Wal-Mart: A Harbinger of Retail Doom?

Is Wal-Mart Stores (NYSE: WMT  ) losing its recessionary edge? Or did its third-quarter results simply reflect an economic situation so gloomy that it may spell doom for weak retailers?

Third-quarter profit at Wal-Mart increased 3.2% to $3.24 billion, or $0.84 per share. The good news, I guess, is that its quarterly profit beat analysts' expectations of $0.81. The company's revenue increased 1.1% to $98.67 billion, but that figure missed analysts' predictions. Meanwhile, excluding fuel, U.S. same-store sales fell 0.4% in the quarter.

Some investors must have taken Wal-Mart's news well, judging by the stock's rise yesterday. But one quarter's decent results don't guarantee a jolly holiday season for the entire retail sector. In its earnings release, Wal-Mart cited a continued difficult sales environment, and emphasized ongoing price deflation in food and electronics, which eroded gross margin by roughly 60 basis points in the quarter. When even the king of rock-bottom prices worries about diminishing pricing power, the retail business as a whole could be in serious trouble.

Increasingly beset by a tough economy, Wal-Mart recently threw down the gauntlet for the holiday season, essentially announcing that it won't be beaten on price. That's a chilling prospect for rivals like Target (NYSE: TGT  ) , Sears Holdings (Nasdaq: SHLD  ) , and Costco (Nasdaq: COST  ) . Wal-Mart's price warrior presence in niche areas such as books will also affect retailers such as Amazon.com (Nasdaq: AMZN  ) , Borders (NYSE: BGP  ) , and Barnes & Noble.

Even though investors have been heartened by reports of tenuous economic "growth," we still face high unemployment, shoppers' widespread fears about their job security, and a host of other serious problems. Wal-Mart should continue to enjoy recessionary boost for a while to come, as consumers trade down to save bucks where they can. Indeed, the company gained market share in the U.S., the U.K., and Mexico in the quarter.

However, Wal-Mart's tidings give investors serious food for thought when they contemplate buying retail stocks. Price wars are one thing, but if consumers can't or won't open their wallets, retailers will have to adjust. Pinching prices could seriously hamper these companies' growth, even for discounters such as Wal-Mart. And let's not even contemplate what forced discounts could mean for luxury retailers like Nordstrom (NYSE: JWN  ) .

Now more than ever, investors need to seek out companies that can survive and thrive even in tough times. Regardless of stock market rallies and word of improving economic indicators, it's many consumer-facing companies remain locked in a Darwinian battle for the survival of the fittest.

What did you think of Wal-Mart's quarterly results? What tidings will the holidays bring to the overall retail sector? Share your thoughts in the comment boxes below.

Wal-Mart, Costco, and Sears Holdings are Motley Fool Inside Value picks. Amazon.com and Costco are Stock Advisor picks. The Fool owns shares of Costco. Try any of our Foolish newsletter services free for 30 days.

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


Read/Post Comments (13) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 13, 2009, at 2:37 PM, LeonPet wrote:

    Walmart went through some serious cost cutting projects which haven't be realized this past quarter. With higher eletricity price in 2010, it going to be harder than ever for other stores to compete. Walmart has the best brains in the country, never forget that.

  • Report this Comment On November 13, 2009, at 2:49 PM, lemoneater wrote:

    Walmart has a much, much smaller book selection than Barnes & Noble so I don't see them as much of a threat in this specific category.

  • Report this Comment On November 13, 2009, at 2:52 PM, lemoneater wrote:

    I don't see Walmart as a serious threat to Barnes & Noble because Walmart has a much, much smaller book selection. Also I rarely buy DVD's at Walmart because the one near me doesn't carry British mysteries or Ken Burn's documentaries.

  • Report this Comment On November 13, 2009, at 6:27 PM, SwampBull wrote:

    Agree with lemoneater on the books comment - most Walmarts have paltry, disorganized book sections with little of value to fans of real literature. All the pulp romances you could ask for, but don't look for anything with substance.

  • Report this Comment On November 14, 2009, at 1:21 AM, gman863 wrote:

    My take is Wal-Mart is facing a greater degree of competition in larger cities. Key competitors in groceries and electronics have honed in on Wal-Mart's weaknesses and are exploiting them to gain back market share.

    In the Houston area, Wal-Mart's grocery prices are (at best) roughly equal to Kroger or H-E-B. Both Kroger & H-E-B carry more specialty items and both offer fresher meat without the additives in the vacuum sealed meat found at Wal-Mart. For the same price you get better quality and don't have to cover 40 acres to find what you need.

    Ditto for electronics. Compare Wal-Mart's prices on TVs & PCs: Best Buy is usually about the same on identical or similar items and has a far better selection. In markets with additional competition (Fry's, hhGregg, Conn's, etc.), Wal-Mart's pricing is no bargain at all.

  • Report this Comment On November 14, 2009, at 1:22 AM, gman863 wrote:

    My take is Wal-Mart is facing a greater degree of competition in larger cities. Key competitors in groceries and electronics have honed in on Wal-Mart's weaknesses and are exploiting them to gain back market share.

