TGT Target Corp

Retailer's upgrades at U.S. stores attract shoppers' attention; low gas prices a boon

By Sarah Nassauer 

Wal-Mart Stores Inc. is reaping the benefits of spending heavily to improve stores and draw shoppers, a sign that retailers need to work hard to lure customers in an era of fast-changing shopping behavior.

Wal-Mart, previously the poster child of staid retailers, reported strong second-quarter results on Thursday, with sales at established stores up for the eighth consecutive quarter and more shoppers visiting for the seventh period in a row.

The report followed weak sales from rival Target Corp. and mixed results from other U.S. chains. Analysts said Americans are willing to shop, but favor stores that offer a deal, slick service or an experience that is difficult to pitch online, such as buying bulky lumber or fresh produce.

This week home-improvement chain Home Depot Inc. reported a 4.7% jump in sales at established stores for its latest quarter, while TJX Cos., the parent of T.J. Maxx, HomeGoods and other off-price chains, posted a 4% increase. However, many apparel retailers and department stores have reported lower foot traffic and falling sales.

Target Chief Executive Brian Cornell said patchy consumer spending was to blame. Macy's Inc.'s executives pointed to encroaching competition from online retailers. It plans to close 100 stores, or 14% of its physical store base, later this fiscal year.

A strong job market, wage gains and low gasoline prices are boosting household budgets. But retailers touting clothes, electronics and household staples from physical stores are struggling to adjust to other changes in consumer behavior.

Americans are being asked to spend more on health care as costs rise, and are choosing to spend more on services such as travel and entertainment. And online retailers, mainly Amazon.com Inc., are gobbling up more spending. In the first seven months of the year, sales at nonstore retailers -- a category that includes Amazon -- rose 10% from the year-earlier period, according to the U.S. Commerce Department, while department stores and electronics outlets posted declines.

Wal-Mart has poured billions recently into making its U.S. stores more efficient and pleasant, boosting employee wages and improving e-commerce operations as it tries to fend off Amazon and keep shoppers happy to roam its 3,500 giant U.S. Supercenters for paper towels or milk.

"With transitions like this you tend to gain first with existing customers," said Wal-Mart U.S. CEO Greg Foran, on a conference call to discuss earnings Thursday. Those customers are visiting more often and "I think they are putting an extra item in the basket because it's in stock or looks fresh," Mr. Foran said.

Executives attributed sales gains in the U.S. to improvements they have made to stores, as well lower gasoline prices that left shoppers with more money to spend. For the first time in nine quarters, Wal-Mart's e-commerce sales rose faster than the previous quarter. Sales were hurt by deflationary food prices, executives said.

For the quarter ended July 31, Wal-Mart reported earnings of $3.77 billion, or $1.21 a share, up 8.6% compared with a year-earlier profit of $3.48 billion, or $1.08 a share.

Revenue edged up 0.5% to $120.85 billion.

On Thursday, Wal-Mart lifted its profit outlook for the fiscal year ending in January. It also said sales at existing U.S. Wal-Mart stores, which rose 1.6% in the fiscal second quarter, would rise 1% to 1.5% in the third quarter. Shares in the company rose 1.9% to $74.30 on Thursday.

Consumers are still "a little more cautious than the numbers might indicate," said Brett Biggs, the retailer's finance chief. "But overall, we are seeing a consumer that is acting quite steadily."

There are also signs that struggling chains aren't being well-run or offering anything shoppers can't buy online with Amazon. Most of the 100 stores Macy's plans to close "are underperformers or in weak locations" Macy's finance chief, Karen Hoguet, told analysts last week. Target has struggled to draw shoppers to its selection of fresh groceries, and its online sales growth is slowing.

Wal-Mart is paying heavily to boost sales. "Unfortunately, the price of this stability has been a multiyear erosion in margins and profitability, " John Zolidis, retail analyst at the Buckingham Research Group, wrote in a note.

Wal-Mart's operating income fell 7.2% in the latest quarter, mostly because of investments in e-commerce and store-employee wage increases.

Earlier this month, Wal-Mart agreed to purchase discount online retailer Jet.com Inc. for $3.3 billion. Including the purchase and latest results, profit could fall as much as 9% this year, compared with an earlier prediction for a 12% drop, Mr. Biggs said in an interview.

Write to Sarah Nassauer at sarah.nassauer@wsj.com

Corrections & Amplifications: What demand there is has been shifting online away from traditional retailers such as Macy's, Kohl's Corp. and Nordstrom Inc., which all reported lower quarterly sales last week. An earlier version of this article incorrectly stated the retailers reported lower sales this week.

(END) Dow Jones Newswires

August 19, 2016 02:48 ET (06:48 GMT)

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