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Black Friday: Wal-Mart Faces a Triple Whammy

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As the retail giant tries to ramp up its profit margins, it is facing a potential employee strike, fears that Americans are too wary to spend heavily during the holiday shopping season, and the need to compete with rivals.

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The decorations are ready, the sales are set, and the Black Friday deals will once again start earlier than ever. Welcome to another make-or-break holiday retailing season for discount retailers. Take Wal-Mart Stores (NYSE:WMT), for instance. The giant retailer lost a chunk of its market share to the dollar stores during the recession and finally saw some strong sales growth in the first half of 2012 only to see a slower gain in the third quarter. Now, as Wal-Mart tries to ramp up its profit margins, it is facing a triple whammy: A potential Thanksgiving strike by employees, fears that Americans are too wary about the economic challenges that lie ahead to spend heavily during the holiday shopping season and the need to compete with rivals in offering deals while still sustaining its margins.

It's likely to get harder and harder for Wal-Mart and its rivals to pull off feats like that. Wal-Mart announced a profit of $1.08 per share last week for its third quarter. While that was up from $.96 per share last year, and ahead of forecasts by $.01, revenue growth fell short of expectations, and same-store sales climbed only 1.5%, below the 4.6% analysts had anticipated.

Jharonne Martis-Olivo, retailing analyst at Thomson Reuters, points out that analysts believe the fourth quarter will be stronger and are now looking for 1.9% growth in same-store sales in the period, in large part because of the big incentives they will be offering to shoppers. As Martis-Olivo points out, the holiday season is becoming increasingly competitive, with retailers offering holiday deals earlier than ever before, being more aggressive with price-matching offers and providing extras, such as layaways or same-day pickup.

Some of the struggles that this group of retailers faces are the fault of the economy, as wage growth remains anemic or non-existent; the unemployment rate remains high and fuel prices are still at high levels. Now, with the fiscal cliff looming large on the horizon, anxiety is growing among consumers that their after-tax paychecks won't be large enough to cope with credit card payments come January. A survey by Ipsos for RBC Capital Markets revealed that 60% of consumers said they intend to cut their holiday spending ahead of the fiscal cliff, while the National Retail Federation says it expects a slight dip in the number of people with plans to visit stores on Black Friday and the rest of the official kickoff to the holiday shopping season.

Some retailers among Wal-Mart's peers are struggling with problems of their own making. JC Penney (NYSE:JCP), for instance, embarked on a radically different business model and its new message has cost it the loyalty of consumers who love the idea of getting bargains every day. The result has been a disaster, with some analysts now questioning whether the century-plus old company can stay a going concern. (Martis-Olivo says JC Penney is likely to see same-store sales fall 15.9% in the fourth quarter.) Meanwhile, Martis-Olivo points out that analysts believe Sears (NASDAQ:SHLD) needs a major restructuring if it is to woo customers by offering an enjoyable shopping experience.
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