Wal-Mart struggles with deeper problems

Clearly, the vagaries of the economy have hit Wal-Mart harder than Target. For the 2005 calendar year, sales at stores open at least a year averaged a 3 percent gain at Wal-Mart, compared with 7 percent at Target.

Higher interest rates and rising gasoline prices have weighed heavily on Wal-Mart shoppers, 20 percent of whom don't have bank accounts, according to Davidowitz.

Wal-Mart is hoping that its expansion into higher-priced, trendier merchandise, like fluffier towels and more stylish clothing will help make it less vulnerable to the economy's fluctuations. At the same time, Wal-Mart officials vow not to ignore their core customers, who shop for staples on a budget.

The new merchandising, which Scott said has gotten good reaction from customers so far, is to get more affluent Wal-Mart customers, who tend to shop just for groceries, to cross over to the other side of the store. While priced higher than other Wal-Mart merchandise, these goods are still cheaper than at Wal-Mart competitors, the company maintains.

Karen Burk, a Wal-Mart spokeswoman, said more changes are planned for fall, including better clothing on the racks and signs that will give the stores a brighter look.

"We are always looking for new ways to make our merchandising more appealing, so you are going to see some subtle changes from store to store," she said.

Still, analysts said Wal-Mart has a way to go to improve its business.

According to C. Britt Beemer, chairman of America's Research Group, based in Charleston, S.C., the question is, "How does Wal-Mart move up in price point so they get the average ticket up, but doesn't destroy the price image of Wal-Mart?"

Beemer said it's critical for the discounter to liven up its apparel, a category that has one of the highest profit margins.

Buchanan said Wal-Mart's women's fashions look better than men's, and its home merchandise needs a lot more work.

"The lower-end customer is much more aspirational, much more aware of fashion," Buchanan said.

The company has also been slow to catch on to some trends, Buchanan said, noting that Wal-Mart didn't have Apple Computer Inc.'s popular iPod digital music players last holiday shopping season. The retailer does have them in stores now.

Some of the pressure on Wal-Mart is coming from the fact that food, which has low profit margins, is accounting for a growing portion of total sales. That means sales of higher-margin goods such as clothes are more critical.

Selling more food means stores get more customer traffic, but that also leads to long lines at checkout counters.

But analysts are bullish about Wal-Mart's ability to turn itself around.

Overall, Wal-Mart's power to "sell the lowest price and still make a fortune is alive and well," Davidowitz said. "At the end of the day, when all the smoke clears, the greatness of Wal-Mart will remain. The company has proven to be resilient."

And he added, when Wal-Mart fixes its problems, companies like Best Buy Co. Inc. and Circuit City Stores Inc. better "watch out."

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