While investors rightly focus on Washington as politicians play Russian Roulette with the future of the U.S. economy, they should not overlook another important concern. Namely, there is a slowdown taking place at the world’s largest retailer. Bloomberg recently reported that Wal-Mart Stores, Inc. (WMT) was reducing orders placed with its suppliers. Why? Because the merchandise is not selling as well as the company’s management had planned.
Indeed, a quick look at WMT’s most recent Form 10-Q filed with the SEC makes the problem quite clear. Inventories, which are the company’s largest current asset by far, stood at $42.8 billion on July 31, up 5.5% over the past year. Yet, during the same time, total revenues (which include membership fees) were up only 2.3%. What’s worse, same-store sales in the company’s U.S. stores actually fell 0.3%. Over the past six months, same-store sales in the U.S. have dropped 0.8%. The company is blaming at least part of the decline on higher payroll taxes, which are leaving core customers with less disposable income.
Of course, there are some firm-specific issues that also explain the slowdown at WMT. For example, the company has reduced headcount so much over the years that it is now having trouble keeping the shelves stocked with the things that customers want. This reminds me of an incident I experienced at Kmart in 1988. I was attending the U.S. Track & Field Olympic Trials in Indiana. After sitting all day long on an uncomfortable stadium bench, I decided to purchase a stadium seat that would allow me to lean back and rest my back. But when I went to Kmart, I was informed that they no longer carried this product. When I asked why not, they said it was because they kept selling out. Huh? Did that mean that K-Mart had decided to only stock items that did not sell? That strategy might get it out of the problem of having to restock the shelves, but it will also kill sales.
Given WMT’s tremendous success over the years, I doubt it is doing anything that stupid. The bigger concern is that the slowdown at WMT might be a harbinger of trouble for the entire retail industry. We already know that real median family income has been falling ever since the financial crisis began in 2008, yet consumer spending has held up remarkably well. Perhaps we have finally reached the breaking point. As I wrote in my post on September 17, ShopperTrak is forecasting the slowest growth in holiday sales since 2009. On top of this, we now learn that the country’s largest retailer is experiencing a slowdown and cutting back on orders. This cannot be reassuring to those who were betting on a significant pickup in GDP growth.