborhood Markets) and Sam's Club, came in at 3.3%--the low end of management's forecast of a 3% to 5% gain--and down from a 4.1% rise last year.

In the Wal-Mart Stores segment the improvement was 2.9%, reflecting a subpar fourth quarter that saw comparable-store sales edge up just 1.4%. With operating costs escalating, operating profit failed to keep pace with overall sales growth, expanding 9.7% to $14.16 billion on a 10.1% top-line increase to $191.83 billion--a disappointing outcome by Wal-Mart standards.

Some analysts suspect that comparable-store trends within the Wal-Mart Stores segment also reflect sales cannibalization--which Wal-Mart prefers to refer to as "market development"--as the retailer opens Supercenters in closer proximity to one another. In other words, comparable-store sales at a given Supercenter will not grow as fast if another Supercenter opens 10 miles away, thus drawing off customers. Management, however, stresses that the overall sales produced by the two outlets will increase faster than the results generated