Inside This Issue - News
Discounters find ways to thrive
September 5th, 2011
NEW YORK – Every day seems to bring another report of plunging consumer confidence, the spectre of a double-dip recession is looming, and the financial markets continue to fluctuate almost hysterically.
And yet a number of major discount retailers reported improved financial results, including positive sales trends, for the quarter that ended in late July. The question is whether those results might signal a nascent recovery, at least for some Americans.
Walmart, for example, reported another drop in comparable-store sales at its flagship Walmart U.S. division for the second quarter ended July 29, but the 0.9% decline was within management’s projection and was in fact the best quarterly performance in nearly two years. More significantly, comparable-store sales improved in both June and July, finally turning positive during the latter month. The improvement was driven by sequential gains in customer traffic and average transaction every month in the quarter.
Bill Simon, president and chief executive officer of Walmart U.S., acknowledged that the chain’s customers remain under severe pressure. "The economy remains challenging for our core customers," he said. "Customers are still consolidating trips, due to higher year-over-year gas prices. The swings in sales due to paycheck cycles remain pronounced, and our stores must staff and stock for the volatility, both up and down. We also have seen an increase in the number of customers relying on government assistance for food and necessities."
In fact, almost 46 million Americans, or 15% of the population, are now using food stamps. That total has skyrocketed 74% since 2007, prior to the recession.
Despite the ongoing duress for Walmart’s core lower-income and lower-middle-income customers, Simon was cautiously upbeat. "Based on the start of August sales, we’re confident that our plans are working and we’ll see ongoing sales improvement," he concluded.
At Target Corp. second quarter results were cause for celebration, although same-store sales growth came at the expense of lower gross margin. A solid 3.9% increase in comparable-store sales helped drive a 5.1% top-line increase. It also represented a big improvement over the 2% rise in same-store sales recorded in the first quarter.
Like Walmart’s Simon, Target chairman, president and CEO Gregg Steinhafel sounded an upbeat note. "As I look ahead to the second half of the year I’m confident in our position and the plans we have in place," he told analysts during a conference call. "Our remodels and 5% REDcard Rewards will continue to drive traffic, sales and guest loyalty, while new target.com will elevate the online experience."
In the dollar store segment, Dollar Tree Inc. had a strong quarter, with consolidated sales up 11.9% as comparable-store sales rose 4.7% on top of a 6.7% gain in the prior-year quarter. President and chief executive officer Bob Sasser said both customer traffic and average transaction increased.
Finally, the warehouse club channel continued to perform well, which is less surprising since clubs typically draw a more affluent customer than discount and dollar stores.
At BJ’s Wholesale Club Inc., an 11% rise in sales was driven by a 7.8% surge in comparable-club sales that included a 4% benefit from gasoline. Merchandise comparable-club sales thus grew 3.8%.
"We are very excited about our positive sales momentum for the second quarter and first half of 2011," said Laura Sen, president and CEO. "It is clear that our members are doing more of their weekly food shopping with us, and I believe we have tremendous opportunities to further grow our business."
Walmart’s Sam’s Club division had another strong quarter. Its 15% jump in operating income was the best among the retailer’s operating segments, and it was driven by a sales increase of nearly 10%.
Sam’s comparable-club sales excluding gasoline rose an impressive 5%, propelled by greater customer traffic and average transaction. It was the sixth quarter of sequential improvement in comparable-club sales excluding fuel.
The Sam’s Club performance reflects, in part, a difference in customer demographics compared to Walmart U.S.: The average household income of Sam’s members is around $70,000.
Of course, not all discount retailers performed so well. Kmart’s comparable-store sales were flat for the second quarter, while regional small-box discounter Fred’s Inc. reported a 0.4% drop in same-store sales. However, CEO Bruce Efird noted that the chain did experience increased customer traffic, and its comparable pharmacy script counts for the quarter rose. He also expressed confidence about the second half of the year.
The economy clearly remains fragile, with job growth anemic at best as cash-rich corporations opt to pour billions into share repurchase programs. Nevertheless, Walmart and Dollar Tree both raised their earnings guidance for the year, while Target projected profits in line with Wall Street’s expectations.
Perhaps the most encouraging indicator in the recent results of these chains is the increases in customer traffic and transaction size. More consumers are shopping, and they are loosening the purse strings, at least slightly.