In a bit of an earnings report shock, Wal-Mart Stores, Inc. (NYSE:WMT) unexpectedly missed estimates for the second quarter. Same-store sales dropped 0.3%, while net income only increased by $50 million from the previous quarter. The reasons for the miss were supposedly due to circumstances beyond Wal-Mart’s control; they include events such as the Social Security and payroll tax hikes hurting their working-class customer base and inflation-driven grocery bill increases. International sales also dropped 2.9%, which the company attributes to the poor weather in Asia and Europe.
For the past few years, Wal-Mart Stores, Inc. (NYSE:WMT) had been seen as the recession-proof big box store. This is thanks to a low price model that enables working-class people to fulfill their grocery needs without breaking the bank, in addition to leading the pack in low-skill hiring. This second-quarter downturn caught a lot of people off-guard, especially when its more upmarket competitors did comparatively well.
Is this a sign the economy is improving?
Members-only is in for this upper-class store
Wal-Mart Stores, Inc. (NYSE:WMT)’s doppleganger, Costco Wholesale Corporation (NASDAQ:COST), has not released earnings yet for the quarter but has performed very well over the last three months. Average net sales have increased by 7% year-over-year from May to July for a total of roughly $26 billion. Same-store sales have also increased by 4%-6%, showing that the decline is not uniform across the big-box landscape.
It should be noted that Costco Wholesale Corporation (NASDAQ:COST) operates on a different business plan than Wal-Mart Stores, Inc. (NYSE:WMT), however, largely because of the fact that Costco customers can only shop there with a membership program. This results in a middle to upper-middle class customer base that needs to buy certain items in bulk, sold largely through Costco’s store-brand counterpart Kirkland.
With 4 million new members signed up in 2011 and executive-level members now comprising 2/3 of the revenue despite only being 1/3 of the customers, it’s clear that the economy has improved to the point where people will pay for a membership to shop for presumably better-quality goods. Costco Wholesale Corporation (NASDAQ:COST) also announced an increase in its annual cash-back cap from $500 to $750 on executive membership cards and a separate reward system for online shopping, encouraging repeat trips for customers.
Loyalty paying off for this middle-class store
In between Costco Wholesale Corporation (NASDAQ:COST) and Wal-Mart Stores, Inc. (NYSE:WMT) lies Target Corporation (NYSE:TGT). Like Costco, Target saw a boost in both year-over-year sales and same-store sales in the US, though smaller at a 2.4% and 1.2%, respectively. Helping the company’s earnings report was a $1.1 billion dividend payout and share buyback program, boosting the company’s earnings per share numbers. Net earnings were soft at $611 million, but Target was able to get around that with expense controls and cost cutting. This is similar to the soft quarter that Wal-Mart had, but the company managed to stay on the positive side on sales.
A notable improvement for Target Corporation (NYSE:TGT) was in the increased usage of its REDcard program, a rewards program for frequent Target customers. Purchases on the REDcard made up 18.7% of total purchases last quarter. As with Costco Wholesale Corporation (NASDAQ:COST), this shows that those who can afford to will pay extra to be part of a rewards program that provides special perks like cash back or an extended return period. While Target has no plans to adopt Costco’s membership-only structure, it shows that there is a growing business for membership perks at popular stores. This allows for more foot traffic and increased sales among regular customers, an asset for a middle-class catered store like Target Corporation (NYSE:TGT).
