Jan. 5 (Bloomberg) -- Wal-Mart Stores Inc., the world's largest retailer, said the smallest December sales gain in five years may crimp fourth-quarter profit. Retailers including Federated Department Stores Inc. beat analysts' sales estimates for December.

Wal-Mart's net income will rise to the low end of its forecast range of 82 cents to 86 cents a share, the company said today in a statement. Last year it had net income of 75 cents in the quarter. The company said December same-store rose 2.2 percent and forecast a gain of 3 percent to 5 percent for January.

The retailer's strategy of cutting prices hurt December sales and wasn't successful in luring shoppers away from competitors who advertised late in the season. The company debuted its earliest-ever holiday marketing campaign on Nov. 1 to avoid last year's mistakes, when it was slow to discount popular items and had to offer last-minute markdowns.

``They were willing to cut the throats of themselves and anyone who got in the way of them,'' said Seattle-based Patricia Edwards, who helps manage $6.4 billion, including Wal-Mart shares, for Wentworth Hauser & Violich.

Shares of Wal-Mart fell 63 cents to $45.69 at 4:00 p.m. in New York Stock Exchange composite trading. They dropped 11 percent last year. Minneapolis-based Target Corp. gained 5.9 percent in 2005.

Target, Gap, Sears

Comparable-store sales increased 1.9 percent at Wal-Mart's main chain of discount stores and supercenters, which sell groceries as well as clothes, home furnishings and other items.

Same-store sales at the company's Sam's Club warehouse chain rose 3.6 percent. Excluding gasoline, Sam's Club climbed about 2.9 percent. Same-store sales gains at Sam's Club have outpaced those in the discount stores for six months.

Wal-Mart said today in a recorded call that traffic fell in December and the average purchase rose.

Target said today December comparable sales rose 4.7 percent. The company said January sales may increase 3 percent to 5 percent.

Federated said its December sales gained 3.4 percent, more than the 2 percent analysts had expected.

Gap Inc., the largest U.S. clothing chain, said same-store sales last month dropped 9 percent, greater than the 3.8 percent decline estimated by analysts surveyed by Retail Metrics.

Sears Holdings Results

Sears Holdings Corp. forecast fourth-quarter net income of $3.55 and $3.95 per share, compared with Thomson Financial's estimate of $3.69. The Hoffman Estates, Illinois-based company said combined November-December same-store sales fell 11.9 percent at its Sears department stores and rose 1 percent at Kmart.

Wal-Mart, based in Bentonville, Arkansas, had forecast a December same-store sales gain of 2 percent to 4 percent from a year earlier. In December 2000, comparable sales rose 0.3 percent,

``The 2004 holiday season revealed that Wal-Mart was no longer invincible,'' wrote Oppenheimer & Co. analyst Bernard Sosnick, who is based in New York and rates Wal-Mart ``buy.'' ``The 2005 season did not erase that impression.''

Discounts Hurt

This year's discounts damped sales gains, said Daniel Popowics, an analyst with Cincinnati-based Fifth Third Asset Management, which has $22 billion in assets including Wal-Mart shares.

The strategy worked in November, when Wal-Mart posted a 4.3 percent comparable sales increase and beat No. 2 discount chain Target for the first time in 18 months. Wal-Mart didn't maintain its momentum after the beginning of the season, said Citigroup Inc. analyst Deborah Weinswig.

``We believe that Wal-Mart's lack of an aggressive advertising campaign after Black Friday likely impacted traffic and ticket, as competitors were very promotional,'' Weinswig wrote in a report this week. Weinswig, based in New York, rates the shares ``buy.''

In 2004, Wal-Mart's same-store sales rose 0.7 percent in November and 3 percent in December.

High fuel prices also hurt sales, Popowics said. ``The number today shows that the lower-income consumer is still somewhat under pressure,'' he said.

Changes Needed

The average price of a gallon of gasoline for the week ended Jan. 2 was about $2.24, according to the U.S. Energy Department. Gasoline prices have fallen about 23 percent since September. They're still about 26 percent higher than a year earlier.

Wal-Mart's customers have average incomes of about $40,000, making them particularly vulnerable when fuel costs rise. The median income at Target is $55,000.

``December's barely passable sales made it evident that Wal- Mart must make changes in its U.S. division with even greater zeal,'' wrote Oppenheimer's Sosnick.

Wal-Mart is improving store layouts and displays and is adding more upscale products such as organic food and plasma televisions. The company wants to get more customers who stop in for basics to also shop for clothing and electronics.

Business lost to new Wal-Mart supercenters by existing stores could have cost 2 percentage points in December same- store sales, Sosnick wrote. Without that factor, Wal-Mart's results would have been closer to Target's forecast range of 4 percent to 5 percent, he wrote.

Wal-Mart calculates same-store sales using locations open at the start of the prior fiscal year. Starting in February, it will adopt the more common gauge of sales at stores open at least a year. It will also eliminate its weekly sales calls at that time. Under the new method, December comparable-store sales for the company would have risen about 2.7 percent.

Target

Target reported a 2.6 percent November same-store sales gain after cutting its forecast in half to 2 percent to 3 percent. The company beat its monthly comparable-sales forecast in seven of the previous nine months.

U.S. retailers' November-December same-store sales rose 3.5 percent, exceeding last year's 2.3 percent gain, the New York- based International Council of Shopping Centers said today. The gain is the second-largest since 1999, when sales rose 5.4 percent.

To contact the reporter on this story: Lauren Coleman-Lochner in New York at llochner@bloomberg.net.

Last Updated: January 5, 2006 16:23 EST