Wal-Mart's Sales Stagnation Reignites Concern About Economy

Friday, 15 Aug 2014 07:19 AM

 

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Wal-Mart Stores Inc.’s latest struggles to revive U.S. sales, following a disappointing Commerce Department report earlier this week, add to evidence that the economy isn’t recovering as quickly as expected.

The company posted stagnant same-store sales in its second-quarter earnings report, marking the sixth straight period of no growth. The world’s largest retailer also cut its earnings forecast for the year, citing higher spending on health care and e-commerce.

The sluggish results followed disappointing earnings from Target Corp. and Macy’s Inc. this month, signaling that a broad swath of retailers are struggling. The Commerce Department’s report on July retail sales was the weakest in six months, hurt by tepid wage growth. While some of Wal-Mart’s woes reflect a shift away from big-box retailers, many consumers appear to be simply keeping their wallets shut.

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“It’s difficult out there,” said Brian Yarbrough, an analyst at Edward Jones in St. Louis. “I just don’t know where consumers are shopping these days.”

Wal-Mart, based in Bentonville, Arkansas, now expects earnings of $4.90 to $5.15 a share this year, down from a previous range of as much as $5.45. Sales at U.S. Wal-Mart and Sam’s Club stores open at least 12 months — a key benchmark for measuring a chain’s health — were little changed last quarter, which ended Aug. 1.

Lower-Income Households

Wal-Mart’s customer base is largely comprised of families with incomes of $40,000 or less, said Bernard Sosnick, an analyst at Gilford Securities in New York. That makes the retail chain dependent on a broad economic recovery.

“There’s distress in that segment of the economy,” he said. “It is a challenging retail environment.”

Chief Executive Officer Doug McMillon, who took the post in February, also is contending with cuts in food-stamp programs. That’s squeezed the buying power of Wal-Mart’s lowest-income shoppers, Sosnick said.

Total U.S. retail sales advanced 0.2 percent in June and showed little additional progress last month, according to the Commerce Department. The lack of momentum surprised economists, who had projected a small gain in July.

One of the biggest challenges: Paychecks aren’t growing. Inflation-adjusted average weekly earnings dropped 0.2 percent in the 12 months through June, the worst performance since October 2012, according to Labor Department data.

Sale Events

Macy’s Chief Financial Officer Karen Hoguet said this week that consumers are still feeling the pinch of an economy that “at best is improving very gradually.” That’s forced retailers to rely heavily on sales and promotional events to entice shoppers.

“This is a very promotional business,” she said. “Our customer very much wants value and very much responds to promotions.”

Target, the second-largest U.S. discount chain, reported preliminary earnings on Aug. 5 that missed its forecast. The company, which is recovering from a hacker attack and mishandled expansion in Canada, tapped PepsiCo Inc. executive Brian Cornell as its new CEO last month. It will deliver its full results next week.

Wal-Mart’s stock dropped 5.9 percent this year through yesterday, trailing the 5.3 percent gain for the Standard & Poor’s 500 Index. The shares were little changed Friday, trading at $74.32 as of 2:59 p.m. in New York.

Health Expenses

Wal-Mart’s health-care expenses, which will grow by more than $500 million this year, are another headache for the chain. And it’s spending more to improve customer service and e- commerce capabilities. Wal-Mart and its subsidiaries employ about 2.2 million people worldwide, and the company has more than 11,000 stores.

“E-commerce is key,” Yarbrough said. “It’s the right place to be investing in.”

Wal-Mart also is opening smaller-format stores called Neighborhood Market and Express, aiming to reach customers unwilling to drive to a supercenter. The company said in February it was increasing its capital spending by an additional $600 million this year to add more of the locations.

Sales at Neighborhood Market stores increased 5.6 percent last quarter, outpacing the growth of traditional stores and e-commerce. Wal-Mart said that it plans to open about 90 Express stores this fiscal year.

The convenience of neighborhood stores increasingly appeals to consumers, especially younger shoppers, said Michael Keara, an analyst at Prime Executions in New York.

“The younger generation doesn’t seem to like big stores,” he said. “People are also trying to save on gas and trips.”

Editor's Note: Weird Trick Boosts Retirement Income by 50%

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