H-P and Wal-Mart – The Peril of Expectations

In one of the most turbulent and bizarre weeks on Wall Street in recent memory, two of the most important indicators of the future of American business announced their earnings and quickly took a U- turns south.

The two companies are Hewlett-Packard and Wal-Mart.  Both announced fairly impressive profits but Wall Street didn’t like what both companies said about their futures and both proceeded lose major percentages in their stock market value.  Such performances illustrate how important expectations have become in gauging the economic future of businesses.

Wal-Mart was the first to check in on Feb. 22.  The Bentonville (ARK)-based retail behemoth offered a fourth-quarter increase in net sales of 2.5% to $115.6 billion. It also reported a fouth-quarter profit of $5.02 billion or $1.41 per share compared with $4.82 billion or $1.26 per share in the same period a year ago.

While these results, on the surface, sound positive, if one reads between the lines, the story is not so good.  It turns out the quarterly sales were the seventh consecutive quarter of declining sales at stores open a least a year, an industry measure known as “same store sales.”  The decline missed the company’s projection, and it’s important to note in retail marketing, same store sales are hugely significant in measuring a retailer’s health because same-store sales are an indicator as to whether in-store marketing initiatives are working.

Company executives and analysts went further and reported this under-performance  indicated changes in the way customers have been purchasing during the recession and through the slow-moving recovery.

The bottom-line, Wall Street didn’t like it and the Wal-Mart stock plummeted from over $55 on Tuesday before the earnings announcement to just over $51 by week’s end.

This is clearly a wake-up call for Wal-Mart. When a company maintains such a high profile, these seemingly small bumps in the road have enormous significance.  Look for some major marketing changes in the Wal-Mart store system.

Hewlett-Packard

Like Wal-Mart, Hewlett-Packard’s news didn’t seem so bad at first sight but like Wal-Mart the news was devastating when one reads between the lines.  For its first quarter HP reported earnings of $2.61 billion or $1.17 a share up from $2.25 billion or $.93 a share a year ago.  But Wall Street didn’t like it one bit.  Shares were selling over $48 when the earnings announcement came out on Feb .23 and the stock ended the week at just over $41 on Feb. 25.

HP has another agenda.  Its management problems are significant with the resignation of Mark Hurd and his ensuing problems.  The earnings statement showed disappointing growth amid poor consumer demand. HP is an important bellwether of the broader technology economy.

Another wake-up call.  HP’s marketing including new product development is clearly suspect and Wall Street is wary.