Wal-Mart's woes highlight retail sector weakness

By Xavier Brenner

retail

Wal-Mart (WMT), the world’s largest retailer, reported disappointing earnings for its just-ended 2013 fiscal year and a softer-than-expected outlook. The company's lackluster results underscore a bigger recent trend of weakness in the retail sector after outperforming the S&P 500 index several years running.

Wal-Mart cited numerous winter storms resulted in store closures that impacted traffic throughout the quarter. A short holiday season and aggressive discounting didn't help, either.

WMT Chart

WMT data by YCharts

It has certainly been a frigid winter in the U.S., but can weather really be blamed for recent signs of weakness in retail and the overall economy? Hopefully, activity will rebound in the spring along with temperatures.

More broadly, the Wal-Mart slump may also be tied to the tough economic times for lower and middle Americans and the uneven nature of the economic recovery from the 2008-2009 financial crisis. If so, Wal-Mart's struggles bode ill for the entire retail sector.

Wal-Mart, off about 5% year-to-date, fell sharply on February 21 after the retail giant offered a lower-than-expected fiscal year forecast. The company cited reductions in US government assistance programs, higher payroll taxes and tight credit conditions as the culprits.

In a January 31 statement, the company noted that the sales impact from the reduction in food stamps (known formally as the U.S. government Supplemental Nutrition Assistance Program) benefits that went into effect Nov. 1 was greater than expected.

Also hitting families on a tight budget is the spike in natural gas prices, up 38% over the last three months as unusually cold weather grips North America.

One would think that tough times would favor retailers that focus on less wealthy consumers. The following chart prepared by Kraft Foods shows where the action is in terms of growth: budget retailing.

Still, Matt Phillips at Quartz noted that economic conditions are so rough for the poorest regions of the country that low-income shoppers are shifting their purchases toward absolute necessities, such as low-margin food products.

In short, even discounters like Family Dollar (FDO) are hurting. Family Dollar CEO Howard Levine, in his company's post-earnings conference call, pointed out:

"Our core lower-income customers have faced high unemployment levels, higher payroll taxes, and more recently reductions in government-assistance programs. All of these factors have resulted in incremental financial pressure and reduction in overall spend in the market."

The trend toward more families living paycheck to paycheck isn't likely to ease any time soon. According to a December calculation by Sentier Research of the seasonally adjusted median household income, adjusted for inflation, Americans' real incomes have fallen 8 percent since the start of 2000.

Consider, too, that the Pew Research Center reported in late January that almost as many Americans now identify themselves as lower class or lower-middle class (40 percent) as say they are middle class (44 percent).

No surprise, then, that the retail sector is trailing the overall S&P 500 (SPX) so far this year and a worse-than-expected retail sales report for January means the trend could continue. Take a look at the SPDR S&P Retail ETF (XRT).

XRT Chart

XRT data by YCharts

The retail sector's slide underscores the uneven nature of the economic recovery, according to Charles Sizemore, who manages several portfolios on the Covestor platform, including the Sizemore Global Macro portfolio.

"When the financial crisis first hit, some called it a rich man's recession because the wealthy were hit first. However, that's turned out to be a huge lie. The wealthy recovered quickly, but in the aftermath the working class has suffered. We're officially out of recession yet the economy is limping along, and unemployment is highest among the young, uneducated and lower-income classes."

Photo Credit: Walmart Corporate

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