Wal-Mart Watching: Same-Store Numbers Scrutinized

Keep an eye on Wal-Mart ( WMT).

The retail giant on Monday reported same-store sales at the low end of its guidance for the first week of December. The disappointing sales figures follow similar results for the month of November. Last week, Wal-Mart reported that its same-store sales last month grew by 2.6%, toward the bottom of its projected range of 2% to 4%.

The weak holiday sales so far call into question the company's ability to meet Wall Street's expectations for its fourth-quarter results, said Bill Dreher, an analyst with W.R. Hambrecht, in a research note issued Monday. Wall Street analysts expect Wal-Mart to post profits of 55 cents per share in its fourth quarter, which ends Jan. 31.

"While the company still expects to make its sales plan for the month, we believe that the shorter holiday selling season, aggressive promotional environment and more conservative consumer spending may limit upside and weigh on the shares," Dreher said in his report. (W.R. Hambrecht does not have an investment banking relationship with Wal-Mart.)

The questions about Wal-Mart's revenue and growth come as the company valuation is also under scrutiny. Wal-Mart is trading at nearly 30 times its projected earnings for its current fiscal year, well above its historic average, Dreher noted. The company's shares closed down $1.19, or more than 2%, to $51.85 on Monday. Wal-Mart's stock is down about 10% year to date.

Wal-Mart had projected that its December same-store sales would grow between 3% and 5% from a year ago. Same-store sales figures compare sales made by stores open for at least a year. Although the company's sales came in at the low end of its range last week, Wal-Mart reaffirmed its guidance on same-store sales for the month.

Last week's cold weather, which dumped snow on much of the country, decreased foot traffic in its stores, Wal-Mart said. However, the company said that the two areas that performed the best were its stores in the Northeast and the Midwest, both of which were severely affected by the winter weather.

The company said its weekly results were also affected by poor food sales following the Thanksgiving holiday and weak sales of seasonal merchandise.

"Sales over the weekend were softer than expected," the company said in a conference call on Monday.

The slow sales at Wal-Mart are a symptom of the problems in the broader economy, said Kurt Barnard, a retail industry consultant and president of Barnard's Retail Trend Report. With the unemployment rate increasing from 5.7% in October to 6% in November, consumers are becoming more cautious about their spending, he said, noting that many retailers posted same-store sales declines last month.

"You're dealing with an extremely cautious consumer who is spooked, truly spooked about all the announcements about layoffs," Barnard said. "Everyone gets hit when consumers look at the price tag before looking at the product."

On top of that, Wal-Mart is having to top strong revenue growth last year, when it posted same-store sales gains of more than 4% for November and 8% for December, noted Dreher. Additionally, the shortened holiday season could well mean that consumers don't spend as much this year, he said. Thanksgiving, the traditional start to the holiday shopping season, fell one week later than normal this year, truncating the amount of time shoppers have to purchase Christmas gifts.

"With the abbreviated holiday selling season, we believe most consumers will run out of time, and while achieving the breadth of gifts, may not offer the same depth of gifts," Dreher said in his note.

But Wal-Mart's troubles could be more than a seasonal problem. The company is being affected by the price revolution it helped foment, said Richard Hastings, chief economist of New York-based Cyber Business Credit.

With prices falling across the board at retailers, Wal-Mart is losing its price advantage, Hastings said. In fact, it might find itself at a disadvantage because better-quality goods are becoming available at cheaper prices at other stores, he said.

Wal-Mart's already made its system about as efficient as it possibly can, so it's not going to be able to drop prices much further to boost sales, Hastings said. Meanwhile, the company has had a difficult time persuading more affluent shoppers to purchase at its stores, he said.

"Is this a seasonal thing? Is Wal-Mart having a head cold this winter? No, this is it. This is what it's going to look like in the future," said Hastings. "They've got some serious futuristic planning to do over there in order to get the growth rate going, and this is definitely going to impact future earnings."

But others think Wal-Mart will be just fine, both this holiday season and in the long term.

As disappointing as Wal-Mart's sales figures might have been for the last five weeks, other retailers "would give their left arm and their right arm" to post similar numbers, Barnard said.

Discount retailers in general and Wal-Mart in particular are poised to do well this holiday season, said John R. Lawrence, who covers Wal-Mart for Morgan Keegan & Co. At this point, there's nothing to be concerned about with Wal-Mart, he said.

"There's some heavy shopping days between now and Christmas," Lawrence said. "Wal-Mart will get its share." (Morgan Keenan does not have any investment banking business with Wal-Mart.)

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