Wal-Mart Takes Center Stage Amid Sales Concerns

It’s going to be a big week for Wal-Mart (NYSE:WMT). The retail giant will report earnings on Thursday, unofficially marking the end of earnings season, and the stakes are high. Wal-Mart closed Friday off 2.15 percent, finishing the week down over 2 percent after news circulated that sales have slowed significantly over the past few weeks.

A series of emails leaked to Bloomberg on Friday revealed that February sales to date have been a “total disaster,” according to Jeff Murray, Wal-Mart’s vice president of finance and logistics. “Where are all the customers?” Murray asked in the leaked emails. “Where’s their money?”

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At a glance, the answers to Murray’s questions are: the customers are at home, and their money went to the government. That is, consumers have closed their wallets and tightened their financial belts in the wake of the expiration of the payroll tax holiday. The result could mean decreased sales at not just Wal-Mart, but other major retailers like Costco (NASDAQ:COST) and Target (NYSE:TGT)…

The payroll tax affects about 160 million Americans, and was lowered from 6.2 percent to 4.2 percent in 2008 to ease the financial burdens of the developing crisis. The tax is regressive, which means it takes a particularly hard toll on lower-income earners, which constitute a large portion of Wal-Mart’s customer base.

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But with the economy ostensibly improving (the jury is still out on that one) and the nation’s priorities tied up in the deficit, it was decided that the previous rate should be restored as part of Congress’ last-minute fiscal cliff tax agreement. This means less money in the pockets of consumers, but more money in the pockets of the government. The tax helped the Treasury run its first January budget surplus in years, but it is also clearly having negative side effects.

The various effects of the expiration of the payroll tax holiday were largely anticipated, but magnitudes are hard to estimate. Most investors and economists expected a negative impact on sales, but were not necessarily forecasting a “total disaster.”

Because of Wal-Mart’s massive size, many investors rightly use the company’s sales figures and quarterly performance results as a bellwether for economic conditions. Discount retailers are closely watched in general because of the relationship between sales and discretionary spending budgets.

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Wal-Mart will report its earnings after the ICSC-Goldman and Redbook retail sales reports are released on Wednesday. Between the reports and Wal-Mart’s earnings, investors should be able to get a good picture of current consumer spending behavior. Many traders are already expecting a pullback in the coming weeks, and weak sales data could catalyze profit taking.

While a disaster for Wal-Mart is not necessarily a disaster for the economy, poor results would be one more indicator that a broad economic recovery in the U.S. is still a fiction.

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