When you’re the world’s largest retailer and the second largest public corporation on the planet, Wall Street sets high expectations. These expectations generally call for consistent sales growth and a reasonable, stable return on invested capital that allows for solid earnings generation. For Wal-Mart Stores Inc. (NYSE:WMT), the company that claims those titles, this meant posting revenue of $130.23 billion for the fourth-quarter and earnings of $1.59 per share.
But Wal-Mart, despite its size and business acumen, didn’t quite live up to expectations. Earnings came in at $1.60 per share, beating the mean analyst estimate by a penny, but revenue increased just 1.6 percent, 20 basis points below expectations, and increased to just $128.8 billion for the quarter.
At a glance, the top-line miss may seem superficial, especially considering the bottom-line beat, but investors were anything but amused with the close call. Wal-Mart stock has fallen about 7.6 percent over the past three months as news of Wal-Mart’s poor holiday quarter made its way through the ether and investors decided to exit their positions before the underwhelming report. The ugly truth of the situation is that Wal-Mart earnings fell 21 percent on the year in the fourth-quarter, and the company has suffered slow or negative sales growth recently. Same-store sales contracted 0.4 percent in the fourth-quarter and 0.4 percent for the full-year. Comparable store traffic declined 1.7 percent in the U.S. segment, and despite a huge push into the space this past holiday season, online shopping only had a 0.3 percent positive impact.
There are a couple of theories about why Wal-Mart had such a poor fourth-quarter. As the world’s largest retailer, not just in terms of volume but in terms of the diversity of its inventory, Wal-Mart is pretty much a barometer for the economy. The company’s business tends to rise and fall with the ebb and flow of the macroeconomic tide. So, generally speaking, Wal-Marts business is sensitive, exogenous factors such as unemployment and wage stagnation. It’s not secret that payroll growth has been low and that long-term unemployment remains an enormous problem, so it’s likely that these factors had an impact on Wal-Mart’s performance.
Another reason for Wal-Mart’s performance could be the format of its stores. Wal-Mart has struggled to grow into some markets because its traditional big-box format didn’t sit well with the locals. To amend this, the company has been experimenting with smaller neighborhood markets and different merchandise mixes designed to make Wal-Mart more dynamic, more relevant to consumers in any given market, and therefore more competitive. To that end, Wal-Mart has been testing a concept called tethering. Tethering is an idea that Wal-Mart began rolling out in earnest last year. The idea is that Wal-Mart’s satellite stores, such as the neighborhood markets and the few express stores in service, will share back-end logistics with nearby supercenters.
Here’s Simon on the subject: “So, imagine you’re at work, and you decide you need gas on your way home, and you know that Walmart Express store — because you go by it every single day — has fuel, and you decide what you want for dinner, and you want a rotisserie chicken, and, by the way, later that night, you decided that you’d like to play Scrabble with your spouse. I mean, go on your phone, let the store know that you want a Scrabble board, certainly something that’s not going to be carried in a 10,000 SKU assortment, and it will be there … or a sewing machine or anything that’s in the Supercenter assortment.”
A third, and arguably more compelling reason why Wal-Mart underperformed in the fourth-quarter is because of another exogenous factor: the expiration of additional post-crisis federal funding for social welfare programs like food stamps. According to company estimates confirmed by the Huffington Post, Americans spend about 18 percent of all food stamp dollars at Wal-Mart locations, or about $14 billion of the $80 billion dogeared for the program in 2013. Additional funding for food stamps expired at the end of 2013, forcing up to 47 million people off the program.
When providing its outlook for the coming quarter, Wal-Mart executive VP and chief financial officer Charles Holley said that, “Some of the factors affecting our consumers include reductions in government benefits, higher taxes and tighter credit.” The lower-income consumers that make up most of Wal-Mart’s customers are particularly sensitive to these changes in disposable income. Since lower-income consumers generally spend a most or all of their income, any reductions in income — such as the evaporation of food stamp benefits — equate to a material reduction in spending. This spending reduction means less business for Wal-Mart.