Black Friday: Wal-Mart's triple whammy

Welcome to another make-or-break holiday retailing season for discount retailers.

By The Fiscal Times Nov 19, 2012 6:56PM
Wal-Mart store in Secaucus, New Jersey / Jin Lee/Bloomberg via Getty ImagesBy Suzanne McGeeThe Fiscal Times logo

The decorations are ready, the sales are set and the Black Friday deals will once again start earlier than ever. Welcome to another make-or-break holiday retailing season for discount retailers.

Take Wal-Mart (WMT), for instance. The giant retailer lost a chunk of its market share to the dollar stores during the recession and finally saw some strong sales growth in the first half of 2012 only to see a slower gain in the third quarter. Now, as Wal-Mart tries to ramp up its profit margins, it is facing a triple whammy: a potential Thanksgiving strike by employees, fears that Americans are too wary about the economic challenges that lie ahead to spend heavily during the holiday shopping season and the need to compete with rivals in offering deals while still sustaining its margins.

It’s likely to get harder and harder for Wal-Mart and its rivals to pull off feats like that. Wal-Mart announced a profit of $1.08 a share last week for its third quarter. While that was up from 96 cents a share last year, and ahead of forecasts by 1 cent, revenue growth fell short of expectations, and same-store sales climbed only 1.5%, below the 4.6% analysts had anticipated.

Jharonne Martis-Olivo, retailing analyst at Thomson Reuters, points out that analysts believe the fourth quarter will be stronger and are now looking for 1.9% growth in same-store sales in the period, in large part because of the big incentives they will be offering to shoppers. As Martis-Olivo points out, the holiday season is becoming increasingly competitive, with retailers offering holiday deals earlier than ever before, being more aggressive with price-matching offers and providing extras, such as layaways or same-day pickup.

Some of the struggles that this group of retailers faces are the fault of the economy, as wage growth remains anemic or non-existent; the unemployment rate remains high and fuel prices are still at high levels. Now, with the fiscal cliff looming large on the horizon, anxiety is growing among consumers that their after-tax paychecks won’t be large enough to cope with credit card payments come January. A survey by Ipsos for RBC Capital Markets revealed that 60% of consumers said they intend to cut their holiday spending ahead of the fiscal cliff, while the National Retail Federation says it expects a slight dip in the number of people with plans to visit stores on Black Friday and the rest of the official kickoff to the holiday shopping season.

Some retailers among Wal-Mart’s peers are struggling with problems of their own making. JC Penney (JCP), for instance, embarked on a radically different business model and its new message has cost it the loyalty of consumers who love the idea of getting bargains every day. The result has been a disaster, with some analysts now questioning whether the century-plus old company can stay a going concern. (Martis-Olivo says Penney is likely to see same-store sales fall 15.9% in the fourth quarter.) Meanwhile, Martis-Olivo points out that analysts believe Sears (SHLD) needs a major restructuring if it is to woo customers by offering an enjoyable shopping experience.

Certainly, the pressure is on retailers like Wal-Mart and Target (TGT) to offer big deals, and it will be tough to balance that against the need to maintain margins. For many chains, it may end up as a kind of tug-of-war between maintaining same-store sales levels and market share on the one side and, on the other, keeping margins at a reasonable level. Either way, this period -- from this week until the end of December -- is a make-or-break time for Wal-Mart, Target, Kohl’s and all their rivals. Sales account for a fifth or more of all their sales for the year, and if they don’t do well, it will be hard for them to post respectable year-end earnings.

Investing in these stocks today may be a risky proposition as a result – at least, you’d be gambling that they pull it off and that price conscious consumers are less cautious than many fear they have become. In contrast, you may want to look at specialty retailers: apparel stores, like Gap Stores (GPS) or Ann, Inc. (ANN), which owns and operates the Ann Taylor and Loft chains, or footwear stores like Foot Locker or Finish Line, for instance. Even if consumers scale back on buying yet another flat-screen TV or other appliance, they’ll be snapping up on-trend merchandise that these apparel stores have been delivering steadily all year, or buying the latest athletic footwear for their kids.

These specialty retailers fall in between the luxury retailers -- those who count on affluent individuals to spend heavily -- and the value-driven retail model that dominates at Target, Wal-Mart and JC Penney. Price and value are important, but if the Gap continues to offer great fashions at affordable prices, it doesn’t have to offer "buy one, get one free" sales every week in order to move the merchandise. Of the 39 apparel retailers that Thomson Reuters tracks, Martis-Olivo expects 31 of them to report positive earnings growth, with some of the biggest gains in same-store sales and profits likely to come from Ann, Inc.

Without a resolution to the fiscal cliff dilemma, and absent any improvement in the unemployment rate, odds are that those retailers that cater primarily to the segment of the population for whom low prices are key will continue to struggle to respond to the competing demands of their investors and shoppers. Absent some clarity on these fronts -- or more evidence that Wal-Mart and its peers are navigating these tricky waters more adeptly -- it might be best to get your retail exposure this Black Friday from another source.

Suzanne McGee is a columnist at The Fiscal Times. Subscribe to The Fiscal Times' FREE newsletter.

More from The Fiscal Times

Nov 20, 2012 6:13PM
The strikes will only make walmart stronger. Thats a lot of free advertising the employees are giving and the media is all over it.  i think ill buy more of their stock its only going up
Nov 20, 2012 6:09PM
LMFAO     Walmart will be just fine with or with out you. If walmart cant make it then were in trouble because it dont get any cheaper then that
Nov 20, 2012 12:52PM

Natural Blonde

I appreciate your honesty. A lot of posters complain about Walmart and say that they never would buy from them BUT probably about 80% of them have shopped there within the last six months or at least had someone pick-up something from there. Give us a break, liars. When the governement is given permission by the votors to set the prices on services the individuals have NO choice but to pay that price for what they need. When the competition in the private sector determines the price of goods and services the company that does the best in the private sector is considered evil.

Let the marketplace determine what the price of an item will be rather than the goverment. The increase in freeway tolls, gas tax, property tax, postage, public schools, and anything else the goverment takes control of is beyond our control and we are stuck receiving poor service . I Now we have Socialized Medicine. One price take it or leave it but if you leave it you will be fined or serve jail time AND you have to have it before getting a new job by 2014. 

Nov 20, 2012 12:31PM
for usa/no party.are you kidding.their stuff falls apart.i call it fall apart w-mart.
Nov 20, 2012 11:35AM

I wish Wal-mart still sold gas it was cheap.I`d hate to compete with Wal-mart.I hate what

they`re doing to us, but we we go there 2 times a week.

Nov 20, 2012 7:49AM
Hi, there is no strike at Wal-Mart , there is 1 person who is acting crazy, the other 2 million Wal-Mart workers need there jobs and are GRATEFUL like me to have such a good 40 hour a week full time job with Great benefits!
Nov 19, 2012 11:50PM
Are you kidding about the loss of sales to the Dollar Stores?  Those Dollar stores don't have groceries, tires, paint, pharmacies and no clothes.  The dollar stores I go in just have China Junk.
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