Wal-Mart, Kohl's: Holidays could be rough

NEW YORK (AP) - Shoppers' focus on staples such as socks and underwear is driving murky holiday outlooks at Wal-Mart and Kohl's, even as both posted higher third-quarter earnings Thursday.

Both signaled they plan aggressive discounting to hang on to customers and drive sales this holiday season.

Wal-Mart Stores' price-cutting campaign is bringing more shoppers in the door. But they're spending less when they get there because the goods are priced lower - because of deflation, especially for meat and dairy items, and discounts designed to bring people into its stores.

The price decreases at Walmart helped fuel a second consecutive quarterly decline in sales at U.S. stores open at least a year, a key measurement of a retailer's health because it excludes the effects of expansion. The company expects sales could continue to decline through the fourth quarter.

The discounts seems to be working. Company Treasurer Charles Holley told reporters Thursday that it has had "a very good" response to its aggressive price cutting on holiday items like its heavily advertised 12-pound turkey for $5. He added that Walmart.com has had "record hits" following price slashing on highly anticipated top book titles and DVDs. And Wal-Mart boosted its full-year profit outlook.

The world's largest retailer has been able to grab wealthier consumers trading down from higher-priced stores, but the discounter has also seen growing signs of financial strain among its core customers, noticing more pronounced swings in spending between paycheck cycles in recent quarters.

"Our customers continue to tell us they are concerned about their own finances and employment," said Eduardo Castro-Wright, vice chairman of Wal-Mart Stores Inc., who heads up the U.S. Walmart business.

Department store operator Nordstrom Inc. announced late Thursday that its profit rose 17 percent in its fiscal third quarter, and it raised its 2009 profit outlook. Luxury stores such as Nordstrom saw solid sales gains last month from the sharp falloff a year ago.

"The upper income shoppers are starting to come out of the discretionary spending hibernation, but the lower- to middle-income shoppers are squeezed," said Ken Perkins, president of research firm Retail Metrics.

The cautious holiday outlooks drew a shadow over quarters in which both Wal-Mart and Kohl's increased profit.

Wal-Mart, which generated $400 billion in sales last year, is considered a key barometer of consumer spending, which accounts for 70 percent of U.S. economic activity.

Wal-Mart Stores Inc.'s profit rose 3.2 percent in third-quarter profit to $3.24 billion, helped by cost-cutting measures like slashing inventories. Revenue rose 1.1 percent to $99.4 billion.

But sales at its U.S. stores open at least a year slipped 0.4 percent, and the company predicted that they could be down as much as 1 percent for the critical fourth quarter, fueling more worries about the holiday shopping season and the economy.

Wal-Mart's apparel business saw smaller sales declines from the previous quarter, but the category's best-performing areas were necessities like socks and underwear. Sales of more discretionary items like shoes and jewelry were weak. Kohl's CEO Kevin Mansell said necessities like coats and underwear are among the best-selling items.

"The consumer is extremely focused on stretching their dollar." Mansell said. "We fully expect competition to be aggressive on price. We intend to ensure consumers view Kohl's as giving the very best value this holiday."

Shares of Wal-Mart rose 41 cents to $53.38 in afternoon trading.

Wal-Mart predicts earnings per share in the fourth quarter to be in the range of $1.08 and $1.12. As a result, it's raising its full-year guidance to $3.57 to $3.61 per share, from $3.50 to $3.60 per share.

In the third quarter, Kohl's profit rose 21 percent to $193 million. Revenue was up 7 percent to $4.05 billion.

Kohl's, based in Menomonee Falls, Wis., raised its full-year earnings guidance to $2.98 to $3.08 per share, from previous guidance of $2.59 to $2.70 per share.

Kohl's shares rose 32 cents to $54.91 in afternoon trading.

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AP Retail Writer Mae Anderson in New York contributed to this report.