2Q profits at Wal-Mart and Kohl's beat forecasts

[August 14, 2009]  WASHINGTON (AP) -- Retailers are waking up to something a bit scary -- all that penny-pinching and fixation on necessities may not be going away. It could be the new reality.

As Wal-Mart Stores Inc. and Kohl's Inc. reported second-quarter earnings Thursday that beat Wall Street expectations, they're preparing for U.S. consumers' newly adopted frugality to be the "new normal" as they don't expect consumer spending to recover anytime soon.

Lower-priced stores may be suffering less than other retailers during the recession, but that still presents big challenges.

Wal-Mart saw an unexpected drop in same-store sales at its U.S. stores for the quarter. Spokesman John Simley said the quarterly decline is believed to be Wal-Mart's first ever, but noted that same-store sales would have been flat without food price drops. Same-store sales is a key industry metric comparing year-over-year sales at stores open more than a year.

Customers at Wal-Mart, the world's largest retailer, are paying for more of their purchases in cash or with debit cards than with credit cards, said Tom Schoewe, Wal-Mart's CFO. And they keep buying less-expensive products and smaller amounts.

"Our customers are more disciplined in their spending," Mike Duke, Wal-Mart's president and chief executive, told investors during a prerecorded call Thursday. "There is a new normal now where people are saving more, consuming less and being more frugal and thoughtful in their purchases."

Kevin Mansell, president and CEO of Kohl's, told The Associated Press that retailers should lower their expectations for holiday shopping.

"Last holiday was horrible, but our attitude is that last holiday is the new reality," said Mansell. If things go better this year, Kohl's can quickly adjust to increasing demand, he added.

The sobering assessment of consumer spending came as the Commerce Department reported that retail sales fell 0.1 percent last month, underscoring worries about when the U.S. will recover from the worst recession since World War II.

Consumer spending accounts for 70 percent of all U.S. economic activity. For retailers, sustained lower spending levels may result in more consolidation. And shoppers may see fewer stores to choose among and fewer styles in those stores as merchants keep inventory lean.

"You will see many more closing of suppliers, stores and malls," said retail consultant Burt P. Flickinger III, who predicts five more years of frugality. "Stores can cut expenses so long. They have to see increased sales."

As shoppers switch to lower-price stores and focus on necessities during the recession, Wal-Mart has resonated with more affluent consumers as it spruces up its merchandise and stores. Similarly, moderate-price department store operator Kohl's has fared better than upscale department stores.

Wal-Mart foresees same-store sales in the current quarter between flat and 2 percent higher than a year earlier, and it raised its full-year profit guidance to $3.50 to $3.60 per share, from $3.45 to $3.60 per share.

In the quarter that ended July 31, Wal-Mart earned $3.44 billion, or 88 cents per share, while revenue fell 1.4 percent to $100.08 billion. Analysts surveyed by Thomson Reuters projected earnings per share of 85 cents on revenue of $102.9 billion.

The company's international sales fell 5.1 percent, hurt by the impact of currency exchange rates. But on a constant currency basis, international sales increased 11.5 percent. Wal-Mart's namesake store sales were up 0.3 percent, while Sam's Clubs sales dropped 3.2 percent.

But Wal-Mart's same-store sales in the U.S. slipped 1.2 percent during the period, compared with a 4.3 percent gain a year earlier.

Wal-Mart, which stopped its monthly report of same-store sales after it announced April's, had forecast flat to 3 percent higher same-store sales for the quarter. Sam's Clubs had a 0.6 percent increase, while Wal-Mart outlets' same-store sales fell 1.5 percent.

"That was a significant miss," said Ken Perkins, president of research firm Retail Metrics. "It shows significant weakness in the consumer."

At Wal-Mart's namesake stores, deflation in groceries and electronics depressed the figure by 1.5 percentage points, so sales would have been flat from a year ago -- still sluggish. The company also said it underestimated the extra business stores received from the stimulus checks a year ago.

Wal-Mart shares rose $1.19, or more than 2 percent, to $51.70.

Kohl's earned $229 million, or 75 cents per share, for the period that ended Aug. 1, topping the 74 cents-per-share profit that analysts polled by Thomson Reuters expected. Revenue rose 2 percent to $3.81 billion from $3.73 billion to surpass Wall Street's estimate of $3.79 billion.

Kohl's same-store sales showed some weakness, falling 2.3 percent during the quarter. But same-store sales of accessories like handbags, home goods and footwear were positive, the company said. Mansell said the demise of Linens 'N Things last year might be helping sales in its home category.

Shares of Kohl's slipped 38 cents to $51.89 as investors were disappointed with its conservative quarterly and full-year outlooks.

[Associated Press; By ANNE D'INNOCENZIO]

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