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Walmart’s Q3 Disappointing; Will Promotion Frenzy Ruin Holiday Shopping Season?

Walmart’s third quarter performance brought some good news during an otherwise challenging economic stretch. The retail leviathan is reporting that its earnings jumped 2.8%, largely on the basis of improved same-store sales at Sam’s Club stores.

However, Walmart’s overall revenue was actually less impressive than generally forecast. The profit for the third quarter hit $3.64 billion, or $1.14 per share, up from last year’s $1.08 per share. Nevertheless, expectations had pegged per share earnings as high as $1.16. Also, while revenue rose 1.7% to $115.69 billion, Thomson Reuters analysts had predicted it would reach $116.81 billion.

Overall, despite a surge from Sam’s Club stores, Walmart’s same-store sales dipped 0.3%, and comparable traffic decreased 0.4%. Sam’s Club managed to improve same-store sales 1.1%, while comparable traffic experienced a 2.4% uptick.

Mike Duke, President and Chief Executive of Walmart, commented on the disappointing numbers. Speaking to the Wall Street Journal, he said, “Our most important priority is growing top-line sales, including comp sales. The retail environment, both in stores and online, remains competitive.”

Like so much of the retail industry, Walmart has suffered from general economic malaise, and intractably thrifty consumers. Bill Simon, head of Walmart US, has referred to the “difficult sales environment” that has plagued retail as a whole. And some experts have surmised that the shutdown of the federal government for sixteen days, and controversy swirling around the uncertain impact of the Affordable Care Act, has further tightened shoppers’ purse strings.

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And the immediate future doesn’t seem to promise any reprieve from these woes for Walmart. A temporary law that bouyed food stamp recipients is poised to expire, leaving 48 million Americans with $5 billion less in spendable funds. This is likely to significantly impact Walmart’s bottom line since food stamps account for 18 percent of its total US sales.

Also, Walmart is banking heavily on a robust  holiday season, hoping that the layaway plan it introduced in September, combined with aggressive promotional discounts, will draw in dollar-conscious shoppers. However, a strategy so reliant upon bargain basement prices is sure to diminish gross margins just as it stimulates sales.

Both Walmart’s third quarter performance and its holiday outlook stand in sharp contrast to the position Macy’s finds itself in. For the third quarter, Macy’s reported that its sales leapt an impressive 22%, a great boon after an unusually slow second quarter. For the period ending November 2, Macy’s enjoyed a profit of $177 million, a considerable increase from last quarter’s haul of $145 million. This represents a per share increase from 36 cents to 47 cents. In terms of overall revenue, Macy’s saw a jump of 3.3% to $6.28 billion.

Terry Lundgren, CEO of Macy’s, enthusiastically trumped his company’s success despite macroeconomic challenges. “We were able to achieve a very successful third quarter of 2013, despite the tepid economic climate,” he said.

This had inspired many industry analysts to predict a much  stronger holiday showing for Macy’s despite previously cautious forecasts. Karen Hoguet, Macy’s chief financial officer, spoke optimistically about the retailer’s prospects. “We are very excited about what we see for the holiday season,” she said.

Still, she had to acknowledge that, similar to Walmart, the company’ success required a marketing strategy laden with discounts. “We felt we had to intensify our marketing and enhance our value offering to drive the business in the current economic environment.”

Of course, promotions necessarily translate into downward pressure on gross margins. Paul Lejuez, analyst with Wells Fargo Securities, observed that the retailer’s margins winnowed by 40 basis points to 39.2%. Houguet carefully acknowledged the pressure but rebutted the notion that it ultimately resulted in a loss of profits. “Did we give some additional value?,” she asked rhetorically. “Yes, in some places we did, but nothing that obviously hurt the bottom line of the company in an obvious way.”