When you’re the world’s largest retailer you don’t just impact the economy you become one of its barometers. So when Wal-Mart reported “weaker-than-expected holiday shopping” had forced them cut their sales projections, it was viewed as an ominous sign for the entire retail industry. Numerous pundits, such as Slate’s Daniel Gross, pondered the meaning of the reduced expectations and questioned whether it was a sign of impending doom or just a signal that the company is “bumping up against limits to profitable growth.”
Glenn Reynolds quickly picked up on the news and rounded up the blogosphere speculation, including some thoughts by my favorite oenophile, Steve Bainbridge:
This is an important story because Wal-Mart's vast size has made it a bellwether for the retail segment and, indeed, for the market as a whole. We thus need an alternative version of the story in which Wal-Mart's troubles actually indicate that the economy is doing well.
Steve proposes that it could be due to an increase in on-line retailing or a willingness of consumers to spend more on quality products. Those are certainly well-reasoned suggestions. But since we’re offering “alternate versions” let me dust off my conspiracy theory from last year.
The recent report appears oddly reminiscent of last year’s claim by Wal-Mart that that December sales were “tracking nearer the low end" of the chain's forecasts for the month. The news sparked a fresh round of hand-wringing over the economy and raised questions of whether retail sales would live up to expectations. What everyone appears to have forgotten is that when the earnings period ended in January, Wal-Mart reported record earnings and sales for the quarter and an increase of 12.2 percent over the similar prior year quarter.
How did Wal-Mart go from “tracking near the low end” on Christmas Eve to record earnings? I suspect the answer is hidden in the gift cards. Even though the store receives the cash for the gift card at the time of purchase, they typically don’t show up on the retailers' ledgers until after the cards have been redeemed for actual merchandise. With gift cards comprising an estimated 8% of holiday sales (around $17.2 billion in 2003), a giant surge in spending can be expected between Christmas Day and the middle of January. Because Wal-Mart is located in rural areas that don’t have malls or other large retail chains, the company is likely to rake in a considerable share of the after holiday market.
But why don't retail executives mention this factor? After all, it would calm some of the shareholders jitters. Perhaps they think the lackluster report will convince shareholders to dump the “under-performing” stock for a year end tax write-off (they might even be tempted to dump it themselves). Flush with the cash from their fat Christmas bonuses, they could buy up their own company’s stock at the new "low Wal-Mart prices." When January rolls around and the consumers cash in the gift cards, the fourth quarter sales sky-rocket, causing a significant bump in the stock's price.
Far fetched? Perhaps. But if the geniuses at Wal-Mart can get rich by putting a “redneck mall” in every hick town in America, I imagine they can do just about anything.
1
Or it could just be coincidence. But, to quote Elim Garak from Deep Space Nine, "I believe in coinicdence, but I don't trust it." And no, I'm not a Trekky. I only catch re-runs of DS9 on Spike TV.
posted on 11.30.2004 3:19 AM2
Isn't it interesting how earnings and revenue expectations become quantified. And then reality comes in, with actual results. And the actuals are compared to quantified predictions to decide if there is a problem, and what the problem is, if there is one.
Wonderful profit - forecast - actual feedback. VERY sustainable. Based on freely made voluntary contracts, and people honestly fulfilling their commitments.
Almost completely unlike any and all government run programs.
And it's wonderful that both the likely problems: dirty crowded stores, too cheap/ low end selection in an expanding economy have already been identified as possible problems. AND a likely reason for "no problem" (no change), if the gifts turn out to come thru and give WM big profits for 4Q after all.
3
The analysis in the press this morning was simply that WalMart had not offered the same pre-holiday discounts as in the past, in an attempt to bump up profits on holiday shopping on the assumption that people would buy just as much at the "everyday low prices", and it backfired.
Retail analyst Kurt Barnard noted that Wal-Mart's downward sales forecast did not necessarily indicate the company will make less money. . . .
Barnard and other analysts said Wal-Mart didn't offer the deep discounts it did in past years as the holiday shopping season kicked off on Friday.
``I think that Wal-Mart simply decided its normal range of pricing is such that it is definitely considered low by any normal standard,'' Barnard said.
By sitting out a year of doorbuster promotions, Wal-Mart may well have been trying to see if it can keep its profits up without having to slash prices on already discounted merchandise, Barnard said.
``They're looking to get a better gross margin,'' he said. ``They undoubtedly achieved that.''
Of course, that could still support an insider-trading stock buy-back scenario, but it doesn't mean that the company is hurting financially.
posted on 11.30.2004 9:26 AM4
But . . . other retailers are reporting solid sales, on the high end of expectations.
Here's my theory: people will do a lot of Christmas shopping in higher-end stores if they can afford to do so. If Wal Mart forecasts are flat, but the Dillards and the McRae's and the Saks are having a great year, that says more about the economy than just Wal Mart's piece of the pie. If Dollar General were having a blowout year, I suspect that is a negative indicator for the economy as a whole. Maybe that's true of WM also.
posted on 11.30.2004 10:29 AM5
I actually heard a similar analysis on NPR yesterday (sorry, no citation/link) and one of their analysts added that 25% of WalMart shoppers have no bank account (!) which explains the boon from the gift cards.
Regardless, I'd just as soon shop at a retailer like Costco.
posted on 11.30.2004 10:14 PM6
I am leaning toward folks looking to diversify their shopping experiencing by heading to higher-quality, less-stress retailers. I like Wal-Mart if I need a bunch of household stuff and a couple of groceries. I just don't, however, view Wal-Mart as a place to look for quality gifts for people. Most folks have a bit more money this Christmas and are willing to head to better stores. Turning something over and seeing a "Made in China" logo (as is on most WalMart stuff) is not quite the same as turning it over and seeing "Made in the USA" or some other country.
posted on 12.01.2004 10:34 PM7
KTK:
Do you mean to imply that Wal-Mart, having achieved near-monopoly status in many US markets, is now charging higher prices? I can't tell you how this shocks me...
/sarcasm
posted on 12.02.2004 3:56 PM8
Perhaps people are realizing that Wal-Mart is not the cheapest place in town. I noticed that their "specials" are usually great buys, but the runnier up products which have some of the basic extra's are usually priced higher than competing stores. I have stopped shopping at Wal-Mart since I have discovered I can buy almost anything they have cheaper somewhere else. Perhaps supporting the competition will preserve free enterprise and avoid the day when the "state" store is Wal-Mart and we have no choice. Wal-Mart has run many smaller stores out of business and I miss them!
posted on 12.18.2004 12:07 AM9
Perhaps people are realizing that Wal-Mart is not the cheapest place in town. I noticed that their "specials" are usually great buys, but the runner up products which have some of the basic extra's are usually priced higher than competing stores. I have stopped shopping at Wal-Mart since I have discovered I can buy almost anything they have cheaper somewhere else. Perhaps supporting the competition will preserve free enterprise and avoid the day when the "state" store is Wal-Mart and we have no choice. Wal-Mart has run many smaller stores out of business and I miss them!
posted on 12.18.2004 12:08 AM