Wal-Mart's Guidance: Up, And Get Used To It

If people are shopping at Wal-Mart (WMT) because of their "wealth evaporation" then it will be years before the trend reverses.

Wal-Mart said first-quarter earnings would come in higher than the company previously expected. They now see its first-quarter earnings between 74 cents and 76 cents per share, compared to its previous estimate 70 cents to 74 cents per share.

A common refrain out there is that people are trading down to Wal-Mart from Target (TGT). I happen to disagree. While I think some people are indeed trading down, the changes the company has made to scores of locations, its online dominance, and its new "Save More, Live Better" ad campaign have more to do with it. But, for argument's sake, let's go with "trading down."

The wealth loss in the US is due to one thing, housing. People still have jobs, as the unemployment rate is low and wages are actually rising. It is the value of their homes, their largest expense, and the fear that illicits are creating the current environment.

Now, since housing prices have fallen at the fastest rate in almost 100 years, this wealth deficit has been dramatic. It also means that a recovery to pre-bubble levels will take years, maybe decades. People who bought homes in the last 3 years have a negative equity or now not enough to tap for loans. Sensing this, they will spend accordingly.

If this is the reason people are running to Wal-Mart rather than the other retailers, one can only assume this trend will be in effect for the foreseeable future.

For shareholders of Wal-Mart, that is indeed good news. For holders of Target (TGT), JC Penney (JCP) and others, it means rapidly shrinking margins and the necessity to redefine themselves.

Disclosure: Author is long WMT

Comments

[bb99]

Add to this the fact that NY State is now forcing Amazon to collect tax on all purchases from New Yorkers. This will add pressure to Amazon's prices (and/or margins) and will be an advantage for the brick and mortars such as Wal Mart and Target. THe retail councils are talking about pushing this tax collection to every state as "e-fairness"... This appears to be the beginning of a gamechanger in the field of e-commerce.

[billddrummer]

WMT sells groceries (most in the US) and everything else for the home. As people perceive better value from WMT, they will continue to shop there. And the changes the company has made with staffing and product mix will continue to drive higher revenues, while top-notch logistics and inventory management systems will preserve margins and profits.

[crowdofcheerleaders]

Lots of things can happen that arent mentioned in this article. Specifically, with WM's supply chains.

[followmetowalmart]

WalMart gets a bad rap too often. Hopefully they will continue to be able to give us good prices. I am worried about the price of fuel. How will they be able to run all those trucks?

[Roudy]

I appreciate this article on WMT since I've owned it since 1981. I have always felt they will meet the challenges ahead as they have since 1981. I am very long on it also. Its time to give them credit for saving us money even though I can afford to shop anywhere I want to. I made my money by saving money and WMT helped me do it and still does. RoudMan