By Andria Cheng
Foreshadowing a competitive holiday season to come, retailers
led by industry leader Wal-Mart Stores Inc. reported a
better-than-expected third quarter profit this week, but their
holiday fourth-quarter outlooks are less than stellar.
In addition to Wal-Mart Stores Inc. (WMT), off-price retailer
Ross Stores Inc. (ROST), Victoria's Secret parent Limited Brands
Inc. (LTD) and Children's Place Retail Stores Inc.'s (PLCE) also
reported fourth-quarter outlooks that may miss analysts'
estimates.
Children's Place, for instance, cut its full-year outlook and
expects superstorm Sandy, which affected about a third of its
business and led to 280 store closings at a peak, will lead to
increased promotions. Ross, which has outperformed the industry
through a model of selling discounted name brand products, pointed
to the difficulty in predicting how promotional other retailers may
become or how macroeconomic and political uncertainty may hurt
consumer spending.
"There's continuing softening and downshifting in the retail
economy," said Craig Johnson of Customers Growth Partners, which
forecast holiday sales to rise 2.8%, about half of last holiday
season's rate. "The slowdown is literally across the board." Luxury
retailer Saks Inc. (SKS) on Tuesday also cut its sales outlook and
expects Sandy, affecting more than half of its business, to lead to
increased promotions.
Children's Place tumbled 14%. Ross was down 1.5%. Wal-Mart, a
Dow component, fell 3.4%. Limited dropped 2%.
Still, there are some bright spots. Target Corp.'s (TGT)
third-quarter results beat estimates and its fourth-quarter outlook
was in line with expectations, sending its shares up 1.1%. Dollar
store chain Dollar Tree Inc. (DLTR) rose 5.4% after its
third-quarter upside eased concerns about slowing demand.
"We continue to view (Target) as an attractive investment," said
Sanford C. Bernstein & Co. analyst Colin McGranahan, adding
Target's forecast suggests its "underlying fundamentals remain on
track." With Wal-Mart, "softer than expected (same-store sales)
growth and elevated inventories will be the focus, and we believe
that (fourth-quarter) estimates are likely to be lowered."
He rates Wal-Mart a market perform and Target outperform.
Consumers trading down
Wal-Mart, the world's largest retailer and a barometer of
consumer demand, said consumers continue to trade down at both its
Walmart U.S. and Sam's Club membership warehouse club, which caters
to a higher-income household than its larger sister chain.
For instance, at Sam's Club, consumers are switching to chicken
instead of steak to save money and at Walmart U.S., they are buying
cheaper detergent, Wal-Mart Chief Finanical Officer Charles Holley
said on a conference call with reporters.
"The economy remains a little challenging," said Holley, adding
jobs, cost of energy and rising food prices are the top three
concerns of its customers. "Consumers (worldwide) are starting to
be under some kind of pressure. It's going to be a very competitive
holiday season. Consumers want to get more for their money."
That means those who can still afford are buying things in bulk
and larger packs to save money, while lower-income consumers who
live paycheck to paycheck and are stretched at the end of the month
are buying smaller pack sizes, Holley said.
To win its share of the holiday sales, Wal-Mart, along with
retailers from Target to Sears Holdings Corp., are opening doors
earlier on Thanksgiving Day to kick off holiday season sales. The
company, which started layaway program a month earlier this year,
has seen $300 million in additional layaway demand this year, with
majority of the gain coming from electronics and other
entertainment item sales, Holley said.
The company plans to increase both its TV and radio advertising
and cut prices and offer promotions in categories from consumable
products and food to apparel and tablets, he said.
Target, meanwhile, is counting on its 5% purchase off its Target
and exclusive launches such as a designer partnership collection
with Neiman Marcus to help lift demand.
Our customers "are continuing to shop with discipline, focusing
on lists and budgets and occasionally splurging on more
discretionary items," said Target's merchandising chief Kathryn
Tesija on a call, adding the company saw an increase in trips
focused only on need-based items in the third quarter. "While
consumers have increased confidence about their near-term prospects
and personal finances, they have a high level of uncertainty about
the longer term health of the economy and intend to continue saving
and paying down debt."
For the holiday season, Target's customers plan to spend
slightly more than last year, with focus on "value, pricing and
promotions," she said.
"We expect the season to be highly competitive and promotional,"
she sad.
While Wal-Mart also doesn't plan to match online pricing, both
Target and Best Buy Co. (BBY) have plans this holiday to match
prices against select online rivals, including Amazon.com Inc.
(AMZN) .
Wal-Mart vs Target
Wal-Mart's profit in the quarter ended Oct. 31 rose to $3.64
billion, $1.08 a share, from $3.34 billion, or 96 cents, a year
earlier. Total revenue rose 3.4% to $113.9 billion.
The company forecast fourth-quarter profit of $1.53 to $1.58 a
share. Walmart U.S.'s same-store sales are projected to rise 1% to
3%.
Analysts, on average, estimated Wal-Mart to earn $1.07 a share
in the third quarter and $1.59 a share in the fourth quarter,
according to FactSet. Revenue came in a little light of the $114
billion analysts were looking for.
Wal-Mart "leaving the high end of its guidance intact suggests
margin pressure is likely" in the fourth quarter," said ISI Group
analyst Greg Melich.
Third-quarter comparable store sales, excluding fuel impact,
rose 1.7%, including a 1.5% increase at Walmart U.S. and a 2.7%
rise at Sam's Club. Analysts surveyed by Thomson Reuters estimated
a 2.1% increase, with misses at both units.
In comparison, Target posted a U.S. comparable sales gain of
2.9%. The company forecast fourth-quarter same-store sales to be up
2% to 3%.
Both retailers also said they don't expect Sandy to curtail its
plan for the quarter despite store closings. November sales so far
have outpaced Wal-Mart's expectations, Holley said, adding Walmart
U.S. incurred about $35 million in damages from Sandy.
Walmart International sales rose 2.4% and would have been up
7.6% minus currency impact. The company said it increased or
maintained market share in most major markets except China. The
company, under an investigation of whether it allegedly violated
the Foreign Corrupt Practices Act in Mexico, is also looking at
Brazil, China and India that may also have alleged violations. It
incurred $48 million in related expenses in the third quarter.
Gross margin narrowed by 0.13 percentage point to 24.5%.
Sears Holdings Corp. (SHLD) and Gap Inc. (GPS) are due to report
after the close of regular trading.
-Write to Andria Cheng at acheng@marketwatch.com
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