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Wal-Mart, Kohl's earnings top forecasts

But retailers expect consumer frugality to be the new reality

A shopper cruises the bread aisle at a Wal-Mart store Thursday in Tallahassee, Fla.
A shopper cruises the bread aisle at a Wal-Mart store Thursday in Tallahassee, Fla.
Phil Coale, Associated Press

Cutting their inventory helped both Wal-Mart Stores Inc. and Kohl's Inc. earn more in the second quarter than Wall Street expected, but neither retailer sees consumer spending rebounding in the crucial coming months.

They said as they reported their earnings Thursday that they're preparing for American consumers' newly adopted frugality to be the new reality — a reality that could hurt them less than many retailers but may not be comfortable for any prolonged period.

Wal-Mart saw an unexpected drop in same-store sales at its U.S. stores for the quarter. Spokesman John Simley said the quarterly decline is believed to be Wal-Mart's first ever, and the figure would have been flat without food price drops. Same-store sales is a key industry metric comparing sales at stores open more than a year with the same period a year earlier.

"Our customers are more disciplined in their spending," Mike Duke, Wal-Mart's president and chief executive, told investors during a prerecorded call Thursday. "There is a new normal now where people are saving more, consuming less and being more frugal and thoughtful in their purchases."

Wal-Mart, the world's largest retailer, noted that its financially strained shoppers keep buying less-expensive store products and smaller sizes. Customers also are paying for more of their purchases in cash or with debit cards than with credit cards, said Tom Schoewe, Wal-Mart's CFO.

Kevin Mansell, president and CEO of Kohl's, told The Associated Press that retailers should lower their expectations for holiday shopping.

"Last holiday was horrible, but our attitude is that last holiday is the new reality," said Mansell. If things go better this year, Kohl's can quickly adjust to increasing demand, he added.

The sobering assessment of consumer spending came as the Commerce Department reported that retail sales fell 0.1 percent last month, underscoring worries about when the U.S. will recover from the worst recession since World War II.

Consumer spending accounts for 70 percent of all U.S. economic activity. For retailers, sustained lower spending levels may result in more consolidation. And shoppers may see fewer stores to choose among and fewer styles in those stores as merchants keep inventory lean.

"You will see many more closing of suppliers, stores and malls," said retail consultant Burt P. Flickinger III, who predicts five more years of frugality. "Stores can cut expenses so long. They have to see increased sales."

As shoppers switch to lower-price stores and focus on necessities during the recession, Wal-Mart has resonated with more affluent consumers as it spruces up its merchandise and stores. Similarly, moderate-price department store operator Kohl's has fared better than upscale department stores, though it has lagged behind Wal-Mart even as it benefited from key competitors like Mervyns LLC going out of business.

Wal-Mart foresees same-store sales in the current quarter between flat and 2 percent higher than a year earlier, and it raised its full-year profit guidance to $3.50 to $3.60 per share, from $3.45 to $3.60 per share.

In the quarter that ended July 31, Wal-Mart earned $3.44 billion, or 88 cents per share, while revenue fell 1.4 percent to $100.08 billion. Analysts surveyed by Thomson Reuters projected earnings per share of 85 cents on revenue of $102.9 billion.

The company's international sales fell 5.1 percent, hurt by the impact of currency exchange rates. But on a constant currency basis, international sales increased 11.5 percent. Wal-Mart's namesake store sales were up 0.3 percent, while Sam's Clubs sales dropped 3.2 percent.

But Wal-Mart's same-store sales in the U.S. slipped 1.2 percent during the period, compared with a 4.3 percent gain a year earlier.

Wal-Mart, which stopped its monthly report of same-store sales after it announced April's, had forecast flat to 3 percent higher same-store sales for the quarter. Sam's Clubs had a 0.6 percent increase, while Wal-Mart outlets' same-store sales fell 1.5 percent.

The quarterly same-store sales decline was the company's first ever. On top of shoppers limiting spending, company officials said a big factor depressing its U.S. same-store sales was price drops in food products like dairy.

At Wal-Mart's namesake stores, deflation depressed the figure by 1.5 percentage points, so sales would have been flat from a year ago — still sluggish. The company also said it underestimated the benefits of the extra business stores received from the stimulus checks a year ago.

"That was a significant miss," said Ken Perkins, president of research firm Retail Metrics. "It shows significant weakness in the consumer."

Wal-Mart shares rose $1.19, or more than 2 percent, to $51.70.

Kohl's earned $229 million, or 75 cents per share, for the period that ended Aug. 1, topping the 74 cents-per-share profit that analysts polled by Thomson Reuters expected. Revenue rose 2 percent to $3.81 billion from $3.73 billion to surpass Wall Street's estimate of $3.79 billion.

Kohl's same-store sales showed some weakness, falling 2.3 percent during the quarter. But same-store sales of accessories like handbags, home goods and footwear were positive, the company said. Mansell said the demise of Linens 'N Things last year might be helping sales in its home category.

Shares of Kohl's slipped 38 cents to $51.89 as investors were disappointed with its conservative quarterly and full-year outlooks.