Wal-Mart and the Retail-Stock Markdown

The world's largest retailer might not be immune to the economic slowdown after all

By Ben Steverman

Sometimes low prices aren't enough. The outlook for retailers has turned so bleak that even Wal-Mart (WMT) is feeling the effects of the consumer slowdown.

The world's largest retailer had looked like it was actually benefiting from the economic slowdown as consumers flocked to its low-priced offerings. Wal-Mart's stock posted a gain in 2008, one of just a handful of large-company stocks to do so.

But on Jan. 8, Wal-Mart warned that fourth-quarter profits could be 12% below previous estimates. December same-store sales, which had been rising strongly as consumers sought out deals, missed expectations by rising only 1.7% in the U.S.

Pinching Pennies

The stock market was expecting weak retail results from the holiday season, but not necessarily from Wal-Mart. Analysts and investors noted that Wal-Mart customers were buying necessities, such as groceries, rather than luxury items. Also, discount stores were attracting cash-strapped consumers who otherwise might prefer more upscale shopping venues.

But Morgan Stanley (MS) analyst Gregory Melich notes that half of Wal-Mart's sales aren't in groceries but in discretionary items. "If those categories are weak, profits can be weak," he wrote in a note on Jan. 8.

One problem for Wal-Mart: Other retailers, such as Nordstrom (JWN) or Limited Brands (LTD), offered big discounts of their own to attract stingy consumers. Retailers with heavy promotions may have won customers at the expense of "everday value" chains like Wal-Mart, says Robert W. Baird & Co. consumer and retail analyst David Cumberland.

Hunting for Value

Also, according to Wayne Titche, chief investment officer of AMBS Investments, consumers may be trading down to cheaper merchandise amid a weakening economy, but they're also looking for good value. He wonders if Wal-Mart discounted the wrong items in some cases.

"It's not just trading down. It's perceived value for the money" that matters, Titche says. Wal-Mart garnered much publicity with its "Black Friday" offerings of deeply discounted flat-screen TVs. But low-quality televisions at a discount won't attract as many buyers as discounts on high-quality TVs, Titche notes. "Just offering merchandise that's cheaper doesn't get someone to buy it."

Of course, the Bentonville (Ark.) behemoth wasn't alone in its misery. December sales suffered nearly across the board from bad weather in many parts of the U.S. as well as from a dramatic cutback in spending.

Higher-end retailers were hit hard. Saks (SKS) last month saw same-store sales drop 20%. Abercrombie & Fitch (ANF) posted a 24% plunge in same-store sales.

At Sears' (SHLD) Kmart chain, December same-store sales fell 1.1%, but the chain's domestic same-store sales was off 7.3%.

Nordstrom reported a decline in same-store sales of 10.6% in December.