Companies rush to blame bad news on payroll tax increase

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WASHINGTON — Com­pa­nies are rushing to describe the impact of higher So­cial Secur­ity taxes that took effect in January. They paint a bleak picture.

Cash-strapped shoppers are spending less, many U.S. firms warned in earnings announcements over the past few weeks. They are avoiding small luxuries such as restaurant meals and fashion items, and they’re reconsidering major new purchases.

In the past, companies have blamed poor results on flu epidemics, earthquakes and SARS. The trouble, experts and analysts say, is that these high-profile events are only part of the story – sometimes barely a sliver.

The latest culprit is a 2 percent increase in the Social Security payroll tax, which all U.S. wage earners pay. As a result, households earning $50,000 will have about $1,000 less to spend this year. A household with two high-paid workers will have up to $4,500 less.

“Any time something like this happens – whether Hurricane Sandy or the tsunami or the payroll tax hike or uncertainty in Washington – any company that didn’t perform as well as they would have liked gets to say, ‘Look, these idiots in Washington are screwing it up for us,’ ” said Dan Greenhaus, the chief global strategist at BTIG, a brokerage firm.

A catchy news hook can help companies “blame a macrotrend for what may be a micro story” about their individual strengths and weaknesses, he said.

Government economists estimate the drop in take-home pay will lower economic output 0.6 percent this year.
Yet the tax talk ignores a host of trends, outside events and company-specific factors, analysts say. They say investors should pay closer attention to these factors when considering how a company might perform this year.

Take Darden Restaurants Inc., whose chains include Olive Garden and Red Lob­ster. Like other casual sit-down restaurant companies, it faces tough competition from chains such as Chipotle Mex­i­can Grill and Panera Bread, whose food and prices fall between fast-food and sit-down fare. Darden’s shares slid 28 percent between a recent peak in September and Feb. 21, the day before it lowered its earnings forecast.

But when the weaker forecast was announced, Darden CEO Clarence Otis blamed the payroll tax increase, along with gas prices and winter weather.

He said things had looked promising for the restaurant chain in late 2012 until these “difficult macroeconomic headwinds” blew in. Sales dropped because customers had less buying power, Otis said, despite the restaurants’ price cuts and promotions.

“They aren’t executing as well as their competitors,” says Sara Senatore, an analyst at Sanford C. Bernstein who covers the industry.

Fast food diners, generally lower-end than Darden’s casual dining clientele, cut spending quickly when taxes rose, said Steve Wiborg, North America president of Burger King Worldwide, on an earnings call last month.

Wal-Mart offered a similar message when it announced earnings, saying its core customers, poor and middle-class Americans, were spending less because of the payroll taxincrease, along with higher gas prices and delayed tax refund checks.

Yet Wal-Mart and other discount retailers saw potential benefits from the tax squeeze. Wal-Mart said it is “confident that our low prices will continue to resonate, as families adjust to a reduced paycheck.” Dollar Tree executives said last week that their store would provide a welcome alternative for Americans seeking to cut back.

“We’re seeing the effect (of the payroll taxincrease) on the consumer,” said CEO Bob Sasser, “but we think we’re part of the solution and a destination for a cash-strapped consumer who’s trying to balance their budget.”

Discount retailer stocks are rising. The TJX Cos. Inc., operator of T.J. Maxx and Marshalls, is up 6 percent this year, Ross Stores Inc. 7.5 percent and Stein Mart Inc. 16.6 percent. Wal-Mart is up nearly 4 percent since its earnings announcement on Feb. 21, while Burger King has gained more than 9 percent since it unveiled results on Feb. 15.

Like the mid-range retailers and restaurants that can blame their woes on tax policy, lower-end stores might be trumpeting its benefits to them too hastily, says Joesph LaVorgna, the chief U.S. economist at Deutsche Bank Securities.

“We don’t know much about the first quarter,” he said, and retail sales data for recent months have been revised upwards. The tax hike will inevitably hurt consumers in the first quarter, he said, “but that doesn’t mean consumer spending is necessarily going to be weak.”

Consumers could keep spending and save less money. The job market is improving and so is the housing market.

LaVorgna noted that people have continued to buy more expensive items like cars and trucks, a trend that “seems to run counter to the payroll tax hype, blaming it for all the problems.”

In general, economists say, the picture is far more complicated than a small reduction in take-home pay. People may be saving for biggest expenses while cutting back on items typically considered staples.

In its earnings announcement, Home Depot said sales were strongest of items that cost $900 or more – hardly the marginal purchases that mid-level restaurant chains must worry about, says Brian Sozzi, a retail industry analyst with NBG Productions. The company also did brisk business in flooring, a product set that tends to track renovation activity, a broad driver of spending.

There’s no reason to believe the companies are being dishonest about why sales might have weakened. But focusing on the payroll tax, a political hot-button, might be a red herring.

“This might be bad for some companies and very good for others,” Greenhaus says. Which companies fall into which group, he said, won’t be clear for a few more months.

THE WEEK AHEAD

TODAY: Finance ministers of the 17-nation eurozone meet to discuss a bailout for Cyprus, further aid for Portugal and Ireland and the controversial issue of direct banking recapitalization through Europe’s permanent rescue fund.

TUESDAY: The Institute for Supply Management releases its service sector index for February.

WEDNESDAY:

• Commerce Department releases factory orders for January.

• Federal Reserve releases Beige Book.

• House Finance Services subcommittee holds hearing on the mortgage companies Fannie Mae and Freddie Mac.

• Staples Inc. reports quarterly financial results.

THURSDAY:

• Labor Department releases weekly jobless claims and fourth-quarter productivity data.

• Commerce Department releases international trade data for January.

• Freddie Mac releases weekly mortgage rates.

• Federal Reserve releases consumer credit data for January.

• Several chain retailers release February sales comparisons.

FRIDAY:

• Labor Department releases employment data for February.

• Commerce Department releases wholesale trade inventories for January.

– Associated Press

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dichotomy
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dichotomy 03/04/13 - 11:05 am
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A tax increase, no matter how

A tax increase, no matter how large or how small, means there is less disposable income for people to spend. It's common sense that it will negatively affect the economy to some extent. We've just had an increase on the payroll tax and an increase in income taxes on higher income earners. It's bound to affect sales. It's common sense. I think the Republicans told us this would happen.

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