Wal-Mart's weak forecast shows how poor and middle-class being squeezed

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NEW YORK — As the fortunes of many Americans go, so goes Wal-Mart, so goes the economy.

Eva Cevallos and her daughter, Quinn, shop at the Wal-Mart store in Rosemead, Calif. Wal-Mart offered a weak outlook  as low-income shoppers face new challenges.  DAMIAN DOVARGANES/ASSOCIATED PRESS
Eva Cevallos and her daughter, Quinn, shop at the Wal-Mart store in Rosemead, Calif. Wal-Mart offered a weak outlook as low-income shoppers face new challenges.

Even as the world’s largest retailer on Thursday reported an 8.6 percent rise in fourth quarter profit during the busy holiday shopping season, it offered a weaker forecast for the coming months. The problem? The poor and middle-class Americans Wal-Mart caters to – and who are big drivers of spending in the U.S. – are struggling with rising gas prices, delayed income tax refunds and higher payroll taxes.

Melanie M. Burkhardt, a mother of two teenagers who shops at Wal-Mart, is one of those people. Burkhardt, a Waycross, Ga., resident, said she’s been hit with a double whammy: the payroll tax hike, which has cut her household monthly income by $260, and higher gas prices.

“We had to do a flip on our budget,” said Burkhardt, a legal assistant who plans to cut back on her trips to Wal-Mart. “This is money we used for things like going to a movie or splurging at Olive Garden. Not anymore.”

It’s widely known that Americans in the lower income brackets continue to struggle even as higher earners benefit from improved housing and stock markets, but Wal-Mart’s results signal that matters may be getting worse for the nation’s poor and middle-class. Because Wal-Mart accounts for nearly 10 percent of nonautomotive retail spending in the U.S., it is a bellwether for the economy.

“Wal-Mart moms are the barometer of the U.S. household,” said Brian Sozzi, the chief equities analyst at NBG Productions. “Right now, they’re afraid of higher taxes and inflation.”

Indeed, while wealthier households have seen their stock portfolios grow, poor and middle-class Americans have struggled to regain their footing since the recession ended 3½ years ago.

Median household income, adjusted for inflation, fell 1.5 percent to $50,054 in 2011 compared with 2010, the latest period for which figures are available, according to the Census Bureau. That was down 8.1 percent from 2007, just before the recession began.

Lower and middle-income households fared worse: The share of overall income earned by the bottom 80 percent of households shrank in 2011, while the income for the top 20 percent grew.

Another hurdle has been the jump in gas prices since mid-January. The average price for a gallon of gas rose 47 cents in the past month to $3.78 on Thursday, according to AAA.

Tax changes also have hit the nation’s lowest earners hard. On Jan. 1, Social Security payroll taxes rose 2 percentage points after a cut expired. Since the tax is levied against income only up to $114,000, it disproportionately affects middle- and lower-income households.

An even larger challenge for many lower-income Americans has been the government’s delay in processing taxes and paying refunds. That’s because income tax rates weren’t set until a last-minute deal between the White House and Congress on Jan. 1. So the IRS pushed back the start of tax-filing season to Jan. 30, two weeks later than usual.

As a result, by Feb. 14 the government had paid only $55 billion in refunds, down from $77 billion at the same time last year, according to an estimate by UBS. That drop of $22 billion is more than twice the impact of the higher payroll tax. Refunds have accelerated recently and will eventually be paid out, but the impact still can be felt by many taxpayers: About 78 percent of taxpayers receive refunds, and the figure rises to 82 percent for those reporting income below $50,000.

Wal-Mart, based in Bentonville, Ark., said while its business has been volatile since December, the month of February, in particular, has been “slower than planned” largely due to the tax refund delay. The company said that resulted in Wal-Mart customers cashing about $1.7 billion in income tax refunds year to date, compared with $3 billion for the same period a year ago.

Bill Simon, president of the company’s U.S. namesake division, said shoppers used their refund money last year to buy TVs ahead of the Super Bowl. This year, the retailer said it isn’t sure how customers will use the additional money when they get it, but some analysts say the most likely scenario is that they’ll save it.

Wal-Mart said it’s also unclear how the payroll tax will affect customers’ spending habits, although Simon said shoppers are “talking about it.” JP Morgan estimates that the payroll tax increase will equate to $70 a month less in take home pay for Wal-Mart shoppers, assuming an average annual income of $42,500. As a result, Wal-Mart is offering smaller packaging and less expensive products.

Wal-Mart earned $5.6 billion, or $1.67 per share, during the fourth quarter that ended Jan. 31, up from $5.16 billion, or $1.50 per share, a year earlier. Results were helped by a lower tax rate, which was 27.7 percent, compared with the rate of 30.9 percent a year ago. Net sales rose 3.9 percent to $127.1 billion.

Earnings topped Wall Street estimates of $1.57 per share, but sales fell short of the $127.8 billion analysts were expecting.

During the current quarter, Wal-Mart says it expects earnings to range from $1.11 to $1.16 per share, below the $1.18 per share analysts polled by FactSet are expecting. For its namesake U.S. business, Wal-Mart expects first-quarter revenue at stores open at least a year, a measure of a retailer’s health, to be unchanged from a year ago. The pace has slowed in recent quarters, and some analysts believe Wal-Mart’s forecast could be too optimistic.

For the year, Wal-Mart expects earnings of between $5.20 and $5.40 per share, while analysts expect $5.38 per share.

Despite the subdued forecast, investors were bracing for a weaker report after Bloomberg published a story Friday that leaked an email from an executive characterizing the first two weeks of February as “a total disaster.” Shares fell that day, but investors appeared to be relieved on Thursday that Wal-Mart’s outlook wasn’t worse. Shares rose about 1 percent, or $1.05 per share, on Thursday to close at $70.26.


Wal-Mart Stores Inc. (WMT)

Thursday’s close:

$70.26 $1.05, or 1.5%

Source: www.nyse.com

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David Parker
David Parker 02/22/13 - 09:58 am
Now that any significant

Now that any significant smaller enterprises have been eliminated by corporate giants, there isn't too much to threaten their profits. There is absolutely zero leverage to govern their pricing schemes. They admittedly will be stocking shelves with lower-quality products (if that's even possible). Their price-mark is set by determining how much the middle/lower class can withstand before dropping to a point where they have no alternative but to do without. There is no measure taken to actually provide a quality product for a fair price and if you say they base their pricing on that you have your head in the sand.

TrukinRanger 02/24/13 - 08:54 am
These type articles really

These type articles really get me going. It makes it sound like the economy is going down the tubes. Perhaps some of it is that people are conserving just a little more and not buy the junk that they don't need at the moment. I'm sure the grocery side, which is the anchor of most Walmart stores, is doing just fine. Just because people are tired of their cross merchandising schemes to squeeze every penny out of you doesn't mean the economy is bad. I personally will go without something I don't "need" because I don't want to go to Walmart, park a mile out, wonder if what I'm looking for is actually in stock, then stand in line for another 30 minutes while the minimum wage employees finally get to me. Perhaps if they quit worrying about over the top profits and stop their store manager's yearly trip to Florida to pick up their bonuses and give that money to those who actually do the work and pay them better people would be more inclined to come and shop there. The whole company is nothing but greed greed greed. Mr. Sam would be sickened at the way the company has turned out. However, I'm sure China is thrilled with their progress.

Darby 02/24/13 - 11:14 pm
Wal-Mart is a good cross section...

of the American economy. I'd tend to lend credence to their outlook.

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