Wal-Mart Leaked Emails Put in Perspective

A leaked email obtained by Bloomberg news reported to be from a Wal-Mart Stores, Inc. (NYSE:WMT) executive characterized February MTD sales (through February 12) as “a total disaster” and “the worst start to a month I have seen in my ~7 years with the company”. Wal-Mart Stores, Inc. (NYSE:WMT)’s response did not confirm or deny the legitimacy of the email, but offered the following statement: “as with any organization, we often see internal communications that are not entirely accurate, that lack proper context and represent individual opinions.” Based on the company response, the email is likely legitimate, but not the whole story.

Delayed tax refunds likely causing some temporary pain. While many analysts have not yet conducted checks in February, January checks have indicated softness in the last week of the month. With the payroll tax increase and delay in tax refunds (more on that below) adding further pressure, it seems reasonable that Wal-Mart sales could have fallen short of expectations so far this month. We suspect the same holds true for other retailers serving middle to lower income consumers, as well.

If Emails/documents were obtained from Target, Best Buy, Sears, etc. they would likely show an identical picture. Why? The reason for the shortfall was attributed to payroll taxes and delayed tax returns. This is not a company specific problem, but an industry problem. Therefore, it would be logical that the stocks of these companies would all have dropped by a similar percentage on the news, right? The market seems to have mostly gotten this point correct, but many in the media seem to have missed that. We will give the sell-side credit, as both Jefferies and Stifel mentioned that point in research notes.

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Putting things into perspective… While the payroll tax increase is likely to create pressure on consumer spending all year long, it is important not to underestimate the significance of the delay in tax refunds. At February 3 (beginning of the retail month for most retailers) there were $22.4 billion fewer tax refunds y-y. To put that into perspective, that equates to 8.5% of February retail sales last year. Now imagine that hitting all in a week or two… the impact is much greater. This early Feb weakness could reverse based on the numbers. Clearly not all tax refunds get spent, and our analysis is for illustrative purposes, but it helps put things into perspective.

More up to date numbers include $77.5 billion in tax refunds as of February 14 versus $55 billion last year, so there is still a $22.5 billion gap, but that is down from a $39.3 billion gap on February 6. The gap should continue to reverse through the tax filing season and there could well be stabilization in retail spending. For more detail, go to http://www.fms.treas.gov/dts/index.html

Silver lining in the email: Wal-Mart Stores, Inc. (NYSE:WMT) taking share through January. One silver lining in the Bloomberg article was contained in the minutes of a February 1 Wal-Mart officers’ meeting, which was attached to the leaked email. The minutes quote Bill Simon, CEO of Wal-Mart U.S., as suggesting that Wal-Mart is steadily gaining share, despite a slow January and a tough macroeconomic backdrop.

Furthermore, the article includes discussions of “worst start to month in at least 7 years”.. worst Wal-Mart US quarterly comp in that period was -2% in 4Q09.

Analysts at Stifel believe that discretionary spending trends are at risk after five consecutive years of retail outperforming the broader market. However, Stifel analysts believe Wal-Mart consumers are most at risk of gas price shocks or tax hikes due to the relative macroeconomic positioning of the company. Therefore, they conclude that they do not think the story is necessarily wrong – higher taxes and delayed tax rebates simply have to hurt sales pace – and if this is right Wal-Mart is a non-cyclical retailer with relatively protected share from online threats due to sales and customer mix.

In a research report issued on Friday, Barclays comes to the same conclusion about online sales. Their online price study indicates that walmart.com holds price advantage vs. Amazon.com, Inc. (NASDAQ:AMZN). In the price study comparing 50 items between walmart.com and amazon.com, Barclays found that items on walmart.com were on average 4.9% cheaper than the same items on amazon.com, before considering the impact of shipping charges. Even after shipping is considered, Walmart fairs well.

Disclosure: No position in any security mentioned

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