    In the Houston area, Wal-Mart's grocery prices are (at best) roughly equal to Kroger or H-E-B. Both Kroger & H-E-B carry more specialty items and both offer fresher meat without the additives in the vacuum sealed meat found at Wal-Mart. For the same price you get better quality and don't have to cover 40 acres to find what you need.

    Ditto for electronics. Compare Wal-Mart's prices on TVs & PCs: Best Buy is usually about the same on identical items and has a far better selection. In markets with additional competition (Fry's, hhGregg, Conn's, etc.), Wal-Mart's pricing is no bargain at all.

  • Report this Comment On November 14, 2009, at 11:44 AM, TMFLomax wrote:

    Thanks for the comments everyone! Keep 'em coming!

    One thing about the books, though... I think bestsellers actually make up a huge amount of what books get sold overall (as much as not ALL of us are only interested in those). In that way discounters like Wal-Mart are a major threat to booksellers since they will be focusing on those...

  • Report this Comment On November 14, 2009, at 7:10 PM, insidermanP3 wrote:

    Even in your somewhat more truthfull article you fail to mention that once you include all of sam's club sales, Comp sales loss amount to closer to a -1% even after all of walmarts number finagling. The really sad part, is that almost all o the profit increase came off the walmart associate's backs! The "PRODUCTIVITY INCREASE" that the CFO touts so loudly came from huge cuts on the highly tenured "hourly managers" and a huge amount of cuts in the hours of workers. Most that were averaging 40 hours a week now average 34! How long can they keep this up? Well we've seen all the saving there going to get, but there is a down side. Last time they tried to increase profits in this way, they did save about a billion in payroll for the year, but SHRINK came in OVER a BILLION HIGHER, and accident costs and healthcare cost also soared, for a huge number DOWN in profit. And not to mention the customer service, in amount and quality tanked. Another savings walmart got, that will cost them later, is the huge reduction in markdowns, that has clogged almost every store in the market with unsellable merchandise! They will have to take the loss sometime. . I'v never seen a company "steal from the poor to give to the rich" get far, it cost them dearly a few years back, history shows it will cost them more dearly a second time. What it all amounts to is while WMT is in the 50's or even 40's SELL SELL SELL

  • Report this Comment On November 15, 2009, at 8:27 PM, Charles577 wrote:

    I've always said that when Walmart adopts Kmart's bait and switch pricing it will be all over for them. Until this evening, I had never had even one such experience in a Walmart. Five out of twenty-four items in the basket rang incorrectly. Had to join Motley Fools just to let this be known. Make of it what you will.

  • Report this Comment On November 15, 2009, at 9:00 PM, mettlemutt wrote:

    Insiderman knows what he is talking about. Walmart has profited of the backs of their associates. Markdowns are way down and wages are being cut. Shelves are empty when the customers are shopping because nobody is there to stock the shelves. No cashiers.....long lines. Walmart has an excellent supply chain, but drops the ball in the stores when it comes to instock and customer service. Walmart can't see the writing on the wall. Too bad, this was once a great company. And they wonder why the stock price has been stagnant for years??????

  • Report this Comment On November 16, 2009, at 4:44 PM, TMFLomax wrote:

    Insiderman, mettlemutt, thanks for bringing up the issue of how Wal-Mart treats its workers. I was very negative on Wal-Mart for a very long time because of this issue. It is interesting though... I think some of us have changed our tunes on Wal-Mart with the poor economic climate. It is, of course, still important but at the same time, low prices for beleaguered consumers can almost be interpreted as socially responsible in itself at this point. It is a bit of a quandary really.

    But, it is still a major issue, of course, and if things are as ugly as described, of course customer service will suffer because of unhappy employees and as soon as people have more resources/options they very well may flee to other retailers. It is certainly something to think about when contemplating Wal-Mart. I can think of retailers that DO treat their employees better (Costco is one example that springs to mind...). Thanks for bringing up these thoughts.

    Alyce

  • Report this Comment On November 17, 2009, at 6:07 AM, deanwest wrote:

    As has been noted in several of the previous comments, Walmart has a history of treating it's associates unfairly. However, there are many bigger issues to be dealt with in recognizing the harm that Walmart causes not just in our own backyards but around the world. A good example: Walmart's buying practices continues to increase the industrial manufacturing base of China. A manufacturing base that is in large part fueled by Iranian oil. China and Iran brokered the biggest oil & natural gas deal last year in the history of the planet. Oil & natural gas that will be used to run plants in China to manufacture products in large part for Walmart. Something to think about the next time your standing in a Walmart checkout line.

  • Report this Comment On November 18, 2009, at 2:52 AM, gman863 wrote:

    Mettlemutt makes a good point about the long checkout lines. Time is money. Unless I think I'll save at least 10 bucks on what I need in a single trip, the local supermarket or drug store is a better deal than blowing an extra 30 minutes on finding a parking place, wandering through a 200,000+ square foot store and waiting 20 minutes to check out.

    I've also noticed that the number of open checkout lines in Wal-Mart seems to vary based on market demographics - a polite way of saying their stores in richer suburban areas usually have better service and more open registers than those in lower and middle-income neighborhoods.

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