Thursday, November 30, 2006

Wal-Mart's decline unsettles retail sector

This is off MSNBC News:

Wal-Mart Stores Inc. unsettled the retail industry Thursday, reporting a sales decline for the first time in 10 years and warning that its holiday sales would be disappointing. The discounter’s news, coupled with a jump in unemployment benefit claims, raised concerns about the strength of the retailing sector at a critical time of the year.

Wal-Mart’s confirmation of weak November sales and its announcement that its December same-store sales gain would be no better than 1 percent came as the nation’s retailers reported an overall mixed performance for the month. Same-store sales reflect business at stores open at least a year and are the industry standard for measuring a company’s strength.

Wal-Mart’s disappointment was a sharp contrast with results from discount rival Target Corp., which beat Wall Street forecasts, and Federated Department Stores Inc., which far exceeded expectations. Other retailers had mixed sales; J.C. Penney Co. and Costco Wholesale Corp. both fell short of Wall Street projections.

Industry analysts generally believed the world’s largest retailer is struggling with its own internal problems, not an industry-wide malaise. Still, the discounter’s woes raised the possibility that it would incite increasingly aggressive price wars this season that would slice into retail profits. And a Labor Department report Thursday that showed a surprising increase in claims for jobless benefits last week added uncertainty to the outlook for holiday sales.

The timing of Wal-Mart’s news couldn’t have been worse, coming just after most consumers started holiday shopping. While many retailers had a strong Thanksgiving weekend, Wal-Mart warned Saturday that its November sales would be weaker than expected.

Wal-Mart’s 0.1 percent dip in same-store sales for the month is in line with the reduced forecast from analysts surveyed by Thomson Financial, which forecast unchanged growth.

Including a drop in gasoline revenues from its Sam’s Club division, which Wal-Mart did not include in its calculation, same store-sales fell 0.3 percent.

Wal-Mart has struggled in recent months with a mix of problems, including the fact that its lower-income customers were hurt by soaring gas prices. But the company’s lackluster sales have persisted even as the cost of gas eased, an indication that there are other factors that are dragging down Wal-Mart’s results.

“This is pretty discouraging,” said Ken Perkins, president of RetailMetrics LLC, a research company in Swampscott, Mass. But he added that Wal-Mart’s weak sales “will not be a harbinger of a broad-based weakness across the retail sector.”

I think one of the big problems that Wal-Mart has is in its image. Wal-Mart caters to the lower-income customers by providing some of the cheapest quality merchandise for the cheapest prices. I've browsed through Wal-Mart stores and I'll admit that a lot of their merchandise is low quality crap. The stores are dirty, crowded, and very much disorganized as consumers have picked through and placed mis-matched products on any shelf space they can find. And the Wal-Mart stores here in San Jose, Milpitas, or even in Gilroy have a customer base that is predominantly Hispanic. Yes, Wal-Mart has some of the lowest prices for their merchandise. But their merchandise just isn't buying in terms of quality--not when I've seen some better quality stuff over at Target for about the same price. So I do find it interesting how Target sales have actually increased by 5.9 percent in November:

CHICAGO (Reuters) - Target Corp. (NYSE:TGT - news) said on Thursday that November sales rose 5.9 percent at stores open at least a year, helped by strong demand for electronics, health-care products and baby clothes.

Analysts, on average, expected the discount retailer to report a 5.8 percent increase, according to estimates gathered by Reuters. The company had forecast 4 percent to 7 percent growth.

Total sales for the four-week period that ended on November 25 rose 11.7 percent to $5.12 billion.

On a recorded message detailing its sales performance, Target reported an increase in both the number of shoppers and the average amount spent.

Rival Wal-Mart Stores Inc. (NYSE:WMT - news), which posted its first monthly same-store sales decline in more than a decade, said its store traffic declined in November.

Target said its inventory was in "very good" condition at the end of the period, and for December, it expects same-store sales growth in the range of 3.5 percent to 5.5 percent.

