Businessweek Archives

Wal-Mart and the paycheck-to-paycheck consumer


Wal-Mart (WMT) has a problem: Its typical shopper appears to be tapped out.

On Feb. 18, the world’s largest retailer reported $112.8 billion in worldwide revenue last quarter, up 4.6% from a year ago. But Wal-Mart (WMT) also said U.S. same-store sales fell 1.6% last quarter, and noted traffic in U.S. stores fell slightly.

That unnerved investors, outweighing plenty of good news in Wal-Mart’s quarterly report. The company has been slashing expenses and inventory, and international sales growth remains strong. Earnings per share last quarter were $1.17, beating Wall Street’s estimate of $1.12.

Still, Wal-Mart shares fell 1.1% on Feb. 18, to close at 53.47.

One explanation for sales weakness is deflation. The company said prices for groceries and consumer electronics continued to fall, causing customers to spend less on each shopping trip.

The tough economy and high U.S. unemployment are also playing a big role. U.S. consumers are still feeling squeezed, Wal-Mart chief financial officer Tom Schoewe told reporters today. “We see the influence of the paycheck cycle as pronounced now as it’s been in the past,” he said, according to Bloomberg News.

In other words, Wal-Mart’s typical customers are living from paycheck to paycheck, just trying to scrape by.

There is a chance that an improving economy could take care of these two problems. Deflation could become inflation, and Wal-Mart customers could buy more if they start finding jobs.

My question: How much does this current economic weakness fall disproportionately on Wal-Mart compared to other retailers?

According to one intriguing statistic in Wal-Mart’s quarterly report, same-store sales at Sam’s Club actually rose 0.7% last quarter, while they fell 2% at the rest of the chain’s U.S. stores. This suggests that Sam’s Club’s higher-end consumers could afford to spend a little more last quarter, while Wal-Mart’s lower-end customers needed to get by with less.

At the beginning of the recession, Wal-Mart and other discounters were seen as the beneficiaries, as consumers “traded down” to cheaper options. It’s possible we’re seeing early signs of the opposite trend. Earnings reports from Target (TGT), on Feb. 23, and Costco (COST), on March 3, could reveal if their consumers are behaving differently from Wal-Mart shoppers.

In the meantime, Wal-Mart faces a tough challenge. Wall Street is no longer giving the company credit for impressive efforts to cut costs and boost profits. Instead, the chain — and its shareholders — must wait for economic fundamentals to turn around for its core customers. That could take a while.


Burger King's Young Buns
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus