Retail heavyweight Wal-Mart Stores Inc 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 stocks lower. Still, top US retailers, including Wal-Mart, posted higher second-quarter profits that beat Wall Street expectations.
Strong results from No 1 home improvement chain Home Depot Inc and department store owner J.C. Penney Co Inc suggested middle- and upper-income shoppers remained in a spending mood for now.
Wal-Mart said rising oil prices - oil topped $67 per barrel this month - increased 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.
The Standard & Poor's retailing index fell 1.8 percent on Tuesday, and Wal-Mart shares dropped 3.5 percent on the New York Stock Exchange. Home Depot shares traded down 1.6 percent, while J.C. Penney's lost 4.3 percent, both on the NYSE.
Bernard Sosnick, retail analyst with Oppenheimer & Co, said 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 US government report on Tuesday that showed surging energy costs drove consumer prices up in July at the sharpest rate in three months. Overall inflation remained subdued, however. Ken Perkins, president of research firm Retail Metrics, said US retailers' second-quarter profits were on a pace to outperform the broader S&P 500 for the first time in 10 quarters, helped by Tuesday's strong performances.
Including the latest results from Wal-Mart, Home Depot and others, his survey of 141 retailers showed that retailers will likely generate a 13.2 percent quarterly profit gain.
"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 US appears to be well under control," Chief Executive Officer Lee Scott said on a recorded message.
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. 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 retailer also reported a 28 percent jump in its service business, including installations of new kitchens, windows and flooring.
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 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. The retailer forecast a full-year profit that was better than Wall Street had expected.
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