CHICAGO Wal-Mart Stores Inc (WMT.N) says the U.S. consumer is still being pressured by soaring gasoline prices, high unemployment and little extra cash.
And while that is typically an economic environment in which Wal-Mart has excelled, circumstances may be different this time, analysts said on Tuesday.
"Their core customer is still in worse shape than anybody else's," Edward Jones analyst Matt Arnold said.
Even slightly more affluent consumers have moved up and away from Wal-Mart, leaving the retailer with shoppers who can only spend on basics, he added.
On Tuesday, Wal-Mart posted quarterly earnings that beat analyst expectations, largely due to tight expense controls, while sales at its U.S. discount stores open at least a year fell a worse-than-expected 1.4 percent.
During the recession, Wal-Mart attracted customers from department stores and competitors such as Kohl's Corp (KSS.N) with low prices. But in recent months, as consumer sentiment improved, it lost ground to rivals such as Target Corp (TGT.N) and to department stores.
However, Wal-Mart executives believe that new evidence of economic trouble, such as persistently high unemployment and a slower recovery of the housing market, could help the world's largest retailer hold on to shoppers. Home improvement chains Home Depot Inc (HD.N) and Lowe's Cos Inc (LOW.N) said this week that a rebound might be pushed into next year.
"Have we lost some customers that were picked up during the most difficult times? Possibly, yes," Chief Financial Officer Tom Schoewe told reporters on a conference call.
But he said declining traffic was mainly caused by an estimated 41 percent jump in gasoline prices from a year ago.
The weak economic environment is when consumers need the low prices Wal-Mart offers the most, Schoewe added.
"Our customer remains under pressure and over the long haul, I believe that speaks very positively to the opportunity for Wal-Mart," he said during a conference call with reporters.
That opportunity includes both the desire for consumers to save money and the prospect for improved spending at some point, a Wal-Mart spokesman said.
DOWNSIDE OF A WEAK CONSUMER
In the meantime, the company is focusing on price cuts again, slashing prices on thousands of everyday items such as cereal and laundry detergent. Their shoppers are mostly spending only on those essentials and not buying items such as clothes and other nice-to-have goods.
"I don't think they want their consumer under as much pressure as their consumer is under," said Patricia Edwards, founder of wealth management firm Storehouse Partners.
"If they can somehow ramp up the international growth further than they have, then I think it's got some legs, potentially. If not, it is a defensive play."
Despite a 3 percent rise in the stock on Tuesday, analysts said there is little in the near-term to boost the shares. Wal-Mart stock performed well during the recession, but is actually down 5.7 percent from a decade ago.
"In many respects, (investors) still view it as a defensive stock," said Wall Street Strategies analyst Brian Sozzi.
The company may need to increase its share repurchases and further raise its dividend to move the stock, as well as improve their merchandise to drive discretionary spending.
"They might need to upgrade their apparel lines," he said. "They might need to upgrade their home departments."
Wal-Mart is rated a "buy" or "strong buy" by 23 of the 26 analysts on Thomson One Analytics, with many saying the stock trades at a compelling value.
"The current modest valuation of 13 times our 2010 EPS estimate and 12 times our 2011 estimate should allow the stock to rise at or above the rate of earnings growth," William Blair analyst Mark Miller said in a research note.
Christopher Tsai, chief investment officer at Tsai Capital Management, a Wal-Mart shareholder, said the valuation leaves little downside risk. He acknowledged he was taking a long-term view and that Wal-Mart's market capitalization -- around $205 billion -- makes it tough to pull the stock out of its range.
"It's a lot harder to move the Titanic than it is to move a Boston whaler," Tsai added.