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Wal-Mart's 'Comps' Creep Lower

The Eagles never recorded a tune called "Life In the Slow Lane", but if they did, the country-rock combo could dedicate the ditty to its new marketing partner, Wal-Mart Stores (WMT). The Bentonville (Ark.)-based retail giant unleashed the latest in a string of disappointing sales updates on Oct. 28, announcing that estimated comparable-store sales for its October four-week period -- Saturday, Sept. 30, through Friday, Oct. 27 -- rose an anemic 0.5%, marking the smallest such increase in nearly six years.

Investors made their displeasure known Monday, Oct. 30, rolling back the stock price 2.4% to $49.53 in late-afternoon New York Stock Exchange trading. The shares touched a 52-week high of $52.15 earlier in October.

In a repeat of the company's sales guidance during September, when it steadily downgraded its expectations for "comps" (see, 10/4/06, "Wal-Mart: The Incredible Shrinking 'Comp'") the company has been backpedaling during October as well. While earlier guidance was for growth of 2%-4%, at an Oct. 23-24 analyst meeting, company management said October comps would be in the 1% range. At the meeting, Bentonville brass expressed confidence about prospects for the holiday season and beyond. Comp-store sales have trended steadily lower, from 2.5% in August to 1.3% in September to October's limp reading.

And while Wal-Mart has tried to engender positive buzz on the Street in recent weeks by announcing expansion plans in China (see, 10/17/06, "Wal-Mart Shops for China's Trust"), dialing back the pace of capital spending (see, 10/23/06, "Less Is More for Wal-Mart") and even trumpeting a marketing partnership with The Eagles on Oct. 30, the sales numbers remain the elephant in the room.

What's holding back sales growth? Analysts cite the retailer's big store remodeling program. Efforts to entice customers with more upscale merchandise -- especially Wal-Mart's new Metro 7 apparel line -- have failed to catch on. And its core customers may only be starting to recover from the energy-price spike earlier this year.

Wall Street analysts reacted to the October projection in divergent ways. Prudential Equity cut its third quarter comp-sales growth forecast from 3.0% to 1.4% -- below the guidance range provided by Wal-Mart management of 2% to 4%. It also lowered its third-quarter EPS estimate to 60 cents from 61 cents.

In an Oct. 30 research note, Pru analysts Mark Rowen, Aimee Landwehr, and Anne Wickland wrote that they believe "disruptions from remodeling and problems in ladies apparel are continuing to drag down comps". The analysts expressed surprise that lower gas prices have not helped drive store traffic and sales. And they are "concerned" bout Wal-Mart's comp store sales performance over the holiday season.

Meanwhile, Citigroup analysts Deborah Weinswig and Charmaine Tang said in an Oct. 30 research note that Wal-Mart's current October forecast was below the firm's recently revised estimate of 1%-3% and original company guidance of 2%-4%.

The Citi analysts believe that traffic during the month may have been negatively impacted by the store remodelings, though they note that most of the remodels will be completed by the first week of November. They think traffic trends could be aided by the company's $4 generic prescription drug program, now in 27 states. In what may be a sign of an intensely competitive holiday season to come, the analysts noted that in late October, Wal-Mart "rolled back" prices on over 100 toys and games.

The Citi analysts are a far sight more bullish on the company's stock, with a $60 target price and a buy rating, citing a "favorable fundamental outlook". They note that customer traffic continues to be strong, driven by strength in consumables and "compelling" prices and improvements made in apparel, consumer electronics, private label, and branded merchandise. But they anticipate slowing earnings growth for 2007 (12.6%) and 2008 (12.5%) -- below the retailer's 10-year average EPS growth rate range of 13%-19%.

Wal-Mart's official sales release for the October period will be on Nov. 2.

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