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Food Deflation Hurts Wal-Mart Comps as Consumer Adapts to Recession

Food â€" and deflation in the sector -- had a lot to do with why Wal-Mart suffered declining comparable store sales in the latest quarter completed.

While 1.3 percent more shoppers visited its stores in the 13-week sales period, comparable store sales declined 1.5 percent at Wal-Mart stores in the United States.

Sam's Club did better, based in part on select price reductions, gaining 0.6 percent, but overall, Wal-Mart's U.S. comparable stores sales were down 1.2 percent. Beating analyst earnings estimates that fell in at around 86 cents per share helped the company, with Wal-Mart actually posting 88 cents per share.

Still, the comps were a disappointment after Wal-Mart had guided for them to come in flat to up three percent. Eduardo Castro-Wright, Wal-Mart's vice chairman, speaking in a conference call last, said three major factors contributed to the comparable store sales decline:

  • The recession continues to pressure consumers, who have become more selective in their discretionary purchasing. The observation coincides with other retail reports that consumers are not only spending less but are focusing on promotions more.
  • Significant food deflation is impacting the grocery sector, which undercut comps by 150 basis points and, in itself, helped ensure that Wal-Mart wouldn't reach the low end of its guidance on the metric. Not only are commodity prices falling but also Kroger, Safeway and Supervalu, among others, have launched price-cutting initiatives to make themselves more effective at attracting an increasingly cost-conscious consumer.
  • The company underestimated how much of a boost it got on comparable stores sales from last year's economic stimulus checks.
Citigroup analyst Deborah Weinswig added one more factor that may have impacted Wal-Mart when she said, in a research note that the soft comps "could be an indication that Wal-Mart's core customers have begun to spend less as they adjust to their lower budgets."

At the beginning of the conference call, Mike Duke, Wal-Mart CEO, described shopping a store with a customer who is working with a budget down 40 percent from last year and still purchasing for herself, her husband and three children under five years old. While Duke said she had shifted shopping to Wal-Mart because of the prices she found in the store, he also described very much the phenomenon that Weinswig observed, when he pointed out that the shopper had stopped buying clothes for herself.

He also noted that she had begun to shop Wal-Mart when she realized that the savings it offered exceeded the money she spent on the extra gas that was required to get her to the nearest store.

Which brings up a couple of related points. First, as conventional supermarkets lower prices, specialty operations such as Aldi expand and dollar stores more effectively draw shoppers for food and other consumables, spending more to go to Wal-Mart may become less attractive. Second, as recovery takes hold, fuel prices are likely to increase. That will actually help Sam's Club sales and those at Wal-Mart stores that pump gas, but it will make the drive to them more expensive and price-cutting retailers closer to home more attractive.

Wal-Mart may even be seeing some consumers who don't feel threatened by job loss in what may be a stablizing economic environment returning to old shopping patterns that don't include as many stops at Wal-Mart. Yet, no matter what the exact details are, big picture, it seems as if consumers may be recovering from a slightly panicked retreat to Wal-Mart that began last autumn, as they knew they could get very good prices without putting a lot of immediate thought into it. They had other things to worry about, after all, and may now be taking time to think about their circumstances in a more considered manner, making a variety of adjustments as to what, how and where they spend.

Yet, Wal-Mart will continue to gain from the recession and, it should be noted, it still is performing better than the overwhelming majority of retailers. And it had positives in the quarter, including nice indications from one of the smaller store formats that have been getting more corporate attention recently. Said Castro-Wright, as transcribed by SeekingAlpha:

Our grocery and health and wellness comps were positive and remained ahead of our major competitors during the 13-week period. In spite of deflationary pressures already discussed, our supermarket format, Neighborhood Market, achieved comps for the 13-week period of 3.8 percent.
Also, he noted that, as supermarket competitors cut prices, Wal-Mart is improving its distribution and merchandising functions, getting food to the store fresher and selling it through quicker. He said:
I'm also pleased with how the investment in merchandising systems and processes is driving product quality in our fresh areas. We have greatly improved the flow of perishables into our stores, which has reduced damaged goods. Further, customers are giving us a lot of credit for improving the quality of our fresh offerings, and their perceptions are validated in our higher sales comps in grocery.
And he also noted that, despite results for the quarter that might be characterized as mixed, Wal-Mart's proposition to consumers remains clear and consistent, saying, "We continue to attribute our strength in sales across the store to the strong price leadership position that we have."
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