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Jan 8, 2009

Wal-Mart Stumble Shows Rivals putting up a fight

Wall Street whistled Wal-Mart's (WMT.N) tune in 2008, singing the discount retailer's praises as an increasingly dour U.S. economy sent shoppers scurrying to its stores in search of low prices.

But the song went off key on Thursday, when the world's largest retailer posted lower-than-expected December sales and cut its fourth-quarter profit forecast, showing it was also vulnerable to the forces of recession.

The news shocked investors who viewed Wal-Mart as a safer bet and made it one of only two stocks to end 2008 at a higher price within the Dow Jones Industrial Average.

Wal-Mart shares fell 7.5 percent on Thursday, weighing on stock and currency markets.

"If you look at how weak the retail environment was, Wal-Mart's numbers were still decent," said David Abella, an analyst at Rochdale Investment Management, which owns Wal-Mart shares. "The problem was the expectations for Wal-Mart had grown too high and there had been whispers that ... Wal-Mart would actually increase their guidance."

December sales at U.S. stores open at least a year, or same-store sales, rose 1.7 percent, Wal-Mart said on Thursday. The store has outperformed rivals as consumers sought its low prices on necessities like food or medicine.

While Wal-Mart was one of the few chain stores to report positive December sales, the results missed Wall Street's view for a gain of 2.8 percent, according to Thomson Reuters. Wal-Mart had said December sales would be at the high end of its forecast for a gain of 1 percent to 3 percent.

One culprit behind that weakness was heavy discounting by competitors like J.C. Penney Co Inc (JCP.N) and Kohl's Corp (KSS.N), which repeatedly slashed prices to lure holiday shoppers.

"Other retailers aren't just rolling over and playing dead," Abella said. "You had some really strong promotional activity and discounting."

Richard Hastings, a consumer strategist at Global Hunter Securities LLC, said other retailers would continue to challenge Wal-Mart by keeping their prices low in 2009.

"Wal-Mart will have some pressure from these issues for the first and second quarters, and then they'll figure out how to respond and the situation should get better," he said.


Wal-Mart said same-store sales for the five weeks ended January 2 rose 1.9 percent at its namesake stores and only 0.1 percent at its Sam's Club warehouse locations, where sales did not pick up until the last two weeks of the period.

"Our members were clearly cautious with their discretionary spending," Sam's Club Chief Executive Officer Doug McMillon said in a statement. "Our small business members in particular continue to face more pressure from today's economy and also are more selective in their purchases."

Sam's Club caters to both individual shoppers and small businesses, like restaurant and convenience stores, which are being squeezed by the U.S. recession. Costco Wholesale Corp (COST.O), the leading U.S. warehouse club operator, said its December same-store sales fell 4 percent.

The weakness at Sam's Club could be a drag on Wal-Mart's results for the early part of this year, said Joseph Agnese, a retail analyst with Standard & Poor's Equity Research.

At rival Target Corp (TGT.N), December same-store sales fell 4.1 percent, a better performance than the 9.1 percent drop analysts had expected. But it said markdowns that month would pressure fourth-quarter profitability.

The disappointing results come one day after Wal-Mart tapped McMillon to head its international operations. McMillon will take his post next month, when Mike Duke, who had held that job, succeeds Lee Scott as Wal-Mart's CEO.

Wal-Mart is increasingly looking overseas to fuel expansion, although those markets are not immune from the global slowdown either. Wal-Mart said its international sales fell 10.4 percent in December, hurt in part by a stronger U.S. dollar that lowered the value of its international sales.

"Our customers around the world continue to feel pressure from the current global economy, leading to sales for Wal-Mart International that were below expectations," Duke said in a statement.

Abella said the first half of this year could be tougher for Wal-Mart than the first half of 2008, when its renewed emphasis on low prices coincided with the start of the U.S. recession and a tendency by consumers to shun splurges.

"It took other retailers a little bit of time to respond," Abella said, although they responded aggressively this holiday by slashing prices to win sales.

Abella said he expects Wal-Mart will continue to gain market share, and the stock still has "defensive" characteristics that investors will gravitate toward as the U.S. recession persists.

S&P's Agnese cut his full-year profit view on Wal-Mart, but reiterated his "strong buy" rating on the shares.

"Everyone is being affected as the consumer is pulling back," he said. "But the strongest players will last the longest, and Wal-Mart is one of our best positioned retailers."

Source : Reuters
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