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Wal-Mart hoping for holiday magic
Says early forecasts show a strong season for No. 1 retailer; expects 4Q sales up between 3-5%.
November 14, 2005: 1:17 PM EST
By Parija Bhatnagar, CNN/Money staff writer
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NEW YORK (CNN/Money) - After a colossal mistake in 2004, Wal-Mart executives say they're pretty confident the retailer is ready to give customers what they want for this year's holidays with must-have gadgets and toys at the hottest prices.

"I believe we will have a good holiday season," Wal-Mart CEO Lee Scott said in a recording Monday to discuss the company's third-quarter performance.

The holiday forecast came as Wal-Mart (Research), the world's largest retailer, posted quarterly profits that met Wall Street targets, but recorded sales that came in weaker than analysts had hoped. The retailer blamed the softness on temporary store closures and gas price hikes in the aftermath of the hurricanes.

And it said same-store sales -- or sales at stores open at least a year -- should grow 3 to 5 percent in the fourth quarter, which includes the crucial holiday shopping season that can account for half or more of a retailer's annual sales and profits.

Wal-Mart, the world's largest retailer, has made no secret of the fact that it's eager to erase its holiday mistake of last year, when it tried to curb promotions to protect profits but lost sales as consumers flocked to juicier deals offered by competitors. This year, Wal-Mart said it will be "very aggressive" with its holiday prices.

Although the company hasn't officially launched its special post-Thanksgiving "doorbuster" ads, several Web sites have already posted what they and some industry insiders claim are the deals Wal-Mart will be ofering.

If the prices are real, such as $398 for an HP notebook computer, it does indicate that Wal-Mart is ready to wage a strong battle in the weeks ahead.

But it did lay out a broad holiday campaign dubbed "Home for the Holiday" in early November, earlier than usual for the Bentonville, Ark.-based retailer. Its print, television and radio ads feature celebrities such as singers Garth Brooks and Matina McBride in their homes as they prepare for the holidays.

John Menzer, vice chairman of Wal-Mart Stores, said on Monday's call that the retailer will strongly showcase consumer electronics, toys, clothing and home accessories for the holidays. "Our early read is that it will be a strong season for us," Menzer said.

Industry watchers expect electronics to be among the best-performing holiday categories. Wal-Mart made another blunder a year ago by not stocking the hottest gadget of the season, Apple's iPod.

The company said it will carry the new iPod Nano this year as well as a few of its own Walmart.com "exclusive" gizmos like the mobiBlu, a 1-gigabyte, 1-inch cube MP3 player that can store up to 500 songs and also features an FM radio.

In a meeting with CNN/Money last week, Walmart.com's vice president of marketing, Raul Vazquez, called mobiBlu the "world's smallest MP3 player." He said Wal-Mart had bought the entire inventory of the gadget with the intention of selling it in stores at a later date.

"But the product is selling so well online that we don't have enough to stock it in stores," he said.

Additionally, Menzer said forecasts for colder weather ahead in the weeks ahead should help spur sales of winter merchandise.

Hurricanes, gas prices pressure sales

Wal-Mart reported improved earnings for its third quarter that met Wall Street forecasts despite softer-than-expected sales.

The No. 1 retailer reported net income of $2.4 billion, or 57 cents a share, for the quarter ended Oct. 31, up from $2.3 billion, or 54 cents a share, a year ago. The earnings were in line with analysts' forecasts, according to First Call.

But sales came in at $75.4 billion, up 10 percent from a year earlier but less than analysts' average forecast of $76.3 billion.

Same-store sales grew 3.8 percent in the quarter.

Scott said during the recorded call that he was pleased with the retailer's results despite challenges to its business in the quarter, which included three hurricanes, a jump in gasoline prices and the temporary closing of hundreds of Wal-Mart stores in the hurricane-impacted areas.

The retailer also recently revealed details of its "revitalization" plan intended to pump up sales by attracting higher-income consumers through more trendy and better quality products.

Analysts said the move away from focusing on discount shoppers was much-needed, especially as Wal-Mart continues to lose customers to its rival Target.

"Wal-Mart is working hard to improve the merchandise and extend the product categories to attract other types of customers," said John Lawrence, analyst with Morgan, Keegan & Co.

The recent introduction of "Metro 7," a younger and hipper line of clothing in 500 Wal-Mart stores, illustrates that effort, he said.

Tweaking merchandise, becoming even more efficient with its global sourcing and new technology like using radio tags to track inventory are steps Lawrence thinks could help boost Wal-Mart's sales and stock price.

"It will take 12 to 18 months, if these measures work, to get sound productivity returns," he added.

Lawrence also said he's not too worried about the spate of negative publicity about its wage and labor policies that still haunt Wal-Mart.

"At the end of the day, 1 million Wal-Mart employees serve 100 million customers a day," he said. "If these customers are so concerned about Wal-Mart's health care practices, they would take their dollars elsewhere. Consumers ultimately vote with their pocketbooks."

The company also gave some guidance for the fourth quarter and full year that was roughly in line with Wall Street expectations as well as its previous outlook.

Wal-Mart said it is now looking for fourth quarter earnings of 82 to 86 cents a share, up from the 75 cents a share it earned in the key holiday shopping period a year ago.

First Call's forecast is for fourth quarter EPS of 84 cents. The company also narrowed its earlier full-year guidance to between $2.64 to $2.68 a share. It had previously forecast full-year EPS between $2.63 and $2.70.

Once again, operating income from Wal-Mart stores didn't grow as fast as its sales in the discount division, a fact that's likely to displease Wall Street.

Scott said operating income was pressured by hurricane losses estimated at about $40 million of costs, and additional warrantee liability adjustments and increased freight costs because of gas price inflation.

Looking ahead, Scott said the first two months of next year "could be difficult" for the retailer as consumers receive their energy bills. "But the economy is improving and we are making improvements in our merchandise and operations," he added.

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