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Christmas Joy? No, a Bloody Battle for Bucks

Ah, the holiday season. Peace on earth, goodwill toward men. And behind the scenes in the retail world, brutal, no-holds-barred competition, with heavyweight contender Wal-Mart Stores (NYSE: WMT  ) out to utterly brutalize its rivals. Season's greetings!

Strong fourth-quarter performance is absolutely essential for retailers, since that period typically makes up almost 40% of U.S. sales. So nearly two full months before Dec. 25, the price wars have shifted into full swing. Wal-Mart has already announced its second (!) round of price cuts on popular toys. Back in September, Wal-Mart threw down the gauntlet when it announced it was offering 100 toys at just $10 each.

Another high-profile price war has been in the offing, this one concerning best-selling books. Some hardcover tomes by big-name authors are going for as low as $9, as retailers like Wal-Mart, (Nasdaq: AMZN  ) , and Target (NYSE: TGT  ) race to the bottom. Is it any surprise that downmarket retailers are slashing prices, when even traditionally price-insensitive luxury names such as Coach (NYSE: COH  ) now have to do much the same (albeit in their own understated way)?

You've got to wonder what will become of any weaker retail names that may want a piece of the action. Sears Holdings (Nasdaq: SHLD  ) , Borders Group (NYSE: BGP  ) , or (Nasdaq: OSTK  ) just don't have the financial or marketing muscle to really make a game of it.

Wal-Mart has thrown down the gauntlet. "We will not be beaten in price this holiday season, and we hope that will draw comparable store sales," Vice Chairman Eduardo Castro-Wright said in mid-October. When it comes to attracting shoppers, no one should underestimate Wal-Mart's fearsome firepower.

Not long ago, Wal-Mart's low-price salvos blasted some of the biggest toy retailers into financial distress or bankruptcy. FAO Schwarz and KB Toys suffered repeated bankruptcies before being swallowed by Toys "R" Us, whose own survival looked dicey several years ago, when it faced its own price war against Wal-Mart.

Price wars don't just hurt competing retailers; they can also squeeze manufacturers and suppliers. If shoppers get used to $10 toys or books, the companies that make them could find themselves forced to accept thinner margins in the long run.

Wrapping up tons of toys, books, and other merchandise at low, low prices will work out great for consumers on tight holiday budgets. However, investors need to recognize that the holiday season is crucial for retailers. Ruthless price wars could curtail sales and profits for many companies. That's yet another good reason to make sure your portfolio consists of strong, fiscally fit businesses. If Wal-Mart's declaring war this holiday season, its jingle bells might toll a death knell for any weaker companies in its way. and Coach are Motley Fool Stock Advisor recommendations. Sears and Wal-Mart are Inside Value selections. Try any of our Foolish newsletters free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.

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  • Report this Comment On November 04, 2009, at 9:52 PM, EditorJim wrote:

    Specifically with Borders, the ONLY number that will mean anything coming out of the 4th quarter is how much of the $350M of debt they can pay off (market cap $125M). Paying down just over $200M last year was the big bright spot and single-handedly drove the share price out of the penny-stock range. A similar performance this year is the only thing that will grow shareholder equity.

    With a nearly 20% drop in sales and much thinner margins on what's left because of this price competition, I think the best they can hope for is half that. Expect a lot of underperforming stores, as many as 100 superstores, to be closed next year to bring operations in line with what looks to be a permanent market share realignment.

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