Why we care about Wal-Mart earnings

With Wal-Mart Stores Inc. reporting “disappointing” earnings Thursday, it’s easy to shrug it off as not that big a deal. Many of Wal-Mart’s core customers continue to struggle in the current economy, making details about sales an interesting window into the broader U.S. situation.

Here are a few earnings details from the Wall Street Journal:

Wal-Mart Stores Inc.’s first-quarter profit and revenue edged higher, but same-store sales at its namesake U.S. stores fell for the first time in seven quarters. The retailer blamed a delay in income-tax-refund checks, challenging weather conditions, and the payroll-tax increase.

While Chief Financial Officer Charles Holley said the second quarter was off to a “healthy” start, he said employment remain customers’ primary concerns and “our consumer is still stretched.”

U.S. same-store sales fell 1.4%, when Wal-Mart in February forecast flat comparable-store sales. “When we provided flat comp guidance for the first quarter, we had expected, among other things, to recover a reasonable portion of tax refunds and had also assumed that customers would follow historical spending patterns with these funds,” said Wal-Mart U.S. Chief Executive Bill Simon. “This did not materialize.”

The importance of tax refunds to lower-income consumers (and to Wal-Mart) can’t be overstated. Here are a few more details from the Reuters story:

Consumers with lower incomes have been especially squeezed by higher payroll taxes, consistently elevated gas prices and a shaky employment recovery.

Shares of the world’s largest retailer were down 2.1 percent, or $1.72, at $78.14 after falling as much as 3.2 percent earlier in the session. The stock had hit a new high of $79.96 on Wednesday.

“We hadn’t seen the business turn around particularly in April,” said ITG analyst John Tomlinson. “That was a concern because at that point you would think tax refunds and lower gas prices would have started to help the business.”

Earlier this year, Wal-Mart said that delays in tax refund checks from the U.S. Internal Revenue Service would crimp shoppers’ spending on discretionary items. But the effects went beyond that, and the drop in refunds pressured shoppers and, in turn, sales at the company’s U.S. stores.

“We do know that the lack of IRS refund checks did hurt our consumers,” Wal-Mart Chief Financial Officer Charles Holley told reporters. “In fact, the IRS, I think, has said that they’ve estimated that there were about $9 billion less in refund checks, and we certainly cashed less of those checks.”

The company forecast earnings of $1.22 to $1.27 per share for its second quarter, which began on May 1. Analysts had been expecting $1.29, according to Thomson Reuters I/B/E/S. The year-earlier profit was $1.18 per share.

Payroll taxes were also to blame, according to Bloomberg’s story:

Unemployment remains “high on the list of concerns” of shoppers surveyed by Wal-Mart, Chief Financial Officer Charles Holley said on a call with reporters today. The U.S. unemployment rate was 7.5 percent in April.

Wal-Mart’s sales slowed in January and February after shoppers’ incomes were reduced by a 2 percentage-point increase in the payroll tax. They also were hurt by tax returns that were delayed because of forms that were shipped late and additional, federally mandated fraud scrutiny.

Jerry Murray, Wal-Mart’s vice president of finance and logistics, said in a Feb. 12 e-mail obtained by Bloomberg News that month-to-date sales had been a “total disaster.” Murray left Wal-Mart last month. Holley said in March that those sales returned to normal by the end of February.

The picture wasn’t great overseas either, according to MarketWatch:

Overseas, a stronger dollar dented international sales by $1 billion. Wal-Mart cited slower personal income growth pressuring U.K. consumers as it cut prices on key food items to lure shoppers.

Without specifying the impact of Target’s entry to Canada, Wal-Mart said consumers there faced higher household debt levels. In its South African market, where it participates through a 51% stake in Massmart, the company also cited cautious consumers. In China, traffic dropped 8% as shoppers consolidated trips. In Japan, “cautious consumer behavior” also was observed.

Holley declined to elaborate on Wal-Mart’s thinking behind not endorsing the Europe-led accord on safety in Bangladesh.

“The key debate will be how much of Walmart’s comp [sales] slowing is temporary” because of weather and deflation or permanent because of such factors as payroll tax hike, said ISI Group’s Greg Melich.

Wal-Mart said it’s seen things improving this month and expects positive U.S. same-store sales this quarter. Investors appear to still need more proof.

It will remain to be seen if consumers and investors return to the company in the second quarter. But it is another piece of the economic puzzle. While some are excited by home sales, many at the lower end of the spectrum continue to struggle to get by and purchase what they need.