Don’t be fooled by any pundit who says Walmart’s (NYSE:WMT) apparent sales struggles are anything less than disastrous news for the U.S. economy — or less than a big waving red flag for consumer staples stocks as a whole.
Why is that? Well, to start, Walmart is massive. In 2006, it made up some 2.3% of GDP and it’s the default shopping choice for many Americans — particularly those in the lower income brackets. The most likely culprit for the “disaster” of sales to start off the year is the payroll tax hike of 2% that kicked in on Jan. 1.
The payroll tax cut was a good idea insofar as Social Security is bankrupt anyway, so rather than having that 2% go towards current retiree benefits, it went straight back into the pockets of wage-earners (which is how it should be). This acted as a de facto stimulus for all Americans, as they put that money to work both directly into the economy and also towards deleveraging their household balance sheets.
Thus, it’s no surprise that Walmart may be feeling the sting of this loss. Some estimates suggest the payroll tax hike is removing $1,000 per worker from the economy.
The second factor at play here is probably higher gas prices. The national average price per gallon has risen from $3.22 in late 2012 to $3.78 today — a 17% increase. That 56 cents per gallon is a big number for folks in the Walmart demographic.
The company has tried to explain some of the sales weakness by claiming the IRS has delayed tax refunds. If anything, that causes me even greater concern. If people normally spend part of their refund money at Walmart, I consider it just as much an artificial boost in sales as the payroll tax cut represented. In other words, Walmart shouldn’t need to rely on either of these tax-related events. The fact that they must sends a chilling message about the economy.
Normally, we should expect about 2.8% GDP growth every year. Instead, we are hovering around 1% (and even saw a 0.1% contraction in Q4). This weak growth, combined with a multi-year trend in stagnant wages and consumer deleveraging, means the Walmart consumer is probably spending a lot less at the retailer than in the last 30 years.
This is really bad news, not only for Walmart but potentially for even the normal safe haven of consumer staples. These are products consumers really need to buy, but if they can’t afford even those, then things will get worse before they get better. It’s going to create pricing pressure on staples and, since Walmart has so much market share, other retailers are going to feel the squeeze.
The only exception is if they are paying dividends of 3% or more. The reason I toss in that dividend threshold is because of the Fed’s QE program, which is the good news here. As I’ve written before, bond yields have vanished due to QE, so investors are seeking out yield in other assets. Consequently, the move into dividend-paying blue chip stocks is likely to continue.
I would also hold onto the dollar stores like Dollar Tree Stores (NASDAQ:DLTR), which will benefit from this economic situation … unless and until management says margins are being pressured by competition from Walmart and the like.
As of this writing, Lawrence Meyers holds shares of Dollar Tree and has sold naked puts at the March 40 strike.