If recent sales numbers are any indication, Wal-Mart (NYSE:WMT) could be getting a lump of coal in its stocking this holiday shopping season.
Earnings for the third quarter reported Tuesday continued the recent downward spiral for the big-box retailer. Costs ate up sales gains at Wal-Mart, profits shrank and the big-box giant’s full-year forecast was slightly lower than analysts expected.
It’s just the latest in a disappointing stretch of quarterly reports that show other discounters are thriving and the king of retail has fallen on hard times — and that a much-needed turnaround might be unlikely amid the crucial holiday shopping period.
The world’s largest retailer has struggled with same-store sales weakness in the U.S. It’s counterintuitive, since persistently high unemployment would appear to work in the favor of discounters like Wal-Mart. But the fact is, smaller bargain shops like Dollar General (NYSE:DG) and Dollar Tree (NASDAQ:DLTR) have been eating Wal-Mart’s lunch. Dollar Tree has seen 12 straight quarters of year-over-year profit growth, and Dollar General has seen 10 in a row.
Meanwhile, Wal-Mart has struggled just to stay stable. Same-store sales had slumped for nine consecutive quarters before the latest earnings report snapped that slide.
And unfortunately, even though WMT sales and revenue have improved this past quarter, there was little impact on the bottom line. Margins slipped and the cost of sales rose 8.9% — meaning stronger Wal-Mart sales didn’t translate into profits this time around. Hence a profit of just $3.34 billion, down from $3.44 billion a year earlier.
Shares of Wal-Mart opened about 2% lower this morning. But if you look at the broader downward trend of the stock, investors should be wary of seeing WMT as a bargain after this selloff. Shares had popped to a new 52-week high before earnings, but the disappointing numbers indicate there might have been some irrational enthusiasm. What’s more, even after this “pop,” shares were only up 7% in the last year — beating the market by a tad, but hardly impressive.
It seems a risky proposition to depend on a brisk holiday showing from Wal-Mart in the fourth quarter after these earnings, so perhaps it is best to steer clear of this retailer for now.
Jeff Reeves is the editor of InvestorPlace.com. Write him at firstname.lastname@example.org, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. As of this writing, he did not own a position in any of the aforementioned stocks.