Wal-Mart, Cheaper By the Dozen? Not Quite.

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This year Wal-Mart Stores Inc. has been struggling to keep its image as the store that offers the lowest prices.

THE STORY

It has managed to show profits over the second quarter but its low-income customers worried about job security, rising costs and their finances and this has been reflected in its sales. The company has thus experienced a second year of sales slump.

Since the recession Wal-Mart may have to now reconsider its motto of Save Money. Live Better. Based on surveys by retail consultants, analysts and brand experts customers who searched for better deals sometimes found them at competitors such asDollar General Corp.

Reports released on July 31 showed that Americas largest retailer reported a profit of $3.8 billion exceeding the expected $3.6 billion. The performance has mainly been a result of the progress in international markets, but within the U.S. the business has stayed weak.

CUSTOMERS ON A BUDGET

Wal-Mart’s U.S. business, which accounts for some 60% of its $419 billion in annual revenue but the sluggish economy has made buyers frugal about their spending. To stretch their budgets, shoppers turned to cheaper items and private-label brands Wal-Mart executives said during an earnings call on Tuesday. “The competitive landscape has changed,” says Wendy Liebmann, chief executive of consultancy WSL/Strategic Retail, which recently surveyed 1,500 Wal-Mart shoppers and found that 86% no longer thought it had the lowest prices.

Although Wal-Mart’s reputation for low prices may be waning, price reviews show it still is the cheapest place for consumers to buy many household staples such as groceries, toilet paper and toothpaste. A recent Goldman Sachs GroupInc. survey of store prices in Chicago found that Wal-Mart prices on identical toys, foods and health and beauty aids were lower than Target’s across all categories and 6.2% less overall.

Morgan Stanley surveys also found similar results. “We were shocked to see 60% of Wal-Mart shoppers no longer viewed Wal-Mart as having the lowest prices,” says Morgan Stanley analyst Mark Wiltamuth, who expects the company’s U.S. same-store sales to decline for the rest of the year due to the image problem. “It is difficult to improve your price perception during a time of inflation.

SALES FLUCTUATIONS

A 0.9% decrease in sales was seen at U.S. Wal-Mart stores that have been open for at least a year, an important measure of a retailer’s health because it excludes the effect of store openings and closings. The analysts had expected a 0.6% drop and this was the 9th consecutive quarter of U.S. same-store sales declines for the chain.

Wal-Mart’s weak U.S. sales performance at its discount stores was offset by a 5% year-over-year same-store sales rise at Sam’s Club warehouse locations. Therefore, through the company, the total sales rose 5.5% to $108.6 billion in the second quarter.

In the week ended Aug. 13 sales went down 1.5%, according to the International Council of Shopping Centers. Flagging retail sales figures are raising doubts about consumer confidence amidst the economic difficulties.

REVERSING THE SPELL

Wal-Mart has been taking a number of steps to turn around its domestic sales numbers. For instance, it has opened smaller locations with more grocery options to increase competition with dollar stores, and shaking up its online management team as it looks to boost Internet sales.

In April the Bentonville, Ark., company announced that it was bringing back thousands of items to its stores this year, but with lower prices and by launching an advertising campaign to promote its price-match policy. The retailer said it would broaden its offerings by 8,500 items, while in 2009 the company had reduce its product assortment.

“It really lays the groundwork for more intense pricing competition in the retail landscape,” said John Tomlinson, a retail analyst at ITG Investment Research. “And if anyone’s going to win that war, Wal-Mart’s got the scale and muscle.”

WAL-MART LOOKING UP

Wal-Mart raised its full-year earnings outlook to $4.41 to $4.51 a share from $4.35 to $4.50 and by the end of the year it hopes to have positive same-store sales at its U.S. discount stores. Its shares rose $1.94, or 3.9%, to $51.92 on Tuesday.

Sources: Los Angeles Times, The Wall Street Journal, The Street

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