Feb 15, 2010
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Has Wal-Mart captured the "slow decade" consumer?

Feb 15, 2010

SAN FRANCISCO (Reuters) - Wal-Mart Stores Inc's (WMT.N) quarterly results will show whether the company gained ground during the critical holiday sales period and if its retail strategy is holding onto its shoppers.

The world's largest retailer will report fourth-quarter results on February 18, and investors want to see if it was able to overcome holiday price wars and deflationary pressures to push U.S. same-store sales into positive territory.

Wal-Mart has forecast U.S. sales at stores open at least a year to be flat, plus or minus 1 percent, for the 13 weeks that ended January 29. That would compare with a year-earlier rise of 2.4 percent.

"The single most important number will be same-store sales since they no longer provide monthly same-store sales," said Lauri Brunner, senior equity research analyst at Thrivent Financial for Lutherans.

Investors are also eager to hear if the retailer is holding on to the customers it attracted in the depths of the economic downturn, or if shoppers are favoring competitors now that the worst of the recession has passed.

"Everyone is worried about how Wal-Mart is faring as the economy stabilizes," said Janna Sampson, co-chief investment officer at OakBrook Investments, which owns Wal-Mart shares.

"I'm expecting the numbers will still look pretty good because I really don't think things have improved enough that you would see a huge amount of people stop searching for value," she said.

Wal-Mart may address that in its first-quarter earnings forecast and its commentary on how consumers are faring.

Stifel Nicolaus analyst David Schick said the retailer fits nicely in his firm's "slow consumer 2010-2019 decade" thesis that households are likely to spend less to improve their personal balance sheets.

"The economy in the last couple of years has handed Wal-Mart this opportunity to appeal to people," Schick said. "People want to know if they're capturing more shop from more consumers. That's the core question."


Schick upgraded Wal-Mart's shares on February 3 to "buy" from "hold," saying the stock, which trades at 13.5 times full-year earnings, is poised to outperform the S&P 500 Index .SPX.

Wal-Mart shares are roughly flat since the company's last earnings report in November, compared with declines of 2.5 percent in the S&P Retail Index .RLX and 2.3 percent in the S&P 500.

U.S. total holiday sales in November and December rose 1.1 percent industrywide, according to the National Retail Federation, while it had forecast a 1 percent drop.

Same-store sales reported by major U.S. retail chains were also better than expected in November, December and January, according to Thomson Reuters data.

Many retailers, including TJX Cos Inc (TJX.N) and Kohl's Corp (KSS.N), have since raised their earnings forecasts, prompting investors to wonder whether the improved sales meant any lost business at Wal-Mart.

"Did consumers prefer higher-ticket discretionary purchases ... at Macy's (M.N) because the promotions looked very attractive vs. at Wal-Mart?" Brunner said.

In November, Wal-Mart issued a fourth-quarter earnings forecast of $1.08 to $1.12 per share from continuing operations. Except for announcing a restructuring charge of 4 cents, it has not revised that outlook.

Analysts, on average, currently expect earnings of $1.12 per share excluding the charge, according to Thomson Reuters I/B/E/S.

Wal-Mart's sales have also suffered from deflationary pressures, like bigger-than-expected price drops for food and electronics in its third quarter.

There was probably no let-up in the fourth quarter as Wal-Mart cut prices on food and TVs to draw holiday shoppers. It also slashed prices on popular books and DVDs sold online to win market share, igniting a price war with Amazon.com Inc (AMZN.O).

In another effort to draw and keep customers, Wal-Mart is revamping its U.S. stores by widening aisles, reducing clutter and improving merchandise.

James Reed, lead portfolio manager for the Scout Stock Fund, said he was looking for signs that this strategy was working.

"They've been refocusing their stores with more of a Target (TGT.N) look, but Wal-Mart prices," said Reed, whose fund owns Wal-Mart shares. "I want to see that they're executing on that U.S. restructuring."

(Reporting by Nicole Maestri; Editing by Michele Gershberg and Lisa Von Ahn)

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