- The Big Picture - http://www.ritholtz.com/blog -

Discounting? What Discounting?

Posted By Barry Ritholtz On November 19, 2003 @ 7:05 am In Finance | Comments Disabled

No Discounting? Boy, that was quick.

I cannot recall the last time a common “meme” was so quickly proven to be false in the financial markets and/or analyst community. As mentioned here yesterday [1] , I do not believe that retailers would win their game of chicken, holding out as long as possible before slashing prices to spur sales.

Now, a FULL WEEK BEFORE Thanksgiving, Wal-Mart (WMT) has looked into the eyes of their fellow retailers and called their bluff: the retailing giant has fired a broadside — not a shot across the bow, but a fusillade into the flank of the not-so-good ship Toys-R-Us (TOY). Upping the ante from previous price cuts, Wal-Mart will press their specialty adversaries on price while they are somewhat vulnerable to margin compression.

To WMT, they — apparently — couldn’t care less about Toy margins. They simply want to bring customers into the store, margins be damned. To Toys-R- US, the X-mas season is 40% (or more) of their year’s sales. A bruising fight will hurt revenues, margins, profits, and ultimately their stock price and market cap.

Here’s an excerpt from this morn’s WSJ:

Wal-Mart Stores Inc. has launched the Great Toy War of 2003 and its top soldier is Hokey Pokey Elmo.

In late September, a full three months before Christmas, and a month before hot holiday items normally are promoted, Wal-Mart Stores slashed the price on Fisher-Price’s newest dancing doll to $19.46 — a stunning 22% discount to the Toys “R” Us price of $24.99.

Then, by mid-October, Wal-Mart had cut prices on more than a dozen toys. A survey of the prices for 15 popular toys conducted by Banc of America Securities found that Wal-Mart’s prices were 12% cheaper than Toys “R” Us and 8% less than prices at discount retailer Target.

The steep and early price cuts are roiling the industry. Tuesday, Toys “R” Us acknowledged Wal-Mart’s moves caught it by surprise and hurt its third-quarter results. Its stock price fell 5.4% Tuesday in New York Stock Exchange composite trading, after falling 11% Monday when company’s earnings came out.

While parents may love the lower prices, other competitors are frustrated, saying they are hard-pressed to match prices below their costs. Yet they can’t afford to lose more market share to Wal-Mart . And manufacturers fret that the discounting will cheapen their brand names, quash innovation and prompt consumers to buy only when toys are on sale . . .”

On Wall Street, beware of Analysts bearing wishful thinking — its a sure path to the poor house . . .

Source:
Wal-Mart Fires the First Shot In Holiday-Toy Pricing War [2]
By Ann Zimmerman, Joseph Pereira and Queena Sook Kim
Wall Street Journal, November 19, 2003

http://online.wsj.com/article/0,,SB106920927210407600,00.html

Wal-Mart kicks off toy price war [3]
Report: No. 1 retailer slashes tags on popular and hard-to-find items, surprising Toys “R” Us.
CNN/Money November 19, 2003

Related Story:
 Toys ‘R’ Us to Close 180 Stores [4]
11/18/03

http://online.wsj.com/article/0,,SB106908127475163400,00.html


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2003/11/discounting-what-discounting/

URLs in this post:

[1] yesterday: http://bigpicture.typepad.com/comments/2003/11/are_retailers_p.html

[2] Wal-Mart Fires the First Shot In Holiday-Toy Pricing War: http://online.wsj.com/article/0,,SB106920927210407600,00.html

[3] Wal-Mart kicks off toy price war: http://money.cnn.com/2003/11/19/news/companies/walmart_toys/index.htm

[4] Toys ‘R’ Us to Close 180 Stores : http://online.wsj.com/article/0,,SB106908127475163400,00.html

Copyright © 2008 The Big Picture. All rights reserved.