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Are price cuts hurting Walmart's earnings?

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Walmart (WMT) has cut prices on products from food to book downloads to toys. It offers $4 prescriptions at its in-store pharmacies. Does the world's largest retailer make any money on these products? It won't say. But $10 toys and $9 electronic books must have tiny margins, if they have any margins at all.

Low prices do bring in additional customers. Reuters writes that Craig Johnson, president of Customer Growth Partners, says "since January, Wal-Mart's share of the U.S. retail market has risen 0.85 percentage points to 11.3 percent."

According to Walmart's 10-Q for the period ending July 31, its gross margins moved up slightly from 2008 to 2009. Widespread discounting could undermine that number, which is something Wall Street would not like.

Walmart may be hoping that if customers come to its stores or go online for significant bargains, they will also buy something else as they walk through the aisles or browse Walmart.com. The "loss leader" is an old trick in the retail business, but it does not always work. Sometimes customers walk in the door, get their bargain and leave.

Walmart is taking a risk by offering products that are probably priced below cost. Its earnings over the holiday period will prove whether or not this strategy works.

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