THIS STORY HAS BEEN FORMATTED FOR EASY PRINTING

Rise in retail profit reflects a divide

By Anne D’Innocenzio
Associated Press / November 17, 2010

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NEW YORK — Third-quarter earnings reports from Wal-Mart Stores Inc. and Saks Fifth Avenue show the far different streets their customers are living on.

Wal-Mart’s third-quarter sales in the United States got squeezed as its financially strapped customers dealt with dire economic straits. Saks’s affluent clientele, encouraged by a rallying stock market, is starting to spend again, albeit cautiously, and is willing to shell out full price for designer labels more often.

“You have the Wal-Mart customers who are going to dollar stores toward the end of the month,’’ said Wall Street Strategies analyst Brian Sozzi. “And on the other end, you have the Saks customers going out there spending more freely.’’

As profit reports from major retailers flow in, it’s clear that lower- to middle-class consumers are unlikely to open their wallets wide this holiday season, with an unemployment rate that’s stuck at almost 10 percent.

The wealthy are recovering faster, buoyed by a rising stock market. But their spending still isn’t quite back to where it was before the Great Recession.

So companies are learning new ways to tighten expenses in a tepid environment. They’re also looking abroad to bolster sales. That’s generally resulting in solid profits for retailers so far.

Retailers “are doing a good job in generating profit growth,’’ said Ken Perkins, president of RetailMetrics, a research firm. “It’s tough sledding out there, on the domestic front. . . . If you miss the boat, competitors are going to take your dollars.’’

Based on the 58 retailers that have reported results, total profits are up 11 percent so far compared with last year’s third quarter; Perkins expects that to rise to 14 percent by the time earnings season is done, on top of the 7.8 percent increase last year.

Wal-Mart Stores Inc. reported a 9.3 percent increase in third-quarter net income as the world’s largest retailer benefited from cost controls and a robust international business. The company raised its full-year profit outlook.

The improvements came despite weakness at its US business. Total revenue at US Wal-Mart stores fell as fewer customers visited and spent less when they did. Revenue at stores open at least a year also fell, for the sixth quarter in a row, underscoring the challenges the company’s US operations face as many customers struggle economically.

Shoppers “are focusing on necessities and being practical in how they’re spending their money,’’ said Tom Schoewe, Wal-Mart’s chief financial officer, during a call with the media Tuesday.

At Saks Inc., net income soared as the luxury retailer sold more at full price, while overall revenue rose 4 percent. Business was helped by strong demand for jewelry and men’s sportswear.

Discount store operator TJX Cos. said its third-quarter profit rose 7 percent.