All across America, families are making their to-do lists for Thanksgiving shopping. Turkey? Check. Fixins’? Check. Sweet potato pie? Check. Flat-screen TV?
With price cutting from Wal-Mart likely to spread among other retailers, it will be all that shoppers can do to avoid picking up toys and electronics along with their cranberry sauce and stuffing.
On Tuesday, Wal-Mart, the world’s largest retailer, announced its fourth price-slashing move since mid-October and said that it would have its most aggressive discounting ever this holiday season. Its rival, Target, vowed price cuts, too.
That’s good for consumers, but probably bad for retail profits in the fourth quarter.
By February, when retailers report fourth-quarter and full-year earning, Wal-Mart and Target may not be able to match the double-digit percent profit increases that they announced Tuesday for the third-quarter. And what’s bad for Wal-Mart and Target may be worse for smaller retailers.
“(Profits) is going to be a big issue for the big box retailers,” said Ken Perkins, president of RetailMetrics LLC, a research firm in Swampscott, Mass. He noted that Target is going to be able to make up some ground lost in digital cameras and flat-screen TVs with its trendier apparel, which carries fatter profit margins. But he said, “It’s going to put pressure on everyone.”
Perkins pointed out that Wal-Mart can’t rely on price cutting alone; it needs to have customers buy merchandise other than electronics and toys. “Customers need to leave with a handful of merchandise,” Perkins added.
Wal-Mart’s assertive discounting is expected to pressure other retailers to match the cuts, a move that would erode profit margins, though it would save customers money. The most vulnerable are toy retailers and electronic chains, but moderate-price apparel chains could be affected as well, Perkins said.
Wal-Mart started holiday discounting in mid-October by cutting prices on more than 100 toys, then followed this month with electronics and small appliances, with a promise of more to come. The company vowed generous discounts, or what the company calls rollbacks, on basic apparel like cargo pants and flannel shirts.
“We are implementing our most aggressive pricing strategy ever across core categories, such as toys and electronics,” said Lee Scott, president and CEO of Wal-Mart, in a prerecorded phone message.
Wal-Mart and other retailers normally reserve such discount blitzes for the day after Thanksgiving.
Target President Gregg Steinhafel told investors during a conference call Tuesday that the retailer would compete on long-running discounts, noting that it has often matched those before Wal-Mart advertises them in its circulars.
John Menzer, head of Wal-Mart U.S. stores, told investors there were “huge sales increases” among the discounted toys and in some electronics.
“We’re seeing a big growth in our new categories such as flat panel TV’s, MP3 players, laptops and cell phones. But this is tempered with declines in our more mature categories such as music, DVD players and telephones,” Menzer said on the recorded message
Scott told analysts last month that Wal-Mart would focus more on discounts after an overemphasis on selling trendier clothing backfired, contributing to a sharp slowdown in sales.
Wal-Mart posted posted net income of $2.65 billion, or 63 cents per share, for the period ended Oct. 31, compared with $2.37 billion, or 57 cents per share, a year earlier.
Net sales totaled $83.5 billion, an increase of 12 percent from $74.6 billion.
Excluding income from operations in Germany and South Korea that it has sold, Wal-Mart’s profit amounted to 62 cents a share. Wall Street expected a profit from continuing operations of 59 cents per share, the average estimate of 21 analysts surveyed by Thomson Financial, on projected sales of $84.48 billion.
Wal-Mart said it expects earnings per share from continuing operations for the fourth quarter to be between 88 cents and 92 cents, resulting in a full-year forecast for earnings per share of $2.85 to $2.89.
In August, Wal-Mart had forecast full-year earnings per share between $2.88 and $2.95.
Analysts polled by Thomson Financial expect 92 cents per share in the fourth quarter and $2.87 in the full year.
For the third quarter, same-store sales, or sales at stores opened at least a year, were up 1.5 percent. Wal-Mart has also forecast a flat November, the first month in a decade with no growth in same-store sales.
Scott said the slowdown was due to factors including overemphasis on its new, trendier Metro 7 women’s apparel and comparisons with heavy shopping last year before and after hurricanes Katrina and Rita.
Wal-Mart expects same-store sales to be up between 1 and 2 percent in the fourth quarter, Chief Financial Officer Tom Schoewe said.
Shares of Wal-Mart rose $1.34, or 2.9 percent, to close at $47.66 on the New York Stock Exchange.
Meanwhile, Target said it earned $506 million, or 59 cents per share, up from $435 million, or 49 cents per share, during the same period last year.
Revenue rose to $13.57 billion from $12.21 billion during the same period last year. Target attributed the growth to new stores, a 4.6 percent sales rise at stores open at least a year, and credit card revenue.
Analysts surveyed by Thomson Financial were expecting 55 cents per share on revenue of $13.59 billion.
Net charge card revenue jumped 20.7 percent to $414 million. Target cards contributed $176 million in pre-tax earnings for the quarter, up $68 million, or almost 63 percent, from the same period last year.
Chief financial officer Doug Scovanner said on a conference call that Target’s same-store sales have risen 4.8 percent for the year so far, and predicted its fourth-quarter same-store sales would be about the same. He said Target expects to earn $3.17 per share for the full year. Analysts are expecting $3.13 per share.
Target shares rose $1.40, or 2.4 percent, to end at $59.16 on the NYSE.