A Wal-Mart Recession? Retail Giant Faces Tax Squeeze
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The Fiscal Times
February 23, 2013

Wal-Mart Stores fourth-quarter earnings announcement Thursday may have eased some investors’ concerns about the behemoth retailer’s stock – its 18 percent dividend hike certainly didn’t hurt in that regard – but the results didn’t clear up all the questions surrounding consumer spending in the wake of tax changes that took effect in January.

Worries about Wal-Mart’s sales had been stoked late last week. Whether it was accidental or a deliberately planned leak to get the bad news out of the way, an e-mail from a vice president at Wal-Mart warning about dire February sales figures made its way to reporters at Bloomberg. Jerry Murray, a vice president, warned other executives, "in case you haven't seen a sales report these days, February [month-to-date] sales are a total disaster." He cautioned that the month could be the worst February the company has experienced in seven years.

February’s sales – the focus of the e-mail – weren’t part of Wal-Mart’s fourth-quarter report, which dealt with the three months through the end of January. But the trend behind the dire warnings began at the start of the year, so investors and analysts were eager to delve into how Wal-Mart performed in the first month of 2013, after its shoppers realized how much new taxes had eaten into their disposable income and had begun to feel the impact of what’s now a four week-long rise in gasoline prices. Nearly half of consumers surveyed by the National Retail Foundation early this month say they have reduced their spending plans as a result of tax changes.

Wal-Mart posted better-than-expected earnings of $1.67 a share, up 10.6 percent from a year ago. Its revenues, though, were slightly below what analysts had anticipated. Same-store sales inched up 1 percent, below reduced expectations. Plus, even as they reassured analysts that sales returned to a “more normal” pattern last week, Wal-Mart’s executives confirmed that shoppers have been hurt by the payroll tax increase, rising gas prices and IRS delays in sending income tax refunds.

Last year, Wal-Mart cashed about $4 billion worth of refund checks, Walmart U.S. CEO Bill Simon told analysts. With the fiscal cliff drama delaying the start of tax season, the total so far this year is $1.7 billion.

“We also know that when a customer received an income tax refund, say the week before the Super Bowl, we had pretty good data that would suggest they would buy a television, for example,” Simon said. “With the delay in the refund moving into March, and even late March, we don’t have any visibility yet to what they might or might not do with those checks.”

Wal-Mart is particularly vulnerable to these tax-induced woes – perhaps surprisingly so for a company known for “everyday low prices” that might appeal to consumers who “trade down” when money is tight. Jharonne Martis-Olivo, director of consumer research at Thomson Reuters, points out that its two closest rivals within the “discounter” category, Target (NYSE: TGT) and Costco (NASDAQ: COST), cater more to the middle class, who aren’t living as much on the edge as are Wal-Mart’s core consumers.

Then, she adds, there’s the risk of a repeat of what Wal-Mart endured in the wake of the 2008 recession, when its clients fled for the still-cheaper dollar stores. “Analysts’ projections show Wal-Mart is in trouble, and could enter another ‘recession’ period, losing market share to dollar stores again,” Martis-Olivo said before the earnings release.

Dollar stores may be wrestling with their own problems – many have expanded in recent years, and it is getting harder for them to show same-store sales growth that is robust as it had been. And they, too, are feeling some of the impact, as shoppers focus on essentials and shun the heavily discounted but still higher-margin items, ranging from toys to housewares.

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Martis-Olivo notes that while same-store sale forecasts for Family Dollar (NYSE: FDO) have been cut back recently, they still call for a growth rate of more than 4 percent, while those for Dollar Tree (NASDQ: DLTR) are projecting an increase in same-store sales for the first quarter of between 2 percent and 3 percent. In contrast, Wal-Mart expects same store sales to be about flat in the first quarter.

It has been clear for some weeks that the payroll-tax increase would take a toll on sales, since Wal-Mart’s target customer is the low-income consumer likely to feel the greatest pain from reduced take-home pay. Even in realms where “the lowest price is the law,” there comes a point when it’s impossible to sell merchandise profitably simply because consumers don’t have the money in their accounts to spend.

Business journalist Suzanne McGee spent more than 13 years at The Wall Street Journal before turning to freelance writing. Author of the book Chasing Goldman Sachs, she has written for Barron’s, The Financial Times, and Institutional Investor.