Consumers' dogged pursuit of rock-bottom prices is making it tougher to squeeze a profit out of this year's holiday shopping season. Wal-Mart says higher fuel prices are also hurting the bottom line.
By John W. Schoen Senior producer
msnbc.com

For months, Wal-Mart has been warning Wall Street not to get too excited about this year’s holiday shopping season. That chilly forecast began to sink in Thursday, as the world’s biggest retailer posted profits that left investors unimpressed. Despite an improving economy, consumers continue to hold out for rock bottom prices — a big reason the rest of the retail industry may have a tough time squeezing profits out of holiday sales.

Based, in part, on the belief that tax cuts have fattened consumers’ wallets, some retail industry-watchers have set ambitious sales targets for the season. The National Retail Federation, for one, has forecast a 5.7 percent increase in holiday sales, which would be the biggest gain since 1999 when a booming stock market helped fuel big spending increases.

But Wal-Mart’s Thursday report on its latest financial results began to raise doubts about how much profit the industry would be able to hold on to — even if those spending increases come through.

Wal-Mart said that for the quarter ended Oct. 31, earnings from continuing operations rose to $2.0 billion, or 46 cents per share, from $1.8 billion, or 40 cents per share, a year earlier. (Results for both periods exclude McLane Co., the grocery distribution business that Wal-Mart sold in May.)

Analysts, on average, were expecting Wal-Mart to earn 47 cents per share, according to Reuters Research, a unit of Reuters Group Plc.

Wal-Mart said quarterly sales rose 13.1 percent to $62.5 billion. Sales at U.S. stores open at least a year — a key retail gauge known as same-store sales — rose 6.1 percent.

Scaling back
As a result of those numbers, some analysts have even begun to revise their holiday spending forecasts.

“We continue to see evidence that the lower-income customer is not enjoying the pickup in spending that the middle-income and higher-income customer is,” said UBS Warburg retail analyst Gary Balter in a research report downgrading Wal-Mart stock Thursday.

No one should be too surprised; Wal-Mart executives have been warning analysts for months that their forecasts were a little too rosy.

“There are those of you out there in the crowd who have taken your estimates above (Wal-Mart’s) guidance. Do that at your own peril,” said Thomas Schoewe, the retailer’s chief financial officer, at an analyst meeting in September. Wal-Mart Chief Executive Lee Scott said he expects the holiday season to be “improved over last year but not significantly.”

Schoewe also said that stronger sales hadn’t necessarily boosted profits, because Wal-Mart has had to cut clothing prices further than expected. The company has also said that high fuel prices are making it more expensive to move goods.

Major Market Indices

Now, with the holiday shopping season nearing, “Wal-Mart hasn’t changed their tune on their outlook,” said CIBC World Markets retail analyst Peter Benedict. “They’re really sticking to” their September forecast.

Part of the reason for Wal-Mart’s caution is that the retail giant’s ruthless pursuit of low prices seems to have become ingrained in American consumers’ shopping habits. The company recently tried to measure just how much prices are falling, according to Bill Dreher, a retail analyst at Deutsche Bank Securities. By analyzing data on some 156,000 products, the company found that deflation was running at about 1.5 percent to 1.75 percent, Dreher said in a recent research note.

The tight-fisted trend among consumers seems to be borne out by a recent holiday shopping survey by NPD Group, a retail industry research firm. While 68 percent of American consumers said they plan to spend the same amount this holiday as last year, some 19 percent said they plan to spend less and only 13 percent plan to spend more. On average, survey respondents plan to spend $637.

The main battleground for the consumer’s holiday dollar will be among major discounters like Wal-Mart, Target and Kmart — where three out of four consumers say they plan to shop. Only a third said they would head for warehouse clubs or department stores.

As usual, apparel tops the list of favorite purchases, with nearly two-thirds of those surveyed planning to buy clothes. But retailers may have overestimated demand, according to Deutsche Bank analyst Dreher.

“It look like we’re having a very tough environment overall with apparel,” he said. “And it sounds like (Wal-Mart) is going to be doing more clearance of apparel in the fourth quarter.”

Dreher says that doesn’t bode well for specialty retailers or department stores that focus heavily on clothing

A little more than half of those surveyed by NPD said they’ll buy toys this year. Dreher says early toys sales look strong, especially for relatively expensive items in the $30 to $55 range. Among this year’s “hot” toys, Dreher lists Hokey Pokey Elmo, Leapfrog, and the remote control Hummer SUV.

But consumer interest this year for other categories is not especially strong, according to NPD. While about 40 percent said they expect to buy books and music, just 12 percent plan to buy electronics this year and six percent expect to buy cameras.

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