Thursday, May 17, 2007

Wal-Mart Hedges On Outlook

From CBS Marketwatch:

Wal-Mart Stores Inc. said Tuesday that first-quarter earnings rose 8%, as robust results from the retailer's growing international division and at its warehouse stores offset persistent problems in its core U.S. stores.

The world's largest retailer also signaled that second-quarter results could fall short of expectations. Moreover, Wal-Mart said it would put greater emphasis on its "everyday low prices" to boost traffic and sales.

Bentonville, Ark.-based Wal-Mart saw its shares slip fractionally to close at $47.62 on the New York Stock Exchange.


The retailer has blamed disappointing U.S. sales on a number of issues in recent quarters -- from disruptions tied to store-remodeling efforts to misreading consumers' desires. But Tuesday it narrowed its list of factors to three related financial concerns that Scott said currently face Wal-Mart customers:

* General money or income worries.
* Inflation's effect on consumers' budgets.
* Escalating prices at the gas pump, which Wal-Mart has long called the biggest factor affecting the purchasing decisions of its core customers.

Gasoline prices at the retail level have risen nearly 40% since the end of February, and on Monday the American Automobile Association said that the cost of filling up a vehicle had hit an all-time high.

Let's look at those three factors in a bit more detail.

1.) Income: According to information from the Bureau of Labor Statistics, the average hourly earnings of production workers rose about 1% after adjusting for inflation from April 2006 to April 2007. I use this figure for Wal-Mart customers because the information from the BEA has figures for executives whereas the average hourly earnings of production workers is focused on the lower 80% of the US workforce.

For the duration of this expansion the increase is even worse. In November 2001, the average hourly pay of non-supervisory workers was $14.72. This increased to $17.25 in the latest survey for an increase of 17.18%. Inflation level increased from 177.4 to 206.86 over the same period for an increase of 16.51%, making the real increase in non-supervisory wages .67% since this expansion began.

Combine this 1% yearly increase and .67% expansion increase with a national savings rate that's been negative for over a year and high consumer debt levels and you can see why Wal-Mart's core customer group may slow down purchases. Their pay isn't increasing much after inflation, they're drawing down their savings (if they have any) to spend and they're already heavily in debt.

2.) Inflation: this is where the ridicules obsession with the "core rate" of inflation really comes into the spotlight. Wal-Mart's customers -- along with every other person in this economy -- consumers food and energy. While the YOY numbers aren't bad, they are still very visible every day at the grocery store and the gas pump. In addition, inflation is hitting key items. For example, the ethanol obsession is increasing corn prices, which is increasing milking cow's feed prices, which is increasing milk prices. The point here is consumers are seeing key food products increase in price at uncomfortable rates.

3.) Gas prices are at a nominal, all-time high -- before the summer driving season. See this post for more detail.

Wal-Mart has some problems that are self-made. But their core customer hasn't seen a meaningful pay increase for the duration of this expansion and is seeing gas and food prices (those annoying non-core elements of inflation) increase at an uncomfortable level. No wonder Wal-Mart had a terrible April.