NEW YORK - Wal-Mart and rival Target are brewing up a price war for toys, electronics and other things consumers may want for Christmas that could spell savings for shoppers, but profit woes for retailers in the critical holiday quarter.

Wal-Mart Stores Inc., the world's largest retailer, on Tuesday promised "its most aggressive pricing strategy ever" to fuel year-end business, but warned the move could also make it miss Wall Street's expectations for fourth-quarter earnings.

Shoppers check out at a newly-opened Target store near Royersford, Pa., on Monday, Nov. 13, 2006. Discount retailer Target Corp. said Tuesday its third-quarter profit rose 16 percent, beating analyst expectations as its sales rose 11 percent. [AP]

That announcement came as Wal-Mart posted an 11.5 percent profit increase in the third quarter when improved merchandise mix and stricter cost controls offset weak growth in US sales.

Its adversary, Target reported a 16 percent gain in third-quarter profit, beating analyst expectations as its sales rose 11 percent. Target President Gregg Steinhafel told investors during a conference call Tuesday that the retailer would compete on long-running discounts, noting that it has often matched those before Wal-Mart advertises them in its circulars.

"(Profits) is going to be a big issue for the big box retailers," said Ken Perkins, president of RetailMetrics LLC, a research firm in Swampscott, Mass. He noted that Target is going to be able to make up some ground lost in digital cameras and flat-screen TVs with its trendier apparel, which carries fatter profit margins. But he said, "It's going to put pressure on everyone."

Perkins pointed out that Wal-Mart can't rely on price cutting alone; it needs to have customers buy merchandise other than electronics and toys. "Customers need to leave with a handful of merchandise," Perkins added.

Wal-Mart's assertive discounting is expected to put pressure on other retailers to match the cuts, a move that would erode profit margins, though it would save customers money. The most vulnerable are toy retailers and electronic chains, but moderate-price apparel chains could be affected as well, Perkins said.

Wal-Mart started holiday discounting in mid-October by cutting toy prices, then followed this month with electronics and small appliances, with a promise of more to come. The company vowed generous discounts, or what the company calls rollbacks, on basic apparel like cargo pants and flannel shirts.

"We are implementing our most aggressive pricing strategy ever across core categories, such as toys and electronics," said Lee Scott, president and CEO of Wal-Mart, in a prerecorded phone message.

As if to emphasize its stance, Wal-Mart on Tuesday announced it slashed prices on more toys. It was the fourth time since mid-October that Wal-Mart rolled back prices on some products, moves that retailers normally reserve for after Thanksgiving.

John Menzer, head of Wal-Mart US stores, told investors there were "huge sales increases" among the discounted toys and in some electronics.

"We're seeing a big growth in our new categories such as flat panel TV's, MP3 players, laptops and cell phones. But this is tempered with declines in our more mature categories such as music, DVD players and telephones," Menzer said on the recorded message

Scott told analysts last month that Wal-Mart would focus more on discounts after an overemphasis on selling trendier clothing backfired, contributing to a sharp slowdown in sales.

Wal-Mart posted posted net income of $2.65 billion, or 63 cents per share, for the period ended Oct. 31, compared with $2.37 billion, or 57 cents per share, a year earlier.

Net sales totaled $83.5 billion, an increase of 12 percent from $74.6 billion.

Excluding income from operations in Germany and South Korea that it has sold, Wal-Mart's profit amounted to 62 cents a share. Wall Street expected a profit from continuing operations of 59 cents per share, the average estimate of 21 analysts surveyed by Thomson Financial, on projected sales of $84.48 billion.

Wal-Mart said it expects earnings per share from continuing operations for the fourth quarter to be between 88 cents and 92 cents, resulting in a full-year forecast for earnings per share of $2.85 to $2.89.

In August, Wal-Mart had forecast full-year earnings per share between $2.88 and $2.95.

Analysts polled by Thomson Financial expect 92 cents per share in the fourth quarter and $2.87 in the full year.

For the third quarter, same-store sales, or sales at stores opened at least a year, were up 1.5 percent. Wal-Mart has also forecast a flat November, the first month in a decade with no growth in same-store sales.

Scott said the slowdown was due to factors including overemphasis on its new, trendier Metro 7 women's apparel and comparisons with heavy shopping last year before and after hurricanes Katrina and Rita.

Wal-Mart expects same-store sales to be up between 1 and 2 percent in the fourth quarter, Chief Financial Officer Tom Schoewe said.

Shares of Wal-Mart rose $1.34, or 2.89 percent, to close at $47.66 on the New York Stock Exchange.

Meanwhile, Target said it earned $506 million, or 59 cents per share, up from $435 million, or 49 cents per share, during the same period last year.

Revenue rose to $13.57 billion from $12.21 billion during the same period last year. Target attributed the growth to new stores, a 4.6 percent sales rise at stores open at least a year, and credit card revenue.

Analysts surveyed by Thomson Financial were expecting 55 cents per share on revenue of $13.59 billion.

Net charge card revenue jumped 20.7 percent to $414 million. Target cards contributed $176 million in pre-tax earnings for the quarter, up $68 million, or almost 63 percent, from the same period last year.

Chief financial officer Doug Scovanner said on a conference call that Target's same-store sales have risen 4.8 percent for the year so far, and predicted its fourth-quarter same-store sales would be about the same. He said Target expects to earn $3.17 per share for the full year. Analysts are expecting $3.13 per share.

Target shares rose $1.40, or 2.42 percent, to finish at $59.16 on the NYSE.