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Wal-Mart limps into the holidays

Despite price cuts, November was the retailer's worst month in a decade. Analysts wonder if rapid growth is possible anymore.

December 01, 2006|Abigail Goldman | Times Staff Writer

Forget the critics, labor unions, activists and politicians who have tried to stir up trouble for Wal-Mart Stores Inc. The company's latest problems come from a far more serious quarter: consumers.

Despite price cuts designed to lure early-bird Christmas shoppers, November was Wal-Mart's worst month in a decade, with sales falling below last year's levels. And December won't be much better.

"The good old days are over," said Mark Husson, an analyst with HSBC Securities in New York. "And some people in the market don't seem to be able to accept that [Wal-Mart] is not going to go back to the rates of growth it used to enjoy."

Wall Street's Wal-Mart believers say this is the time to buy, noting that the stock has essentially stagnated since a peak in 1999, while earnings have more than doubled. The company is on track to post annual sales of more than $350 billion and profit of close to $12 billion this year.

But limping sales at the company's established stores for most of 2006 tell some analysts that investors have good reason to be wary: How can the biggest retailer on Earth turn around sales and continue to grow?

"Nobody has ever been this big, so it's impossible to say," said Bob Buchanan, an analyst at A.G. Edwards & Sons Inc. in St. Louis, who rates the stock "hold." "Retailing is all about momentum, and that's especially true for a company doing $350 billion in sales. There's not going to be a quick fix here."

For years, Wal-Mart was able to post month after month of highflying sales, delivering impressive earnings growth, often better than 15% annually. By undercutting competitors with its "Every Day Low Prices," the company also was able to quickly expand its store base, yielding greater total sales gains.

The company has more than 6,600 stores worldwide, nearly 4,000 in the United States.

In a bid to top last year's success with an early holiday campaign, Wal-Mart began cutting prices on hundreds of items this year even before Halloween.

Nonetheless, October sales were barely above flat, 0.5% in stores open at least a year, a yardstick that investors use to measure growth.

On Thursday, the company confirmed preliminary estimates that November sales fell 0.1% compared with the same period a year earlier and said it expected December sales to be between flat and up 1%.

Shares in Wal-Mart fell 79 cents on the news to $46.10. In the previous 52 weeks, shares have ranged between $42.31 and $52.15.

Wal-Mart's sales troubles come while other retailers' cash registers are ringing loudly -- the opposite of what has occurred for much of the last 10 years.

For the year, Wal-Mart has an average monthly same-store sales gain of 2.2%, compared with 4.9% for Target Corp. and 6.6% for Kohl's Corp., according to the International Council of Shopping Centers.

"I think what was incredibly important for Wal-Mart in the '90s was that they would always beat on price," said Adrian D'Ambrosi, an analyst for Lord, Abbett & Co.'s Large Cap Growth Fund. "A lot of retailers have learned they don't have to compete with Wal-Mart on price anymore; they just have to offer better value."

For most of the year, Wal-Mart Chief Executive H. Lee Scott Jr. has blamed macroeconomic forces for the company's woes, noting that its core lower-income consumers were particularly hard hit by soaring gas prices.

But in the fall, when gas prices stabilized and the rest of the retail industry rallied, Wal-Mart continued to suffer. Scott was forced to acknowledge other problems.

Moves to spruce up the company's fashion offerings went "too far, too fast," Scott told analysts this fall.

The bid to offer more fashionable apparel was a bid for Target's business. With designer names and fashion flair, Target has made customers comfortable buying dental floss and flirty dresses under one giant, uber-hip roof.

But such across-the-store buying is the Holy Grail of discount retailing, which brings in customers for its commodities but covets the fat profits of apparel and other soft goods.

Wal-Mart found out that though its edgier Metro7 line for women sold well in several hundred stores, the line's skinny jeans and other higher-style fashions bombed when the company expanded it to 3,000 stores.

Scott also said Wal-Mart's bid to overhaul 1,800 stores "created a higher level of customer inconvenience than we had anticipated." That project has been halted for the holidays and will resume in January.

At the same time, the company is facing tough sales comparisons because of unusual events a year before -- money pumped into stores as people rebuilt after hurricanes Katrina and Rita.

Earlier this fall, Wal-Mart moved to mollify investors.

The company shaved capital expenditures, which will grow 12% to 15% this year to about $18 billion, to only 2% to 4% next year.

It's also scaling back square-footage growth from 8% this year to 7.5% next year to focus on improving performance at existing stores.

And Wal-Mart is exiting Germany and South Korea after years of struggles in both countries.

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