Wal-Mart's Sales Problem—And America's

The Super Bowl was played on Feb. 3, with the Baltimore Ravens coming out on top. The loser claimed, with some justification, that the officials stole the game. The loser I refer to is Wal-Mart, WMT +1.04%not the unlucky San Francisco 49ers.
February was a rotten month for the Bentonville Giants. Rarely does one hear musings such as "Where are all the customers?" and "Where is their money?"—let alone grumblings such as "total disaster" and "the worst in seven years"—from senior executives in a publicly traded company. Such wording is frowned upon in Investor Relations 101. But that is how Cameron Geiger, Wal-Mart's vice president for merchandise replenishment, described woeful February sales in a leaked email.
Wal-Mart CEO Bill Simon quickly stepped in bearing higher shareholder dividends and an explanation. It was the officials' fault, he said. Mr. Simon didn't mean the pinstriped guys who rule the gridiron, but the U.S. Congress and the Internal Revenue Service. The Washington zebras made two misjudged calls that wrecked Wal-Mart's hopes for February.
One was the expiration of the payroll-tax cut on Jan. 1. With the tick of a clock, the take-home pay of the average American family dropped by $80 per month. The second bad call for Wal-Mart was the IRS delaying the start of its tax refunds to Jan. 31 from Jan. 17.

According to economists at UBS, UBSN.VX +1.09%pre-Super Bowl tax refunds dropped $20 billion from 2012 to 2013. In past years, Wal-Mart could rely on big sales of flat-panel TVs and party accessories during the week before the Super Bowl. This year, not so much.
But perhaps Wal-Mart shareholders can take heart: Since the delayed IRS checks hurt sales in early February, sales will rebound in March as the IRS checks flow in. Maybe Wal-Mart's customers will rush out to buy new TVs before college basketball's March Madness begins.
Even if they do, though, Wal-Mart faces a long season of headwinds.
• The expiration of the payroll-tax cut will continue to hurt. Wal-Mart's customers aren't thriving, and they will sorely miss that $80 lost per month. The average American family of four earns around $50,000 in annual income. The income of Wal-Mart households is thinner yet, with analysts typically pegging it around $45,000. Incomes in this range have stagnated and lost ground to inflation in 2011 and 2012.

• Food prices are rising faster than overall inflation. Inflation is the great hidden tax, especially when it hits essentials like food. Core inflation is running at about 2%, but the U.S. Department of Agriculture predicts that food prices will be up 3%-4% in 2013. This will nip at Wal-Mart customers and Wal-Mart itself, which now gets half of its U.S. revenue from groceries.
Will Wal-Mart eat the inflation and hurt its profit, or will it pass it onto its customers and risk driving them away? Food inflation presents no good choices.
• Gas prices are up 30 cents a gallon in 2013. History says that gas hikes always hurt Wal-Mart (and other big-box stores such as Lowe's). Back in spring 2011, Wal-Mart's sales slumped for several months as gas prices rose to nearly $4 a gallon. Here's an obvious fact that isn't always obvious to pundits who live in large cities: To get to nearly all of Wal-Mart's more than 4,000 American stores, one must drive—usually several miles to the edge of town or outer suburb.
• Wal-Mart shoppers have a higher unemployment rate than the national average. An Advertising Age study from 2003 showed that only 23% of Wal-Mart shoppers had a four-year college degree. The degree-less are suffering in today's economy. As of January, their unemployment rate was 8.1%, while the national average was 7.9%. Worse, the employment-to-population ratio among this group is only 54%, as compared with 62% in the general population.

It once was true that as General Motors GM +2.20%goes, so goes the U.S. economy. Today that is truer of Wal-Mart, and that's a problem. The political left loves to see the Bentonville Union Bashers suffer a bit, but does Wal-Mart's bad February herald another recession? If so, what would that do for the Obama administration's recovery narrative and credibility?
If higher gas prices and lower income levels represent a new normal, consumer spending is in trouble—and with it, the fortunes of both Wal-Mart and the U.S. economy at large.

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