Market Overview

Payroll Tax Cut Not Enough to Bring Shoppers to Wal-Mart, Costco, Family Dollar

Finally, Congress approved a payroll tax cut that would put more money in the pockets of 160 million American workers. At first glance, this may spell out greater sales volumes for retailers targeting cost-conscious shoppers like Wal-Mart (NYSE: WMT), Costco (NASDAQ: COST), and Family Dollar Stores (NYSE: FDO), but other economic challenges may offset the take-home pay increase for American families, and drive down spending more than the tax cut can raise it.

One difficulty for American wage earners is increasing gas prices, which jumped 0.9 percent in January thanks both to inflation and higher oil prices as markets mull the ongoing fued between the EU and Iran over sanctions. While European officials insist that they have plenty of oil even without Iran, the market has been less confident, and Brent Crude has risen steadily since the end of January, nearing the $120 level.

Barack Obama is hoping that the payroll tax cut will fuel domestic consumption. The cut, which would give workers earning $50,000 a year about $85 a month in extra take-home pay, would give consumers more money to spend and thus help the U.S. economy gain momentum.

Pressue in the opposite direction may render Obama's plan moot. Today, the Bureau of Labor Statistics announced that the Consumer Price Index (CPI) had risen by 0.2 percent in January, up from an increase of 0.1 percent in December. Inflation continues to put pressure on Americans, who cannot afford even the smallest rise in prices while incomes continue to decline.

Low-cost retailers have seen steady revenue increases that helped boost earnings despite rising costs. 2011 saw a 12.6 percent rise in operational EPS for Costco as revenues leaped over $10 billion to $87 billion for the fiscal year as sales grew by 14.2 percent. Wal-Mart has seen profits rise steadily since crossing the $10 billion mark in 2010 after a loss of momentum the year prior. Family Dollar Stores saw basic EPS grow 50 cents to $3.20 in 2011 as revenues rose to $8.5 billion, although the company has profited tremendously from the subprime mortgage crisis and America's ensuing economic struggles. The company's stock is up 189 percent from the beginning of 2008.

Since these retailers appeal to penny-pinching consumers who are hardest hit by inflation, higher fuel costs are a serious threat. Add the government's plans to cut unemployment insurance payouts to 73 weeks in states struggling the most (the jobless in other states will only get 63 weeks of benefits), and retailers appealing to budgeting consumers fighting against the pull of poverty, and the big-box retailers specializing in small prices might see sales volumes decline in an industry that relies on economies of scale for growth.

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