Wal-Mart’s bleak outlook routs retailers

08/17/2005

August 16, 7:02 PM EDT

CHICAGO (Reuters) - Retail heavyweight Wal-Mart Stores Inc. (WMT) on Tuesday warned of a weaker third quarter as steep oil prices hurt consumer spending, casting a pall over the entire sector and sending retail shares plummeting.

Still, second-quarter earnings from a few leading U.S. retailers, including Wal-Mart, topped Wall Street forecasts.

Strong results from No. 1 home improvement chain Home Depot Inc. (HD) and department store owner J.C. Penney Co. Inc. (JCP) suggested middle- and upper-income shoppers remained in a spending mood for now but gave investors no reason to buy retail stocks.

High-end department store operator Nordstrom Inc. (JWN)even raised its full-year profit outlook as it reported a 39 percent increase in second-quarter profit, sending its stock 4 percent higher in after-hours trading.

Wal-Mart said rising oil prices—oil topped $67 per barrel this month—raised costs and hurt consumer spending, particularly among low-income customers.

As a result, the world’s biggest retailer said profit in the current third quarter would likely fall shy of Wall Street expectations.

After the market closed, teen apparel retailer Abercrombie & Fitch Co. (ANF) posted a second-quarter profit well short of analysts’ expectations, sending its shares sliding more than 9 percent to $55.61 from its New York Stock Exchange close of $61.23. Its decline also dragged on stocks of other teen oriented chains like Pacific Sunwear of California Inc. (PSUN)and Urban Outfitters Inc. (URBN) lower.

Pacific Sunwear was down 2.6 percent after hours to $22.67 while Urban Outfitters was down more than 2 percent to $55.53.

The Standard & Poor’s retailing index fell almost 3 percent on Tuesday, and Wal-Mart shares ended 3.12 percent lower on the NYSE. Home Depot shares fell 2.4 percent, while J.C. Penney’s lost 4.1 percent, both on the NYSE.

Bernard Sosnick, retail analyst with Oppenheimer & Co., said earlier on Tuesday that the spike in oil prices “has all retailers red on our screens this morning,” referring to falling stock prices.

Wal-Mart’s warning echoed a U.S. government report on Tuesday that showed surging energy costs drove consumer prices up in July at the sharpest rate in three months. Overall inflation, however, remained subdued.

3RD-QUARTER FORECASTS IN DOUBT

Ken Perkins, president of research firm Retail Metrics, said U.S. retailers’ third-quarter prospects looked cloudy even though second-quarter profits were on track to outperform the broader S&P 500 for the first time in 10 quarters.

“The third quarter is in question,” Perkins said, noting that Wall Street is currently looking for about 15 percent profit growth in the period ending in October. “That’s likely to come down, particularly with Wal-Mart’s guidance today.”

Wal-Mart said profit grew just 6 percent in its second quarter, marking the smallest gain in four years.

“Inflation in the U.S. appears to be well under control,” Chief Executive Officer Lee Scott said on a recorded message. “The only real economic concern I have is that oil prices will erase improvements in employment and real income for an important portion of our customer base.”

Emme Kozloff, retail analyst with Sanford Bernstein, said the weak outlook came as a surprise because Scott had been more optimistic about the second half in previous quarters.

“The most surprising aspect of the (Wal-Mart) release was management’s more conservative outlook for the rest of the year, driven by the impact of higher oil prices on consumer spending,” she said.

Analysts have watched closely for signs that rising gas prices were cutting into household budgets, but a rosy report from Home Depot showed that a strong housing market continued to outweigh the fuel effect so far.

Home Depot said quarterly profit rose 14 percent on strong summer sales of home improvement products, and raised its full-year forecast.

The second quarter is particularly important for home improvement chains since it encompasses the prime summer season, when homeowners buy gardening and repair supplies. Fast-growing rival Lowe’s Cos. Inc. (LOW) said Monday its quarterly profit rose 20 percent.

J.C. Penney also reported a bigger-than-expected jump in quarterly profit, helped by strong summer sales and an “encouraging” start to the back-to-school shopping season.

Although the retailer forecast full-year profit better than Wall Street’s estimates, it said rising fuel prices were “on the radar screen” for its customers.” (Additional reporting by Ellis Mnyandu and Angela Moore in New York and Karen Jacobs in Atlanta)