Wal-Mart's (NYS: WMT) third-quarter results summed up a retailer that's stuck between a rock and a hard place. The discount giant has finally reversed the course of its long-declining U.S. sales. However, Wal-Mart has sacrificed some profitability in its drive to lower prices to increase sales.
Third-quarter net income from continuing operations dipped 2.9% to $3.34 billion, or $0.97 per share. On the other hand, Wal-Mart's net sales increased by 8.1% to $110.23 billion.
Wal-Mart's much-watched same-store sales metric in the U.S. improved, reversing course after a very long string of dwindling quarters. Stripping out fuel, Wal-Mart's total U.S. comparable-store sales increased by 1.9%, compared to a 0.7% drop this time last year; comps for its U.S. Wal-Mart stores increased 1.3% without fuel impact, compared to a 1.3% decline last year.
There's good news and bad news in the comps number. The good news is, customers who came into U.S. Wal-Mart stores spent more, but the bad news is that the total amount of customer traffic declined. Clearly, Wal-Mart's troubles aren't over -- it still needs to woo more customers.
It's going to be a difficult and highly competitive holiday season for Wal-Mart and its rivals like Target (NYS: TGT) , Best Buy (NYS: BBY) , and Sears Holdings (NAS: SHLD) , not to mention the online competition from Amazon.com (NAS: AMZN) . Wal-Mart admitted that the economy's still dragging on its customers, and CEO Mike Duke said its stores are "continuing a strategy of investing in low prices for the holidays."
Not only has Wal-Mart brought back layaway to lure financially strained consumers (particularly hurting Sears and Kmart, which pioneered the return to layaway options), it also sounds like Wal-Mart's gearing up to be an even more aggressive price warrior than ever -- a fairly scary thought for other retailers, really.
Further, retailers have advertised their desperation with "early" Black Friday openings this year. Target, Best Buy, Macy's (NYS: M) , and Kohl's (NYS: KSS) will all open their doors to shoppers at midnight; Wal-Mart has inserted itself into Thanksgiving itself by announcing it will open at 10p.m. on Turkey Day. Toys R Us has tried to one-up everybody with plans to open its doors at 9 p.m. Thanksgiving.
Wal-Mart's biggest story is how much it can hurt retail rivals by offering rock-bottom deals and other aggressive methods to coax customers into its stores. In so doing, it may bring more shoppers in, but it will sacrifice its profit margins. The fact that its U.S. comps showed improvement is an important reversal, but given the whole "rock, meet hard place" factor in what Wal-Mart's touting as its "price leadership," there's no resounding reason to buy shares of Wal-Mart right now.
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At the time thisarticle was published Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool owns shares of Best Buy and Wal-Mart Stores. Motley Fool newsletter services have recommended buying shares of Wal-Mart Stores and Amazon.com. Motley Fool newsletter services have also recommended writing covered calls in Best Buy and creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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