Consumers Spending Less; Just Ask Wal-Mart

By George Leong for Investment Contrarians

All of the talk about the negative impact of the sequestration on consumer spending appears to have some validity.

While the rich consumers are continuing to spend on luxury items, those who are making less money and are influenced by the fragile jobs market and flat income levels continue to worry, which could likely impact consumer spending going forward. The effects of this, along with the widening gaps between the rich and the poor and the middle class are affecting consumer spending by Americans. In fact, we are seeing a widening income gap in many countries around the world, so it’s not just an American phenomenon—its impact on consumer spending is global.

Wal-Mart Stores, Inc. WMT is a good barometer on the state of consumer spending around the world, especially with the lower- to middle-class consumers.

The company reported its results last Thursday, and it seems like Wal-Mart is facing some hesitation in consumer spending.

In the fiscal first quarter, the company’s net sales grew a mere one percent year-over-year to $113.4 billion, which was below the Thomson Financial consensus estimate of $116.4 billion. The sales reading was also shy of the low range of the estimate of $114.6 billion.

The low-cost retailer blamed the decline in consumer spending on a delay in tax refunds, adverse weather, and the rise in payroll taxes. The key comparable U.S. store sales fell 1.4% for the 13 weeks ended April 26, 2013, which represents the first contraction in this key metric in many quarters.

My concern is that Wal-Mart is facing sales pressure at a time when money is cheap. What will happen to consumer spending when interest rates edge higher due to rising carrying costs?

While the decline in same-store sales is worrisome for Wal-Mart, there are also concerns regarding the foot traffic in the stores worldwide. Retailers want to see rising and high foot traffic. The thinking is that everyone who walks into the store is a potential customer and represents an opportunity to convert the foot traffic into sales at the register.

In the case of Wal-Mart, there are issues, according to Patrick McKeever, a discount retail analyst at MKM Partners: “The foot traffic trend has been deteriorating at Wal-Mart, pretty much across the entire portfolio, both domestically and internationally,” he states. (Source: Chang, A., “Wal-Mart Has a Bigger Worry Than Sales Growth,” Yahoo! Finance web site, May 16, 2013.) McKeever says the foot traffic for Wal-Mart is declining in North America, Mexico, Brazil, China, and Japan, and predicts it to fall even further this year.

Wal-Mart estimates it will see a rise in comparable store sales in the next 13-week period. If the company doesn’t deliver on this estimate, then you have to pause and consider that maybe all is not as rosy as the media is letting on.

This Article Consumers Spending Less; Just Ask Wal-Mart was originally published at Investment Contrarians