Wal-Mart aside, retailers on track for December

By Emily Kaiser

CHICAGO (Reuters) – Disappointing December sales from
Wal-Mart Stores Inc. dented investor sentiment on Tuesday, but
analysts said other U.S. retailers probably met modest
forecasts for the biggest shopping month of the year.

Two key questions remain as retailers prepare to release
December results on Thursday: Were chain stores able to protect
profitability in the face of fierce competition from Wal-Mart,
and how quickly will shoppers spend an estimated $18.5 billion
worth of gift cards?

Wal-Mart, the world’s biggest retailer, on Saturday
estimated that December sales rose just 2.2 percent at its U.S.
stores open for at least one year. Analysts had expected closer
to 3 percent growth.

“Outside of Wal-Mart, we expect the retailers under our
coverage to hit the middle to upper end of the planned range
laid out by managements,” Sanford Bernstein analyst Emme
Kozloff wrote in a note to clients.

“However, the degree of promotions required to drive the
top line will dictate the health of gross margins and hence
could be the swing factor in terms of fourth-quarter earnings,”
she added.

Wal-Mart’s shares dropped 2 percent in early New York Stock
Exchange trading, but the Standard & Poor’s retail index was
down less than 1 percent, suggesting that Wall Street still
expects other chains to meet their forecasts. Some specialty
retailers, including Abercrombie & Fitch Co., traded higher.

Wal-Mart’s biggest rival, Target Corp., said last week that
it expected to meet its December same-store sales forecast for
4 percent to 5 percent growth — which would be double
Wal-Mart’s. Target’s November same-store sales growth trailed
Wal-Mart’s for the first time in 18 months.

Mall-based retailers also appeared to recover from a
sluggish start to the holiday shopping season, with foot
traffic picking up in the final week before Christmas. Malls
remained busy the day after Christmas as customers started
cashing in gift cards.

Analysts listed Abercrombie & Fitch among the likely
mall-based winners, while Gap Inc. continued to struggle with
poorly received fashions.

MERRY JANUARY?

Oppenheimer & Co. analyst Bernard Sosnick called Wal-Mart’s
December results barely passable.

“The 2004 holiday season revealed that Wal-Mart was no
longer invincible,” he wrote in a note to clients. “The 2005
holiday season did not erase that impression.”

Wal-Mart got off to a quick start this holiday season with
aggressive advertising and discounting, and it paid off with
strong November sales.

But demand dissipated in early December, and shoppers did
not return until the last days before Christmas. Indeed, the
Friday before Christmas was Wal-Mart’s busiest shopping day of
2005, Vice Chairman John Menzer told Reuters last week.

Menzer also said that gift card demand was stronger than
expected last month, which may explain at least some of the
weakness. Retailers record revenue from gift cards only when
they are redeemed, not when they are purchased, so Wal-Mart
expects that to push some demand into January.

The company on Thursday will provide a January sales
forecast and update its earnings expectations for the current
quarter.

Wall Street will be watching forecasts particularly closely
this month because most retailers operate on a fiscal year that
ends in January, so the fourth quarter drives the biggest
portion of annual sales and profit.

January used to be a minor month for retailers, typically
marked by clearance sales as they made room for spring
merchandise. But with the rise in gift-card demand, it has
become increasingly important.

“Without any real must-have item this year to entice
shoppers,” Merrill Lynch analyst Mark Friedman wrote, “gift
cards and electronics became the must-haves.”