Linda Sims: As we’ve been reporting, mixed results out of Home Depot and Wal-Mart. But what about the holiday season coming up? To find out how they’re going to do, we’re joined by Rick Wolfe. He is President of PostStone Corporation. Good to see you this morning, Rick.

Rick Wolfe: Good to be here, Linda.

LS: Let’s start with Wal-Mart, it is the biggest retailer in the world. So, [they have] better than expected earnings and it looks as if they are making some gains in their U.S. operations.

RW: They are and they’re doing it by discounting earlier on more items than they have in past seasons. So, good for them for making the tough decision to bring customers in the door, but not a new growth story.

LS: OK, because I wonder, they’ve been having execution issues, shall we say, for example in apparel. And I wondered if they’ve been making any improvements in actually getting the stores working better?

RW: They have. It’s a good news, bad news story. Over the last year they tried something new. They’ve tried moving into a more fashionable garment. Which is one of the things Target has done. It was a massive failure. They wrote down something like four billion dollars of clothing. So, it’s, “OK, let’s get back to basics, let’s cut prices, the thing we know how to do.” That won’t transform the business.

LS: No, but it may bring the customers in. Although there is some confusion about this. Sometimes we hear from Wal-Mart that their customers are spending less because they are getting squeezed by the housing slump, by high gasoline prices. On the other hand, you hear that a slowing economy and those problems will bring new customers in, people who might not have shopped at Wal-Mart before and now are feeling the squeeze. Which do you think is going to happen?

RW: Well, I think it’s yes on all fronts. With the on-going turmoil in both the housing market, and now credit cards are starting to get wobbly, we can expect individuals to have a smaller overall shopping basket and we can expect Wal-Mart to get a bigger share of that overall shopping basket as people look for value.

LS: And yet when I look at things like same store sales I see for example Costco doing so much better than Wal-Mart.

RW: Well, Costco is that strange creature, a discount store that serves the upper middle class with their wonderful, magical mystery tours of fresh surprises every time you go.

LS: Yes.

RW: Many people can’t walk out of a Costco without spending $500.

LS: True enough. So they’ve got their own formula that works for them. I wonder about this price war, though. Because you’ve got two things going on. First of all, Wal-Mart lowers its prices. Don’t all the other retailers lower their prices as well? And then don’t you get into a game of chicken with customers as they wait to see just how low these retailers are willing to go?

RW: That’s right and that’s why I say it’s not a long-term strategy. Take a look at Wal-Mart’s stock. If you put a dollar in Wal-Mart eight years ago, that’s where the stock is today. Great trader’s stock, it’s up and down constantly, but in terms of actually building wealth, it hasn’t happened and it’s not going to happen until they have a very dramatic change in strategy. And frankly, I think that means new leadership.

LS: Meanwhile, they’ve got new competition coming in. We’ve got Tesco, which is quite a success in the U.K., [they’ve] opened their first supermarkets in California.

RW: That’s right. And such an innovative story. It’s the whole creative destruction thing that we see over and over again in the economy and most particularly, over and over again in retail. This concept brings the best of Tesco’s expertise from the U.K. They had executives living with consumers for two weeks at a stretch, trying to get a feel for how the American consumers live. They had anthropologists studying consumers. They set up a dummy store and pretended it was a movie set so consumers couldn’t go out to the competition and say, “Oh, this is what I saw in the Tesco.” It is very tough to break in to the U.S. If anybody can do it, Tesco can. It will impact the industry dramatically.

LS: Certainly. Let’s move over to Home Depot. No surprise that they had disappointing numbers. But how much of that is Home Depot’s own story? They’ve, for example, lost market share to the likes of Lowe’s in recent years.

RW: They have and they’ve had to re-invest I think something like $2 billion in order to bring the stores back. This kind of a turn-around cannot be done overnight. I read one analyst say he thinks it’s going to take six quarters. I think that’s a fair estimate. I would not rule out Home Depot. Frank Blake is turning the attention of the company to where it belongs, their core customer, that’s the contractor. And they are upgrading service for the contractor, they are improving the value proposition for the contractor. I wouldn’t throw a fresh investment at Home Depot today but I’d keep a close eye on them.

LS: So in a tough environment, they’re doing the right things.

RW: I think so.

LS: Let’s bring it home because we take a look at the holiday shopping season. If they’re cutting prices across the border, do we lose more sales? Do our retailers lose more sales as Canadians cross-border shop, head to the internet, get those catalogues out?

RW: You know, I think Canadian retailers should be sending a cheque to the Department of Homeland Security. They are the best friend of Canadian retailers. By putting all those blocks at the border they make it so much harder for people to cross. Otherwise we would have a flood of people crossing the border.

Yesterday, I walked up to the cashier at an Indigo shop with a book in hand. And there are the two prices, the Canadian price and the U.S. price, I don’t know, 25% lower. And I say, “So, have you guys moved to the U.S. price?” No. “Any plans to move to the U.S. price?” Don’t think so. And I said, “OK”. And I walked away. As I walked away the two men behind the counter said, “You know, you are the nicest person we’ve seen here today. You wouldn’t believe what other people tell us.”

LS: At least you didn’t complain loudly.

RW: Well that’s right.

LS: But you didn’t buy the book.

RW: Right. And so what are these retailers thinking? To have two prices in front of me, one of them 25% lower than the other?

LS: Well we know that books have it the hardest ’cause the prices are right there. But are we going to see our retailers not make much money? We’ve heard about various retailers lowering their prices to try to keep Canadian shoppers in the door. Is it going to be a rough Christmas for them?

RW: Well, it’s not going to be a rough Christmas for them, because the Canadian economy is in good shape. But it will be a tricky Christmas for them. And they must respond to this dollar issue and they must do it more effectively than they have.

LS: OK, Rick, good to talk to you today. Thanks for coming in.

RW: My pleasure, Linda.