Wal-Mart seen squeezed in midst of mixed recovery

CHICAGO (Reuters) - Wal-Mart Stores Inc (WMT.N) may find itself in an uncomfortable place in the "new normal" of the U.S. economy, getting squeezed in the middle as some customers trade up while others seek out even lower prices.

Wal-Mart, the world's largest retailer, thrived during the recession as consumers pared back spending to the most basic necessities and sought bargains at its stores.

But as the U.S. economy recovers in fits and starts, people who have held onto their jobs are more willing to shop trendier fashions at department stores like Kohl's Corp (KSS.N) or at discount rival Target Corp (TGT.N), analysts said.

On the lower end, chains like Family Dollar Stores Inc (FDO.N) are stocking more food on their shelves, helping them win customers that are shopping only for essentials.

"Some of the shoppers that they (Wal-Mart) have suffered significant economic damage and have gone down-channel to the dollar stores," said Richard Hastings, a consumer strategist at Global Hunter Securities. "And some of the Wal-Mart customers that are economically recovering have gone up-channel."

"That's what happens when you are really closely intertwined with the lower-income universe," Hastings said. "It's going to be a classical marriage -- for better or worse, for topline and for not."

Many retailers, including Target and Kohl's, posted better-than-expected March same-store sales last week, in the strongest sign yet of revived consumer demand. Family Dollar posted better-than-expected quarterly earnings.

Wal-Mart does not report monthly sales and a spokeswoman declined to discuss sales trends.

In February, the company forecast first-quarter sales at stores open at least a year would be flat, within a range of up 1 percent to down 1 percent. The forecast excludes fuel.

Hastings sees those sales being flat when Wal-Mart reports results on May 18.

HOW MUCH HAS CHANGED IN A YEAR

Fist-quarter sales will be pressured by broad price cuts to woo back customers, as well as by a tough comparison to the 2009 quarter, when the company was taking shoppers away from other retailers, analysts said.

"They have tough comps; nobody else does," said Janna Sampson, co-chief investment officer at OakBrook Investments, which holds 430,000 Wal-Mart shares.

Sampson still sees Wal-Mart as the safe retail play so long as the strength of the economic recovery is in doubt.

"I don't think it has the upside of some of the retailers that got beaten down as much," Sampson said. "That said, for us, it's a core, steady holding because it does have those more stable, consistent earnings, and you aren't going to have the risk" should the recovery hit a snag.

Since the beginning of the year, Wal-Mart shares are up 3 percent, while Target's stock has jumped 16 percent and Family Dollar's is up 36.3 percent. The Standard & Poor's 500 Index .SPX is up 7.3 percent in the same period.

Analysts on average expect Wal-Mart to post a 9 percent increase in first-quarter earnings per share, according to Thomson Reuters. That compares with expectations for Target's earnings to rise almost 22 percent, an attractive prospect to some.

"We view Target as almost like the Goldilocks retail stock for any investor that is worried about the consumer," Edward Jones analyst Matt Arnold said. To Arnold, Target is a retailer that can do well with just a middling improvement in consumer spending.

"It's a discretionary retailer, but it's not ultra-discretionary," he said.

(Reporting by Brad Dorfman; Editing by Michele Gershberg and Gerald E. McCormick)