Wal-Mart Stores Inc. and Kohl’s Corp. played the value game well in the third quarter, driving up sales and earnings, but both retailers were less bullish about holiday than Wall Street had hoped.

This story first appeared in the November 13, 2009 issue of WWD. Subscribe Today.

The two retailers continued to forge ahead with expansion even as many competitors have avoided it in favor of cash preservation. “All over the world we’re gaining market share,” said Mike Duke, Wal-Mart’s president and chief executive officer, on a conference call. “We added more than 13 million square feet this quarter.”

Still, profits at Wal-Mart rose 3.2 percent to $3.24 billion, or 84 cents a share, and the company said fourth-quarter earnings from continuing operations would range from $1.08 to $1.12 a diluted share, a range peaking at the $1.12 analysts had penciled in. However, incremental sales increases were hard to come by. The world’s largest retailer saw its comparable-store sales decline 0.4 percent, excluding fuel, in the third quarter, six months after it discontinued reporting comps on a monthly basis.

Kohl’s third-quarter net income shot up 20.6 percent to $193 million, or 63 cents a diluted share, but the company placed earnings in the current quarter at $1.14 to $1.24 a share, just below the $1.25 analysts projected.

The somewhat weak forecasts could be overly cautious and part of the expectations game executives often play with analysts and investors, but they could also signal that financial models have gotten ahead of retail reality. Macy’s Inc. also laid out fourth-quarter plans that fell short of expectations on Wednesday.

Still, investors stood by the companies Thursday, pushing Wal-Mart shares up 0.5 percent to $53.24 and Kohl’s ahead 0.1 percent to $54.64 even as the S&P Retail Index slid 0.8 percent, or 3.28 points, to 400.58 and the Dow Jones Industrial Average retreated 0.9 percent, or 93.79 points to 10,197.47. (For more on stocks, see page 14.)

Despite Wal-Mart’s dominance, fashion remained a weak spot in the company’s U.S. discount business, which registered negative comparable-store sales in apparel for the quarter.

“While much of our basics are working, we are not satisfied with the overall performance in apparel,” said Eduardo Castro-Wright, vice chairman. “Essential categories such as sleepwear, socks and underwear were our best sales performers. Sales were softer in ladies, shoes and jewelry.”

Analysts see Wal-Mart’s apparel business as a work in progress.

“The merchandise is improved, but the improvement is what I would call spotty,” said Craig Johnson, president of Customer Growth Partners.

The economic downturn has helped drive traffic to Wal-Mart, but Johnson said the new shoppers who come for food and toothpaste are more often enticed to spend extra money on electronics than they are on apparel.

“They want to increase the cross-shopping percentage in the apparel area, and they haven’t quite fully cracked the code there,” Johnson said.

“They’re still the word’s largest retailer of men’s underwear and that’s not going to change,” said Charles O’Shea, a debt analyst at Moody’s Investors Service.

O’Shea said Wal-Mart continues to tweak its approach to apparel, as it did in electronics, a business it finally figured out to the peril of the now-liquidated Circuit City.

Wal-Mart’s profits for the quarter ended Oct. 31 compared with its year-ago take of $3.14 billion, or 80 cents. Revenues were up 1.1 percent to $99.41 billion from $98.35 billion in the year-ago quarter. Excluding fuel, same-store sales were off 0.5 percent at U.S. discount stores and up 0.1 percent at Sam’s Club units.

For the first nine months, net income rose 1 percent to $9.7 billion, or $2.50 a share, as revenues dipped 0.4 percent to $294.56 billion.

Like Wal-Mart, Kohl’s has expanded despite the recession, adding 56 doors through the first nine months this year. In 2010 the company plans to open about 30 doors, five to 10 more than previously projected.

In addition to focusing on price, Kohl’s has emphasized exclusive and private brands, which now make up 45 percent of its sales.

Kevin Mansell, chairman, president and ceo, told investors on a conference call the company was speeding up the rollout of LC Lauren Conrad merchandise, which hit 300 stores last month. The line will be in all stores in March instead of fall as previously planned, and could displace other offerings.

“One of the things that’s been most exciting to us in the third quarter was that the women’s business, for the first time this year, ran with the company,” Mansell said. “And the reason it ran with the company is that, unlike the previous quarters or fall-holiday of last year, our core opening price-point private brand performance significantly improved.”

Kohl’s earnings compared with its year-ago take of $160 million, or 52 cents a diluted share. Sales advanced 6.5 percent to $4.05 billion from $3.8 billion. Same-store sales were up 2.4 percent. For the nine months, earnings rose 2 percent to $560 million, or $1.83 a diluted share, on a 3.1 percent increase in sales to $11.5 billion.

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