Is the Stage Set for Wal-Mart to Underperform?
It looks like winter got the best of Wal-Mart (NYSE:WMT) this year. The big-box retailer reported on Wednesday that first-quarter sales increased just 0.8 percent on the year, less than half of the 1.8 percent mean analyst estimate. Earnings of $1.10 per diluted share were down 3.5 percent on the year, below the mean analyst estimate of $1.15 and at the low end of guidance.
President and CEO Doug McMillon didn’t so much defend the results as excuse them. Commenting in the company’s first-quarter release, McMillon said, “Like other retailers in the United States, the unseasonably cold and disruptive weather negatively impacted U.S. sales and drove operating expenses higher than expected.” The market was unsympathetic and drove shares down more the 2 percent following the announcement.
To be fair, McMillon did warn in the fourth quarter that Wal-Mart was facing a number of serious economic headwinds. “Some of the factors affecting our consumers include reductions in government benefits, higher taxes and tighter credit,” McMillon said at the time. “Further, we have higher group health care costs in the U.S.” The weather ostensibly compounded these issues, yielding the underwhelming results.
But it’s not just Wal-Mart that suffered this winter — it was retail at large. Census Bureau data show that overall retail sales growth in the U.S. began declining in October and continued decelerating until February, when sales grew just 1.47 percent on the year. Sales growth rebounded to 4 percent in March, but the dip sent a wave of concern through the market. The winter was difficult, sure, but consumers are still pessimistic and spending has declined over the past month. What if the headwinds McMillion mentioned drag down overall retail sales in the second quarter, as well?
The reason consumer spending is the focus of so much attention is because of its significant — although sometimes overemphasized — role in the economy. But regardless of whether people believe consumption is a cause or effect of economic activity, consumer spending is one way to measure economic activity.
By this measure, the growth that has helped fuel the recovery to date, modest though it may be, appears to be moderating. According to Gallup, self-reported consumer spending clocked in at $87 per day in March, flat with February and down from $89 per day one year ago. Although the level of spending is high relative to the spending observed in the five years since the crisis, the outlook appears to be modest. Per a different Gallup survey, overall, Americans are still more pessimistic than optimistic about economic conditions, and a majority of Americans believe the economy is getting worse.
This pessimism can translate into reduced spending. Wal-Mart, acting as a bellwether, is guiding second-quarter earnings from continuing operations in a range between $1.15 and $1.25 per share compared to year-ago earnings of $1.24 per share and below the current mean analyst estimate of $1.28 per share.
Perhaps the worst sign for the retailer in the first quarter was yet another period of comparable store sales contraction. Comparable store sales across both Walmart stores and Sam’s Club fell 0.2 percent in the quarter, an improvement over the 1.2 percent contraction experienced a year ago, but still concerning.