Target has always marketed itself as a "cheap chic" department store, over that of Wal-Mart's "always low prices" slogan. In terms of prices, there really isn't much of a difference between Target and Wal-Mart. In terms of quality and selection, Target seems to have better merchandise than Wal-Mart. I'll admit that this is subjective, and that I may have a bias towards Target over that of Wal-Mart. But how do you explain Target's 5.9 percent increase in sales, over that of Wal-Mart's 0.1 percent decline in sales? I'm wondering if the lower-income consumers have enough money to spend for Christmas shopping at Wal-Mart. Take this Bloomberg story on unemployment benefits:

Nov. 30 (Bloomberg) -- The number of U.S. workers filing first-time applications for state unemployment benefits unexpectedly rose last week to the highest in more than a year.

Initial jobless claims increased by 34,000 to 357,000 in the week that ended Nov. 25, the highest since October 2005, the Labor Department said today in Washington. The four-week moving average, a less volatile measure, rose to 325,000 from 317,750.

Weekly claims figures were distorted by seasonal adjustments and temporary layoffs associated with the start of the holiday season, a Labor Department spokesman said. Claims may creep higher in coming weeks as builders, mortgage brokers and other housing-related businesses cut staff in a slumping real-estate market.

``Even considering that the number might have been exaggerated by the seasonals, we believe this is starting to show the cooling in labor-market conditions,'' Elisabeth Denison, economist at Dresdner Kleinwort in New York, said in an interview.

Economists had forecast initial jobless claims would decline to 315,000 from the originally reported 321,000 for the prior week, according to the median of 34 estimates in a Bloomberg News survey. Estimates ranged from 310,000 to 330,000.

A separate report today showed personal spending in the U.S. rebounded last month, fueled by income growth. The 0.2 percent rise in spending followed a 0.2 percent decrease in September, the Commerce Department said today in Washington. Incomes rose 0.4 percent, and the Federal Reserve's preferred measure of inflation increased 0.2 percent for a second month.

Just last month, we've seen a major slowdown in the housing market:

The Commerce Department said Friday [November 17, 2006] that construction of new single-family homes and apartments dropped to an annual rate of 1.486 million units last month, down a sharp 14.6% from September.

The decline, bigger than expected, was the largest percentage drop in 19 months and pushed total activity down to the lowest level since July 2000.

The level of building activity in October was 27.4% below October 2005, biggest year-over-year decline since March 1991.

Applications for new building permits, seen as a sign of future plans, fell for an eighth month, declining 6.3% to an annual rate of 1.535 million units.

Construction of single-family homes fell 15.9% in October from the seasonally adjusted September level, dropping to an annual rate of 1.177 million units. Construction of multi-family units dropped 9.1% to an annual rate of 309,000 units.

The drop in construction was led by a 26.4% decline in the South. Construction fell 11.7% in the Midwest and 2.1% in the West.

The collapse in housing is certainly going to cause some serious job losses within the construction, mortgage, and home-building sectors. I'm wondering if we're just now starting to see the start of a new recession here--the housing slowdown in October has forced home-builders, construction firms, and the mortgage industry to start laying off workers, causing the sudden increase in unemployment claims "by 34,000 to 357,000 in the week that ended Nov. 25." I'm wondering if a good chunk of these unemployment claims is actually coming from the construction industry, which could employ not just construction workers, but also the day laborers that work in building homes. Such laborers could be in the lower-income brackets, and perhaps be the major shoppers at Wal-Mart. These shoppers are cutting back on their spending at Wal-Mart, resulting in Wal-Mart's decrease in sales forecasts. Are we starting to see a ripple effect starting from lower-income consumers, which could then move up into the higher income brackets? I would certainly be curious to see what December retail sales forecasts are going to be for the major department stores. Because if we are heading in to a recession as a result of the housing slowdown in September/October, then we could start seeing the effects of this slowdown on consumer spending within three to six months—perhaps between late December to March.

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