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Consumers still king. Wal-Mart slipping?
Strong retail sales numbers show shoppers are still in a mood to buy, maybe just not at Wal-Mart.
May 13, 2005: 2:59 PM EDT
By Parija Bhatnagar, CNN/Money staff writer

NEW YORK (CNN/Money) - Consumers did it again.

Despite the dual distractions of rising gas prices and rising interest rates, they showed an uncanny ability to shop -- a lot -- last month.

That's good news for the economy and good news for retailers. Oddly, Wal-Mart, the world's largest retailer, probably has more reason to sulk than smile.

The numbers out Thursday showed that retail sales jumped 1.4 percent in April, the strongest performance in seven months.

"It seems more and more the temporary pause in spending in March was just a pause," said Michael Niemira, chief economist and director of research with the International Council of Shopping Centers.

Consumer spending is the backbone of the U.S. economy, accounting for two-thirds of overall activity. So every time there's a blip showing a slowdown in buying, it raises worries among policy-makers and investors.

Other worries: rising energy prices, the Fed's rate hiking campaign, and record levels of consumer debt.

Not surprisingly, red flags waved when sales rose a sluggish 0.3 percent in March and were even weaker excluding autos, which account for about a quarter of total retail sales. The government revised the March sales figures higher as part of its report on April sales Thursday.

Niemira said that April's retail sales strength, along with surprisingly strong job growth last month, go a long way to assuage fears that the economy was in for a prolonged slowdown.

"Decent growth in income levels is helping to prop consumer spending. Home demand is holding up nicely and there's also spillover effect from that," said Niemira.

Anthony Chan, senior economist with JP Morgan Asset Management, pegged last month's buying frenzy to an improving labor market.

"It appears as though the level of job security is rising and that's a very encouraging thing to consumers," Chan said. "Consumers are spending more on general merchandise as well as on eating out. People don't go out to restaurants a lot if they're not feeling good about their economic situation."

"The bottom line is that consumers experienced a soft patch in the first quarter and they appear to be emerging from it," Chan said. At the same time, the jury's still out on the second half of the year.

"I think it's safe to assume that this robust pace of sales won't continue over the next few months. There are too many headwinds out there, including higher energy costs," he said

Wal-Mart: Becoming yesterday's story?

A case in point is Wal-Mart, which rattled Wall Street Thursday. The retailer reported higher profits but the numbers missed Wall Street forecasts, and it warned about the rest of the year, blaming higher gas prices and weather.

Wal-Mart executives have repeatedly warned that higher gas prices weigh more on its customers, most of who live paycheck to paycheck.

But some industry watchers wondered whether Wal-Mart's troubles are running deeper than a bout of gas pains.

"Starting with the recession in the mid-70's, the worse the economy got the better Wal-Mart sales would be. Now, like everybody else, Wal-Mart is using every excuse in the book to disguise company-specific problems," said Burt Flickinger, retail analyst with New York-based Strategic Resource Group.

Robert Buchanan, retail analyst at A.G. Edwards, said Wal-Mart is struggling with internal execution problems.

"Basically it's long lines and slow speed at checkout and missing some fashion (items) and not having iPods in the majority of the stores," he said.

In addition, he said, morale at the company is being hurt by a drumbeat of negative publicity about the company, such as reports that former Vice Chairman Tom Coughlin padded his expense account with up to $500,000 in improper purchases and numerous lawsuits against it by disgruntled employees.

Coughlin resigned from the company after Wal-Mart found what it said was a pattern of expense-account abuses.

"Management distractions can have a tremendous effect on a company," said Craig Johnson, retail analyst with Customer Growth Partners. "The good news is that Wal-Mart took some action and they're putting more effort into their public relations."

For starters, Wal-Mart invited the members of the media for a first-ever two-day meet-and-greet with senior executives in early April.

But that's not likely to be enough to help pull the world's largest retailer out of its funk.

"Wal-Mart has to redefine itself to consumers," said Johnson. "If the lowest price pitch is its only value proposition, that's yesterday's news." In other words, it needs to come up with something new and fresh instead of just rocking along like it's the 1980s.

Perhaps rival Target Corp. (Research), the No. 2 discounter after Wal-Mart, can provide some inspiration. Target on Thursday beat analysts' forecasts for earnings, although sales were slightly softer than estimates.

Analysts credited Target with outmerchandising and outmarketing Wal-Mart with trendy clothes and home furnishings -- both of which are higher profit categories -- as well as running savvy ads focusing on the company's Bull's eye logo.

At Wal-Mart, lower-profit food sales have grown faster than sales of general merchandise in 11 out of the last 12 weeks.

"In absolute dollar terms Wal-Mart is outpacing Target but that's primarily because it's the bigger player," said Johnson.

"I wouldn't necessarily say that Target is stealing market share away from Wal-Mart because Target's customers are slightly more upscale. Where it's outperforming Wal-Mart is in grabbing market share away from department store chains."

Click here to read more about how retailers are selling to the boomer generation.

Click here to read why it doesn't pay for retailers to ignore the customer.

Click here to read why it's good to be Target  Top of page

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