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.
