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Wal-Mart's Low Prices Mean Big Profits In Crisis

ANNE D'INNOCENZIO | November 13, 2008 05:10 PM EST | AP

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In this Nov. 7, 2007 file photo, a customer leaves a Wal-Mart in Mountain View, Calif. in this Nov. 7, 2007 file photo. Wal-Mart Stores Inc. reported a 10 percent increase in third-quarter profit, Thursday, Nov. 13, 2008, as the world's largest retailer's renewed focus on low prices is attracting financially squeezed shoppers around the world. (AP Photo/Paul Sakuma, file)

NEW YORK — Wal-Mart officials sounded an upbeat tone for the holidays as the retailer posted a 10 percent increase in third-quarter profits on Thursday, saying that shoppers are responding to its early Christmas promotions.

But the world's largest retailer trimmed its profit outlook for the fiscal year as it faces a troubled global economy and the renewed strength of the dollar.

Nevertheless, Wal-Mart _ with its renewed focus on low prices _ has been one of the few bright spots in retail, as Americans have focused on necessities at discounters. The trend has intensified since the financial meltdown in September, with Best Buy Co. saying that "seismic" changes in consumer behavior have created "the most difficult climate" it has ever seen.

"Wal-Mart is regaining market share across the board," said Richard D. Hastings, a consumer strategist with Global Hunter Securities.

In apparel, which had been a trouble spot, Wal-Mart executives told analysts in a pre-recorded call that the company is outpacing its rivals in sales at established stores _ indicating to Hastings and other analysts that it is drawing customers away from moderate-price chains like Kohl's Corp. and J.C. Penney. But it said shoppers are cautious about buying electronics, suggesting that they are watching their spending even at low-price Wal-Mart.

Wal-Mart officials weren't shy about touting its reclaimed status amid the drab news from many other retailers.

"Our price leadership positions us well and will help our customers in all markets navigate through these difficult times," President and CEO Lee Scott said in a pre-recorded call. "I am optimistic about the holidays for Wal-Mart and for the Wal-Mart customer. It is our time and we have momentum from the third quarter."

The retailer said it earned $3.14 billion, or 80 cents per share, in the quarter ended Oct. 31. That's up from $2.86 billion, or 70 cents per share, a year earlier. Profit from continuing operations came to 77 cents per share, better than the 76 cents analysts expected.

Total sales for the quarter rose 7.4 percent to $98.64 billion.

Wal-Mart's profit gain was a "standout" among what is turning out to be a dismal quarter for the rest of the industry, said Ken Perkins, president of research company RetailMetrics LLC. He added that of the 50 retailers he tracks that have reported third-quarter earnings, 75 percent have reported lower profits from a year ago, while the remainder recorded a loss.

Kohl's reported after the markets closed that its third-quarter profit fell 17 percent, and it cut its fourth-quarter and full-year profit outlook. Nordstrom Inc. fared worse, saying that its profit fell more than 57 percent and giving an earnings outlook that's well below what Wall Street predicted.

Wal-Mart Stores Inc. has been able to pull ahead of competitors like Target Corp. with the right mix of merchandise as well as marketing like its "save money, live better" campaign. The company's shares have risen 21 percent in the past 52 weeks, while Target's have lost 40 percent of their value and J.C. Penney Co.'s have shed almost 60 percent in the same period.

Wal-Mart's shares rose $2.31, or more than 4 percent, to close at $54.93 on Thursday.

Eduardo Castro-Wright, president and chief executive of Wal-Mart's U.S. division, said in the pre-recorded call that sales results of early holiday price promotions on thousands of items from toys to laptops started last week are "exceeding expectations."

But he added that shoppers were cautious about discretionary purchases such as electronics. And Chief Financial Officer Tom Schoewe told The Associated Press that the spending around paycheck cycles has become even more pronounced since September, with a prolonged drop in spending in the days before shoppers get their paychecks, before splurging around payday.

Wal-Mart offered a modest projection for same-store sales for the fourth quarter, predicting that sales at stores opened at least a year will be up from 1 to 3 percent. Same-store sales are considered a key indicator of a retailer's health. In the third quarter, Wal-Mart's same-store sales rose 3 percent. But that's dramatically better than its competitors, which expect sales declines. Kohl's expects a same-store sales drop of between 8 percent and 12 percent for the fourth quarter.

Wal-Mart's profits rose 7.3 percent at its U.S. division and 1.7 percent at the Sam's Club warehouse unit. The international business remains the company's fastest-growing division, with profits up 10.6 percent. But that has made it more vulnerable to fluctuations in exchange rates, such as the recent rise of the dollar.

Schoewe said the "rapid changes" in exchange rates in the past few weeks are expected to hurt fourth-quarter results by about 6 cents per share.

"In U.S. dollar terms, strong operating performance in international may be overshadowed by these currency fluctuations," he said in a statement.

The retailer now expects earnings per share from continuing operations for the fourth quarter of $1.03 to $1.07 per share. Analysts expect $1.11 per share.

For the full year ending Jan. 31, Wal-Mart expect earnings from continuing operations of $3.42 to $3.46 per share _ compared to its August forecast of $3.43 to $3.50 per share. Analysts surveyed by Thomson Reuters expected $3.49 per share.

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AP Retail Writers Emily Fredrix in Milwaukee and Ashley M. Heher in Chicago contributed to this report.

Filed by Dave Burdick  |  Report Corrections