Wal-Mart Stores Inc. (WMT:US)’s fourth- quarter forecast signals the world’s largest retailer stands to face more obstacles than competitors such as Target Corp. (TGT:US) this holiday season as price-conscious consumers hold back in the sluggish U.S. economy.
While Wal-Mart beat analysts’ estimates on third-quarter profit today, sales in the U.S. and an earnings forecast for this quarter trailed expectations, pushing the shares down the most in more than six months. Meanwhile, Target gained 1.7 percent after it met earnings projections.
“That Wal-Mart customer continues to be under pressure, and that pressure will remain,” Brian Yarbrough, an analyst for Edward Jones & Co. in St. Louis, said in a telephone interview. “Target’s average consumer is higher-income and isn’t under as much pressure.”
The results came a week before the Thanksgiving weekend, when retailers unleash discounts and deals to lure shoppers as part of an unofficial start to the holiday shopping season. The biggest shopping period of the year arrives after U.S. retail sales in October fell 0.3 percent, the first decline in four months.
Wal-Mart, based in Bentonville, Arkansas, fell 3.6 percent to $68.72 at the close in New York for the biggest decline since April 23. Minneapolis-based Target climbed to $62.44.
Executives from both chains mentioned the economy as a potential drag on sales, though in different terms. Target’s customers have more confidence in their personal finances while also being uncertain about the long-term health of the U.S. economy, Kathee Tesija, the chain’s executive vice president of merchandising, said on a call with analysts.
Consumers Trading Down
Meanwhile, Wal-Mart’s Chief Financial Officer Charles Holley said the economy continues to pressure its customers. At U.S. Wal-Mart stores and at Sam’s Club, the company’s chain of membership warehouses, and customers traded down to cheaper products, such as going to chicken from beef and moving away from premium brands.
Different sentiments among its customers may have been reflected in last quarter’s same-store sales, a key assessment of a retailer’s growth because new stores are excluded. At Target, the second-largest U.S. discounter after Wal-Mart, revenue by that measure increased 2.9 percent, almost double the 1.5 percent gain at Wal-Mart’s U.S. stores.
Target may have an edge this holiday season with its focus on exclusive products, according to Natalie Berg, an analyst at researcher Planet Retail in London. Target is unveiling a line of designer goods co-branded with Neiman Marcus Group Inc. on Dec. 1 to keep store traffic levels high after the initial holiday rush next week.
“Innovation, technology and exclusive products will be differentiators this Christmas, and in that regard Target is much better placed than Wal-Mart to win share,” Berg said in an e-mail. Because of so many discounts, “retailers will be forced to provide more than just low prices in order to stand out from their competitors.”
Wal-Mart’s advantage on price may be slipping too, according to Yarbrough. Target has said it will match prices in its stores with items online at large competitors, including Wal-Mart and Amazon.com Inc. (AMZN:US) Target’s loyalty card, which offers 5 percent off purchases, also may bridge that gap, he said.
“That’s another way they differentiate themselves from Wal-Mart,” said Yarbrough, who recommends buying shares of both companies.
Still, Wal-Mart continues to show improvement in its U.S. business, said David Schick, an analyst for Stifel Financial Corp. in Baltimore. The chain has posted five straight quarters of same-store sales gains in the U.S. as it added more items and cut prices. Sales this month are ahead of expectations, Bill Simon, president of Wal-Mart U.S., said today on a conference call.
“The stock is very much overreacting,” Schick, who recommends buying Wal-Mart shares, said in a telephone interview. “In October, the business was a little soft, but it’s already better in November. It’s a better-run business that should perform well during holiday.”
Wal-Mart’s net income last quarter ended Oct. 31 rose 9 percent to $3.64 billion, or $1.08 a share, from $3.34 billion, or 96 cents, a year earlier. Analysts projected $1.07 a share, the average of 23 estimates compiled by Bloomberg. The chain’s fourth-quarter profit will be $1.53 to $1.58 a share. The average estimate of analysts surveyed by Bloomberg was $1.59.
At Target, net income in the quarter ended Oct. 27 rose 15 percent to $637 million, or 96 cents a share, from $555 million, or 82 cents, a year earlier. Analysts projected 96 cents, the average of six estimates compiled by Bloomberg. Profit in the fourth quarter will be $1.45 to $1.55 a share. Analysts projected $1.50, the average of 15 estimates.
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