BENTONVILLE, Ark. — As Wal-Mart's U.S. same-store sales slump marked its ninth straight quarter last week, the retailer indicated it was slowing the pass-through of product price inflation while widening the price gap on competitors.
Yet one of those competitors, Target Corp. of Minneapolis, also last week reported its strongest quarterly comparable-sales performance in four years. The difference between Wal-Mart's 0.9% comp decline and Target's 3.9% gain in their respective second quarters reflects in part the degree to which each is affected by the continued struggles of financially distressed shoppers, sources told SN last week.
While Wal-Mart's struggling shoppers are hitting the stores for basic needs at a good price, Target is getting a boost from wealthier shoppers making discretionary purchases of apparel and home goods in addition to the basics.
“If you're one of those 90% of people that have a job, you're spending again,” Craig Johnson, president of Customer Growth Partners, New Canaan, Conn., told SN last week. “You're spending astutely, but you're spending again. Target is very much benefiting from that consumer spending rebound. They're also benefiting from their own better execution.”
Target officials acknowledged that while economic challenges including unemployment and inflation are limiting consumer confidence and spending, wealthier customers have begun to cautiously spend more and trade up at Target. The company is also getting a sales boost from loyal shoppers as a result of its rewards card.
“While optimism at all income levels has improved since the recession, wealthy households continue to be the most optimistic,” Kathy Tesija, chief merchandising officer, said in a conference call last week. “Across all of retail, the 20% of households with the highest incomes are shopping more often and spending more while the other 80% have been cutting trips and spending less. Some of these trends are visible in our own results.”
A preponderance of those struggling customers have continued to affect Wal-Mart results, although officials there pointed to improving sequential trends during the quarter and continued to express confidence that comps could turn positive before year-end. Bill Simon, chief executive officer of Walmart U.S., said the company realized “minimal” pass-through of 3.5% quarterly grocery inflation as its core customers remained under intense economic pressure.
“Food inflation has surpassed gasoline price as the most important household concern,” Simon said. Shoppers are reacting to inflation by trading down to lower-price items and smaller pack sizes, he said.
Simon also said the company was looking to widen the pricing gap with competitors, although he did not share specific details as to how. Lagging competitors on the pass-through of inflation, particularly on known-value items, would be one such way, Johnson of Customer Growth Partners said.
“We think they are going to try to be their consumers advocate and will selectively absorb some of the price increases rather than pass them along on a one-to-one basis,” he said, adding that CGP's studies indicate that Wal-Mart's pricing has come down relative to Target in recent months.
“Even though they've been adamant about EDLP and don't want to play the high-low game, we think there's a good likelihood they will be inevitably drawn to what I call strategic pricing — they will focus on having the sharpest prices in terms of price differential, on the key items,” Johnson added.
The news wasn't all bad for Wal-Mart. A strong performance by its Sam's Club and International divisions helped the company improve overall sales 5.5% to $108.6 billion in the 13-week second quarter, which ended July 31. Net earnings improved 5.7% to $3.8 billion. International sales totaled $30.1 billion, a 16.2% increase, while U.S. sales were flat at $64.9 billion and Sam's Club sales improved 9.5% to $13.6 billion.
U.S sales gained momentum throughout the quarter, helped in part by a 90-day gas-discount program the retailer ran in 18 states. The program offers customers a 10-cent-per-gallon refund for fuel purchased with a Wal-Mart gift card. Comparable grocery sales were positive in the “low single-digits” during the quarter.
Walmart Market (formerly Neighborhood Market) stores showed a 3% comp increase in the quarter, and its success is prompting a faster rollout, Simon said. Around 180 new Walmart Market stores have been approved over a multi-year period. Simon said he would provide additional details on the rollout in October.
Gross profit dollars improved 1.2% in the quarter for Walmart U.S., as the company lapped last year's aggressive rollbacks and made improvements in efficiency. Operating income in the division was up 2.1% to $5 billion.
Target, whose second quarter ended July 30, posted overall quarterly sales of $15.9 billion, a 5.1% increase, while net earnings improved 3.7% to $704 million.