NEW YORK As the fortunes of many Americans go, so goes Wal-Mart, so goes the economy.
Even as the worlds largest retailer reported an 8.6 percent rise in fourth quarter profit during the busy holiday shopping season, it offered a weaker forecast for the coming months. The problem? The poor and middle-class Americans Wal-Mart caters to and who are big drivers of spending in the U.S. are struggling with rising gas prices, delayed income tax refunds and higher payroll taxes.
Melanie M. Burkhardt, a mother of two teenagers who shops at Walmart, is one of those people. Burkhardt, a Waycross, Ga., resident, said shes been hit with a double whammy: the payroll tax increase, which has cut her household monthly income by $260, and higher gas prices.
We had to do a flip on our budget, said Burkhardt, a legal assistant who plans to cut back on her trips to Walmart. This is money we used for things like going to a movie or splurging at Olive Garden. Not anymore.
Its widely known that Americans in the lower income brackets continue to struggle even as higher earners benefit from improved housing and stock markets, but Wal-Marts results signal that matters may be getting worse for them. Wal-Mart is the latest in a string of big-name companies from Burger King to Zale to say that Americans are being squeezed by new challenges. But because Wal-Mart accounts for nearly 10 percent of nonautomotive retail spending in the U.S., it is a bellwether for the economy.
Wal-Mart moms are the barometer of the U.S. household, said Brian Sozzi, chief equities analyst at NBG Productions who follows Wal-Mart. Right now, theyre afraid of higher taxes and inflation.
Indeed, while wealthier households have seen their stock portfolios grow, poor and middle-class Americans have struggled to regain their financial footing since the recession ended more than 3½ years ago.
Stocks have about doubled since June 2009. Dividends and capital gains from stocks, which disproportionately benefit higher-income Americans, are taxed at lower rates compared with ordinary income.
At the same time, while incomes for most Americans have failed to keep pace with inflation since the recession, thats been particularly true for middle and lower-income people.
Median household income, adjusted for inflation, fell 1.5 percent to $50,054 in 2011 compared with 2010, the latest period for which figures are available, according to the Census Bureau. That was down 8.1 percent from 2007, just before the recession began. (The median is the point halfway between the highest and lowest levels.)
But lower and middle-income households fared worse: The share of overall income earned by the bottom 80 percent of households shrank in 2011, while the income for the top 20 percent grew. And in 2012, inflation-adjusted hourly pay barely rose, inching up 0.3 percent.
Another hurdle for lower- and middle-income Americans has been the jump in gas prices since mid-January. The average price for a gallon of gas rose 47 cents in the last month to $3.78 on Thursday, according to AAA.
Tax changes also have hit lower and middle-income households especially hard. On Jan. 1, Social Security payroll taxes rose 2 percentage points after a temporary cut expired. That sliced about $1,000 from the take-home pay of a household earning $50,000. Because the Social Security tax is levied against income only up to $114,000, it disproportionately affects middle- and lower-income households.
An even larger challenge for many lower-income Americans has been the governments delay in processing taxes and paying refunds. Thats because income tax rates werent set until a last-minute deal between the White House and Congress on Jan. 1. So the IRS pushed back the start of tax-filing season to Jan. 30, two weeks later than usual.
As a result, by Feb. 14 the government had paid only $55 billion in refunds, down from $77 billion at the same time last year, according to an estimate by UBS. That drop of $22 billion is more than twice the impact of the higher payroll tax. Refunds have accelerated recently and will eventually be paid out, but the impact still can be felt by many taxpayers: About 78 percent of taxpayers receive refunds, and the figure rises to 82 percent for those reporting income below $50,000.
Wal-Mart, based in Bentonville, Ark., said its business has been volatile since December, and February, in particular, has been slower than planned largely because of the tax refund delay. The company said that resulted in Wal-Mart customers cashing about $1.7 billion in income tax refunds year to date, compared with $3 billion for the same period a year ago.
Bill Simon, president of the companys U.S. namesake division, said shoppers used their refund money last year to buy TVs ahead of the Super Bowl. This year, the retailer said it isnt sure how customers will use the additional money when they get it, but some analysts say the most likely scenario is that theyll save it.
Wal-Mart said its also unclear how the payroll tax will affect customers spending habits, although Simon said shoppers are talking about it. JP Morgan estimates that the payroll tax increase will equate to $70 a month less in take home pay for Wal-Mart shoppers, assuming an average annual income of $42,500. As a result, Wal-Mart is offering smaller packaging and less expensive products.
Wal-Mart is facing other challenges besides the economy, though. The company is still grappling with allegations that surfaced last April that it failed to notify law enforcement that company officials authorized millions of dollars in bribes in Mexico to speed up getting building permits and gain other favors. The Foreign Corrupt Practices Act forbids American companies from bribing foreign officials.
The company has launched its own investigation and is working with government officials in the U.S. and Mexico. In November, the retailers said in a filing with the Securities and Exchange Commission that it was looking into potential U.S. bribery law violations in Brazil, China and India.
During a pre-recorded call to investors Thursday, CEO Mike Duke said that the company has made significant improvement to its compliance programs around the world.
In the fourth quarter, Wal-Mart earned $5.6 billion, or $1.67 per share, up from $5.16 billion, or $1.50 per share, a year earlier. Results were helped by a lower tax rate, which was 27.7 percent, compared with the rate of 30.9 percent a year ago. Net sales rose 3.9 percent to $127.1 billion.
Earnings topped Wall Street estimates of $1.57 per share, but sales fell short of the $127.8 billion analysts were expecting.
During the current quarter, Wal-Mart says it expects earnings to range from $1.11 to $1.16 per share, below the $1.18 per share analysts polled by research firm FactSet are expecting. Wal-Mart says its guidance includes about $40 million to $45 million in first-quarter costs related matters involving the Foreign Corrupt Practices Act and compliance issues.
For its namesake U.S. business, Wal-Mart expects first-quarter revenue at stores open at least a year, a measure of a retailers health, to be unchanged from a year ago. The pace has slowed in recent quarters, and some analysts believe Wal-Marts forecast could be too optimistic.
For the year, Wal-Mart expects earnings of between $5.20 and $5.40 per share, while analysts expect $5.38 per share.
Despite the subdued forecast, investors were bracing for a weaker report after Bloomberg published a story Friday that leaked an email from an executive characterizing the first two weeks of February as a total disaster. Shares fell that day, but investors appeared to be relieved that Wal-Marts outlook wasnt worse. Shares rose about 1 percent, or $1.05 per share, on Thursday to close at $70.26.
DInnocenzio reported from New York and Rugaber reported from Washington, D.C.