CHICAGO (Reuters) - Wal-Mart Stores Inc (WMT.N) has a low bar to clear when it reports third-quarter financial results this week: just show that sales at existing U.S. stores fell only a little bit.
But that will not be good enough for the market going forward. Analysts expect the world’s largest retailer to confirm that sales at U.S. stores open at least a year will improve in the current fourth quarter, which includes the holiday season.
The world’s largest retailer has seen sales fall for five consecutive quarters at stores open at least a year. Investors are not expecting much out of the third quarter from steps the company took to lift that measure.
“For the third quarter, expectations for Wal-Mart in terms of getting back the lost consumers, I think those expectations are muted,” said Jeff Bagley, portfolio manager at Wal-Mart shareholder Haverford Investments. “I think where the rubber meets the road is the fourth quarter.”
Wal-Mart shares are up about 4 percent from the middle of August, but trail the 6.6 percent increase in shares of rival Target Corp (TGT.N) over the same period. Target’s sales have outperformed those of Wal-Mart as some consumers, feeling more secure in their jobs, have traded up slightly. Target also reports earnings this week.
Wal-Mart has said that it expects same-store sales to rise in the fourth quarter and some investors have been excited by the prospect that tight cost controls, coupled with higher U.S. sales, could boost profits.
“If you start seeing positive comps, you could see some upside in earnings,” Bagley said.
But the market could also be in for a disappointment when it comes to the fourth quarter.
Wall Street Strategies analyst Brian Sozzi said that promotional discounts by Wal-Mart and its competitors already seem more aggressive than last year, which would cut into sales.
“I wouldn’t be surprised if they guide down,” Sozzi said of the fourth-quarter U.S. sales forecast. “I think they have a lot of excuses to do so.” If Wal-Mart pulls back from saying fourth-quarter sales will improve, that would cause the stock to sell off, Sozzi said.
Wal-Mart has used cost-cutting and growth in international markets to boost profits even as U.S. sales struggled, and that is expected to be the case again when it reports earnings on Tuesday.
Analysts on average expect earnings of 90 cents a share, compared with 84 cents a year earlier, according to Thomson Reuters I/B/E/S. The average forecast for Target is 68 cents a share, up from 58 cents a year earlier.
“The bad news is we don’t think the company had a very good quarter in the U.S. as Wal-Mart, under the direction of new U.S. CEO Bill Simon, unwinds many of the mistakes that were made in conjunction with Project Impact 12 months ago,” J.P. Morgan analyst Charles Grom said.
“The good news is the bar has been set low,” he said of market expectations for sales.
Wal-Mart’s mistakes included what the company admitted was an overly aggressive effort to cut the number of items it had in its stores, which drove some customers away when they could not find their favorite products.
Wal-Mart has also been shifting away from deep short-term discounts on hundreds of products, known as “rollbacks,” and is instead focused on “everyday low prices.”
The rollbacks were an attempt to bring Wal-Mart’s more struggling customers back from dollar stores, which have flourished since the recession. But they did not generate the traffic Wal-Mart expected.
One of those rival store chains, Dollar Tree Inc (DLTR.O), is expected to see earnings jump to 62 cents a share from 51 cents when it reports third-quarter results on Thursday. Dollar Tree has gained shoppers due to high U.S. unemployment and steps to include more food in stores. It is also making those stores look better, keeping the pressure on Wal-Mart.
“The traffic in these dollar stores has just been very robust,” Sozzi said. “I don’t see that pulling off any time soon.”
Reporting by Brad Dorfman, editing by Matthew Lewis