February 20, 2013

What’s In Store For Wal-Mart? It Could Be Trouble …

by Jharonne Martis

Investors are bracing for some disappointing news from Wal-Mart when it releases its earnings this week, but the real problem may prove to be more than just a fourth-quarter phenomenon: the giant retailer’s core consumers are grappling with shrinking paychecks and more demands on their scarce disposable income.

The warnings are in: Wal-Mart Stores (WMT.N) is line for some deeply disappointing first-quarter earnings, at least according to an internal e-mail leaked to Bloomberg news late last week, bemoaning the fact that February sales so far have remarkably weak. But the company’s problems may actually begin with some disappointing fourth-quarter results, which Wal-Mart is expected to release tomorrow.

Currently, analysts are calling for Wal-Mart to report same-store sales grew only 1.8% during the fourth quarter, compared to year-earlier actual SSS growth of 2.1%, and analysts have been busy trimming their earnings estimates for the company. (Indeed, every sell-side analyst who covers Wal-Mart has lowered his or her forecast for fourth-quarter earnings since November of last year.) Currently, the mean estimate stands at $1.57 a share, down from $1.59 at the beginning of the quarter in early November. That would still represent a 9% gain over the $1.44 level reported in the fourth quarter of 2011. But while that gain may seem encouraging, and analysts agree that the company had a healthy December, thanks to hiring to boost staffing levels during the holiday sales period, the retailer’s flexibility with respect to layaways and its willingness to match prices offered by its competitors. But the trend isn’t encouraging.

The storm cloud on the horizon is the impact of the changing tax laws on the paychecks of Wal-Mart’s core customers: those with little disposable income to spare at the best of times. This group has been hit disproportionately by a triple whammy: higher payroll taxes, rising healthcare insurance premiums and higher gasoline costs. Meanwhile, their gross incomes aren’t rising much, if at all, and unemployment remains high. All that means that consumers are likely to keep their wallets firmly closed except when it comes to purchasing the bare essentials.

Smaller paychecks began taking a toll on Wal-Mart’s same-store sales in January, analysts have calculated, and any slide in SSS may be even more pronounced in February, if the leaked e-mail about the month’s results at the midway point is to be believed and that trend remains intact. Certainly, investors and analysts will be paying particularly close attention to any comments in the retailer’s earnings release or the subsequent earnings conference call about the precise impact of the higher payroll tax or higher gasoline prices on sales. Some of those are already taking a toll on spending: for instance, gasoline prices have been rising steadily day after day for more than four weeks without interruption, a trend that is causing Wal-Mart’s cost-conscious shoppers to consolidate the number of trips they are willing to make and the amount of gasoline they are willing to use.

Wal-Mart’s share price is already lower, thanks to the leaked e-mail warning that February sales are on track to become the worst for any February in the last seven years. That is also what is responsible for the most recent cuts in analysts’ forecasts for SSS growth in the first quarter of 2013, which has fallen from 2% at the beginning of February to only 1.8% today. Moreover, analysts also are expected to cut their earnings estimates for the first quarter. As seen in Exhibit 1, below, analysts current are projecting that the company will see earnings of only $1.18 per share in the first quarter, down from the forecast $1.57 for the just-completed fourth quarter.


The fear is that Wal-Mart may undergo the same kind of dire scenario that it experienced during the 2008 recession, when its core consumers – low income individuals and families disproportionately affected by any change in household disposable income – traded down, deserting its stores, where the ‘lowest price is the law’, for dollar stores. The chart below shows just how difficult it has been for Wal-Mart to recover from that experience. The giant retailer’s SSS have lagged those of the dollar stores since then, and only recently had begun to gain some traction, at least in relative terms.


Based on the same-store sales forecasts for Wal-Mart for the first quarter of 2013, the odds are that this tentative relative recovery will be halted in its tracks, and that its growth in SSS for the first quarter of 2013 will continue to lag that reported by those rivals.

What is in store for Wal-Mart may indeed turn out to be some more foreceful headwinds than previously anticipated.

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