Wal-Mart Hit Hard by German Losses

Wal-Mart Stores Inc. revealed Tuesday its first earnings drop in a decade owing to its withdrawal from Germany and sluggish US sales at a time of sky-high fuel prices.

The US-based chain said its second-quarter net profit slumped 26 percent to $2.08 billion (1.62 billion euros), after it booked a charge of $863 million for the sale of its German stores to Metro AG.

Excluding the $863 million loss on the sale of the German branch, Wal-Mart's second quarter earnings per share met Wall Street expectations.

Wal-Mart hard hit by German pull-out

The world's largest retailer said last month that it was pulling out of Germany after eight years and would sell its 85 hypermarkets to the Metro chain.

Wal-Mart had struggled to establish itself in Germany, which was its third-largest market after the United States and Japan, but the announcement still came as a surprise.

"As we focus our efforts on where we can have the greatest impact on our growth and return on investment strategies, it has become increasingly clear that in Germany's business environment, it would be difficult for us to obtain the scale and results we desire,'' Michael Duke, a vice chairman of Wal-Mart, said in a statement last month.

In addition to proving ineffectual in fighting off cut-throat competition from local discount retailers Aldi and Lidl, Wal-Mart's disastrous performance in Germany is believed to have been a combination of pressuring German executives to enforce American-style management practices and a failure to fully understand the German market.

If you want to be successful in a foreign market, you have to know what your customers want. That's the most important lesson," Wal-Mart's Germany CEO David Wild, who is from England, said in a recent newspaper interview. "It does not good to force a business model onto another country's market just because it works well somewhere else."

First earnings decline in a decade

The earnings decline was Wal-Mart's first since early 1996, which itself was the company's first profit fall since it started trading as a public company in 1970.

The retailer also announced in the past quarter that it was selling its 16 stores in South Korea, but it did not mention any material impact from this in its earnings statement.

"These changes allow us to continue to focus our efforts where we can have the greatest impact on Wal-Mart's growth and our ROI (return on investment) strategy," company chief executive Lee Scott said. "We are, however, quite honestly disappointed in the sales performance of Wal-Mart US. Some of the same issues affecting our customers, such as higher utility costs and gas (gasoline) prices, are impacting corporations like Wal-Mart as well."

Despite the hefty charge in Germany, Wal-Mart stuck to its earnings targets for the 2006-2007 fiscal year.

It predicted it would earn $2.88-2.95 per share over the 12 months, against Wall Street's forecast of $2.92.