Will Wal-Mart’s Earnings Miss Big Time Next Month?

Shares of Wal-Mart (NYSE:WMT) have climbed 15 percent so far this year through Wednesdays close, a gain slightly greater than the 8.8 percent etched out by the Standard & Poors 500 Index in the same period. Yet, since the beginning of February, there has been a feeling of impending doom surrounding the company and its stock. That was when an email indicating the company was facing deteriorating sales was leaked to Bloomberg. In the intervening months, the commotion that initially surrounded the email has died down slightly, as no major problems have surfaced. But another indication that operations might not be moving smoothly appeared Thursday.

Analysts at Detwiler Fenton Group said in a research note seen by the publication that they have seen signs of slumping sales of perishable goods at Wal-Marts stores, suggesting that the retailers grocery business may be struggling. The firm also noted that Wal-Mart may have stocked too much outerwear.

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Following the firms assessment, shares of the retailer fell the most in two months, dropping as much as 2.4 percent in Thursday morning trading. The companys last significant intra-day decline came on February 15, the day when the emails were leaked. Also in February, the retailer gave a forecast for the current quarter that sparked concerns as it fell below analysts estimates. Wal-Mart said that the end of the payroll tax holiday, which returned the tax that funds Social Security back to 6.2 percent in January from a rate of 4.2 percent, and delayed refunds would curtail spending by its lower-income customers…

As Wal-Mart generates about 70 percent of its revenue from sales in the United States, it is impossible that decreased earnings power in its key customer base — lower income Americans — could not have a significant effect on its bottom line. Even before the tax fell back to its pre-2008 level, the companys sales were subject to a payroll cycle, in which sales rose when paychecks were issued and subsequently shrank over the course of the two-week pay period. That trend characterized the companys business throughout 2012.

With this trend in mind, along with hypotheses that the payroll tax would hold back consumer spending, analysts did expect the retailer to struggle this quarter. But still, analysts were surprised when Bloomberg reported that an email authored by Wal- Marts vice president of finance and logistics, Jerry Murray, called Februarys sales a complete disaster. Where are all the customers? he wrote, and wheres their money?

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The retailers exposure to the payroll tax — which has yet to be quantified — had been exacerbated by other problems, including comments made by Bill Simon, the executive vice president and chief executive officer for Wal-Marts United States operations, at a February 1 meeting, according to minutes leaked once again to Bloomberg

Simon commented at an executive officers meeting, that the company has inventory problems. We run out quickly and the new stuff doesnt come in, he stated, noting that these self-inflicted wounds were Wal-Marts biggest risk. As the publication outlined in an article published at the end of March, Wal-Mart does not have enough workers to restock the shelves, according to interviews conducted with store workers. In the past five years, the company has added 455 stores in the United Stores, a 13 percent increase according to regulatory filings. But the companys employee count dropped by approximately 20,000 in the same period.

This thinly spread workforce has had widespread consequences. As several interviews with Wal-Mart customers served to prove, shoppers are moving elsewhere

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Brooke Buchanan, a Wal-Mart spokeswoman disputed Wal-Marts struggles in a statement emailed to the publication. Our in stock levels are up significantly in the last few years, so the premise of this story, which is based on the comments of a handful of people, is inaccurate and not representative of what is happening in our stores across the country, she wrote. Two-thirds of Americans shop in our stores each month because they know they can find the products they are looking for at low prices.

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