Wal-Mart drops outlook and what that means

Stocks took a dive on Thursday as Wal-Mart, the largest retailer in the U.S., lowered its outlook for the rest of the year and missed second-quarter predictions. This doesn’t bode well for the nascent economic recovery or the health of consumers.

Here’s the story from the New York Times:

Wal-Mart Stores, the nation’s largest retailer, missed analyst expectations in the second quarter and lowered its full-year profit and sales guidance Thursday, saying consumers were still weighed down.

Coming a day after Macy’s missed expectations — its first miss in 25 quarters — and lowered annual guidance, and the same day that Kohl’s did the same, the retailers’ results suggest that consumers in both the low and middle sectors of the market are not yet being buoyed by an improving economic picture.

Wal-Mart’s profit increased by 1.3 percent to $4.07 billion for the quarter, while sales rose $2.4 percent to $116.2 billion. The crucial measure of same-store sales, though, dropped 0.3 percent for stores in the United States, versus analyst expectations of a 0.7 percent increase.

Wal-Mart attributed the sluggish results in the United States to the payroll-tax increases, a lack of expected inflation in food, and “a general reluctance of customers to spend on discretionary items right now,” said Charles M. Holley Jr., Wal-Mart’s chief financial officer, in a call with reporters.

The Associated Press (via the Huffington Post) added this context about the importance of Wal-Mart’s numbers:

But Wal-Mart’s results are even more troubling because it is considered an economic bellwether, with the company accounting for nearly 10 percent of nonautomotive retail spending in the U.S. Wal-Mart’s latest performance appears to show that many people continue to struggle in the U.S. and abroad.

In the U.S., while jobs are easier to get and the housing market is gaining momentum, these improvements have not been enough to get Americans to spend. On top of that, Wal-Mart said Americans continue to struggle with a 2 percentage-point increase in the Social Security payroll tax since Jan. 1.

During a call with the media, Wal-Mart Chief Financial Officer Charles Holley said the top three concerns among its customers are jobs, food costs and gas and energy prices.

“The retail environment remains challenging in the U.S. and our international markets, as customers are cautious in their spending,” Holley said in a statement, noting a “reluctance” among customers to spend on things items like flat-screen TVs.

The Wall Street Journal story pointed out that Wal-Mart is also incurring higher expenses due to foreign bribery charges and other business investments:

Wal-Mart has missed Wall Street estimates in recent quarters as its core lower-income customers in the U.S. contend with high gasoline prices and persistently high unemployment levels. This year’s comparable-store sales have also been pressured by a delay in income-tax-refund checks, severe weather conditions and a higher payroll tax. The Consumer Price Index, which measures what Americans pay for everything from bread to medical care, rose for the third straight month in July, the Labor Department said Thursday.

Executives warned an inventory increase of 6.8%, primarily driven by softer sales, could cause Wal-Mart to pull back on orders from suppliers to make room for an expanded array of holiday goods.

Strong expense-control efforts helped Wal-Mart’s margins, but the retailer is still grappling with costs related to a foreign-bribery investigation and revamping its e-commerce operations.

Expenses related to foreign-bribery allegations and an overhaul of its compliance programs came in at $82 million in the latest quarter, $12 million to $17 million higher than executives expected. In addition, earnings per share were reduced by one cent due to an undisclosed charge for a “certain non-income tax matter” in operating expenses within Wal-Mart International.

The Daily Beast wrote an interesting piece blaming the drop in same-store sales on Wal-Mart’s low wages saying it hampers the ability of lower-earning people from spending money at stores that cater to them:

People tend to shop with the wages they earn. Sure, they use debt to boost the size of the purchases when they have access to credit and are shopping for big-ticket items, like cars. But by and large, for the typical consumer at the lower end of the income ladder, spending is a function of income. When consumers earn more, they can—and do—spend more. When they earn less, they generally spend less.

The biggest problem in the economy is the refusal of companies, now in the fifth year of this expansion, to boost wages broadly. The rich are continuing to do well. But the typical worker just isn’t getting a meaningful wage. According to the Bureau of Labor Statistics, average hourly earnings for workers in the private sector have risen by a scant 1.9 percent in the past 12 months. Quarter after quarter, corporate America collectively puts up big profits, buys back shares, rewards executives handsomely, pays dividends—and then effectively freezes wages. And then executives at stores that cater to the bottom half of the income ladder wonder why nobody shows up. “Where are all the consumers?” read a plaintive email from a Walmart executive earlier this year. “And where is all their money?”

Too many CEOs labor under the delusion that the salaries and hourly wages they pay are adequate and sufficient to sustain growing consumption. In too many instances, they’re not. We’ve discussed this before. Walmart is the largest private-sector employer in the U.S. It accounts for about 10 percent of employment in the retail sector. It claims to pay average hourly wages of $12.78 in the U.S. Critics say those numbers, which are low ($12 an hour annualized for 52 weeks is less than $25,000), are inflated because they take into account higher-salary managers. Check out Glassdoor.com’s numbers on the pay at Walmart. Plenty of Walmart’s rank-and-file associates earn less than $10 an hour.

This isn’t complicated. Or, rather, it shouldn’t be complicated. By paying low wages, Walmart is effectively limiting the ability of a large chunk of the American workforce to consume. By setting a low benchmark, it encourages other employers to do the same. The sort of people who make up Walmart’s core shopping constituency are the sort of people who work there. Were they to earn more income, they’d surely spend more at stores—including Walmart. Since they don’t, they don’t.

So Wal-Mart’s low wages may in effect be hurting its own bottom line. For sure higher gas prices and payroll taxes aren’t helping, but it would be interesting to see if the nation’s largest retailer could be its own engine for economic stimulus.