Why Wal-Mart's Biggest Threat Isn't Amazon

Wal-Mart (WMT 1.60%) will release its quarterly report on Thursday, and despite a long period of sluggishness, the stock has finally made investors happy again by rising to new all-time record highs. Analysts make much of the company's ongoing battle with Amazon.com (AMZN +3.47%) as the war between online and brick-and-mortar retailers wages on. But Wal-Mart has also lost some of its competitive advantages against its traditional retail rivals, with Costco (COST 0.32%) and Target (TGT 0.70%) producing better growth through strategies aimed at distinguishing themselves from their peers.

Wal-Mart has come a long way since its terrible performance from 2009 to 2011, in which it posted nine straight quarters of falling same-store sales. Yet over the past two quarters, Wal-Mart has once again fallen into its old ways, with a 0.6% drop in overall U.S. same-store sales in the first half of the fiscal year showing the retailer's continuing growth struggles. Given the much faster pace of revenue growth at Amazon and even Costco's impressive sales gains lately, Wal-Mart needs to up its game once again. Let's take an early look at what's been happening with Wal-Mart over the past quarter and what we're likely to see in its report.

Stats on Wal-Mart

Source: Yahoo! Finance.

How can Wal-Mart fight harder?
In recent months, analysts have reined in their expectations on Wal-Mart earnings, cutting October-quarter estimates by more than 3% and trimming full-year fiscal 2014 and 2015 projections by about a dime per share. The stock, though, has kept rising, picking up another 3% since early August.

Wal-Mart has long had the reputation of being the low-price leader for retail, and that has led to countercyclical financial results that might have contributed to poor performance in a rebounding economy. In its July-quarter earnings report, Wal-Mart cut its guidance for the remainder of the fiscal year, pointing to customer concerns about their jobs and the costs they face for food and energy. Even though rival Target also reported troubling results, it at least posted a solid gain in same-store sales.

There's no denying that Amazon has been a thorn in Wal-Mart's side for years. The latest example comes from Amazon's deal with the U.S. Postal Service to offer Sunday delivery, which further increases Amazon's ability to get goods to customers quickly enough to satisfy many shoppers. Wal-Mart has been offering same-day delivery of groceries and some household goods, but the arms race to ever-faster delivery options still takes away from Wal-Mart's core business of having customers actually come into its stores.

Beyond Amazon, though, Wal-Mart has also lost touch in part with its once-loyal customer base. Moves to incorporate grocery offerings in its stores have made Wal-Mart more of a one-stop shopping destination, but they've also drawn attention away from the other higher-margin offerings that used to drive Wal-Mart's overall growth. By contrast, Target has sought to raise its cachet with name-brand designer partnerships and other efforts to make stores more attractively designed. As a result, Wal-Mart and Sam's Club have seen growth fall well behind Target and Costco, let alone Amazon.

The big question facing Wal-Mart is whether it can break its countercyclical reputation. Historically, as shoppers get more money to spend, they've been more likely to spring for a membership at Costco or to pay slightly higher prices at Target to get what they perceive as a higher-quality shopping experience. Wal-Mart needs to break that cycle and woo customers beyond its traditional base to keep shopping there even if their economic fortunes improve.

In the Wal-Mart earnings report, watch to see if the company can come up with an innovative way to attract either its existing customers to shop more or a new set of potential shoppers to boost sales. Without changing the business-as-usual attitude, Wal-Mart could continue to languish even as retail rivals pass it by.

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