Holidays bringing retailer price war

Sunday, November 19, 2006

Like many Americans, Jennifer Vandeven does a lot of her shopping at Wal-Mart. That doesn't change when it comes to Christmas presents for her nieces, but that doesn't mean she's not beyond bargain hunting.

"If it's a special toy I'm going to buy, I'll see what the prices are at different places," said the 25-year-old Chaffee, Mo., resident.

The same goes for Delanie Tanchek, 29, of Benton, Mo.

"I price shop," said Tanchek, who expects to spend about $1,000 on Christmas presents this year. "I go where the best deal is."

That's exactly what Wal-Mart and Target are banking on.

Wal-Mart and rival Target are brewing up a price war for toys, electronics, and other things consumers may want for Christmas that could spell savings for shoppers but profit woes for retailers in the critical holiday quarter.

Wal-Mart Stores Inc., the world's largest retailer, last week promised "its most aggressive pricing strategy ever" to fuel year-end business, but warned that the move could also make it miss Wall Street's expectations for fourth-quarter earnings.

That announcement came as Wal-Mart posted an 11.5 percent profit increase in the third quarter, when improved merchandise mix and stricter cost controls offset weak growth in U.S. sales.

Its adversary, Target Corp., reported a 16 percent gain in third-quarter profit, beating analysts' expectations, as its sales rose 11 percent.

"This is a very competitive time of year for retailers," said Dr. Bruce Domazlicky, director of Southeast Missouri State University's Center for Economic Research. "Stores are going to do everything they can to draw people in."

Toys and electronics are popular gift items, Domazlicky said. But he expects the stores are cutting prices on those items in hopes that customers will come for the sale prices, but stay and buy other nonsale items as well.

"That's always part of the strategy," he said. "The forecast for spending is decent this year, but it's not a huge increase over last year. Everybody's going to be chasing those dollars."

Profit "is going to be a big issue for the big-box retailers," said Ken Perkins, president of RetailMetrics LLC, a research firm in Swampscott, Mass. He said Target was going to be able to make up some ground lost in digital cameras and flat-screen TVs with its trendier apparel, which carries fatter profit margins. But, he said, "it's going to put pressure on everyone."

As if to emphasize its stance, Wal-Mart said last week that it had slashed prices on more toys. It was the fourth time since mid-October that Wal-Mart cut prices on some products, moves that retailers normally reserve for after Thanksgiving.

Wal-Mart posted net income of $2.65 billion, or 63 cents a share, for the three months ended Oct. 31, compared with $2.37 billion, or 57 cents a share, in the year-earlier period.

Net sales totaled $83.5 billion, an increase of 12 percent from $74.6 billion.

Excluding income from operations in Germany and South Korea that it has sold, Wal-Mart's profit amounted to 62 cents a share. Wall Street expected a profit from continuing operations of 59 cents a share, the average estimate of 21 analysts surveyed by Thomson Financial, on projected sales of $84.48 billion.

Shares of Wal-Mart rose rose $1.34, or 2.9 percent, to close at $47.66 Friday on the New York Stock Exchange.

Meanwhile, Target said it earned $506 million, or 59 cents a share, up from $435 million, or 49 cents a share, during the same period a year earlier.

Revenue rose to $13.57 billion from $12.21 billion. Target attributed the growth to new stores, a 4.6 percent sales rise at stores open at least a year, and credit card revenue.

Business editor Scott Moyers contributed to this report.

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