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February 22, 2013

Walmart tempers retail profit expectations

The Associated Press

NEW YORK - As the fortunes of many Americans go, so goes Walmart.

The world's largest retailer Thursday reported an 8.6 percent rise in fourth-quarter profit due to a smaller tax rate, but the company offered a tempered forecast as the lower- to lower-middle income shoppers that it caters to struggle with delayed tax refunds and higher payroll taxes.

Walmart is among several companies from fast food chain Burger King to jewelry retailer Zale that have warned that shoppers are being hurt by smaller paychecks and delayed income tax refunds. But since Walmart is an industry behemoth that accounts for nearly 10 percent of nonautomotive retail spending in the United States, it is seen as a bellwether for how Americans are spending.

It's widely known that many Americans in the lower income brackets have continued to struggle during the economic recovery even as higher earners have benefited from rebounding housing and stock markets. And while Walmart's results for the fourth quarter were promising, the retailer's expectations for the future signal that many Americans still are being pinched.

"Walmart moms are the barometer of the U.S. household," said Brian Sozzi, chief equities analyst at NBG Productions who follows Walmart. "Right now, they're afraid of higher taxes and inflation."

Walmart, based in Bentonville, Ark., said that while it had a strong start to the winter holiday shopping season in November, business has been volatile since December. The retailer said February, in particular, has been "slower than planned," largely due to the Internal Revenue Service's decision to delay accepting tax returns by eight days until Jan. 30 because the government didn't reach an agreement on the U.S. budget until late last year.

That resulted in Walmart customers cashing about $1.7 billion in income tax refunds year to date, compared with $4 billion for the same period a year ago, said Bill Simon, president of the company's U.S. namesake division. Simon said last year, shoppers used their refund money to buy TVs ahead of the Super Bowl, but this year, the retailer isn't sure how customers will use the money.

Walmart said it's also unclear how the payroll tax, implemented last month when the U.S. government allowed a temporary 2 percentage point cut in Social Security taxes to expire, will affect customers' spending habits. Nearly all working Americans are taking home less pay, and JP Morgan estimates that the payroll tax increase will equate to $70 a month less in take-home pay for Walmart shoppers, assuming an average annual income of $42,500.

Walmart said it has seen its business affected by the payroll tax in recent weeks, and shoppers are "talking about" it. So, the company is doing things such as offering smaller packaging and less expensive products.

Walmart also said it 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 U.S. companies from bribing foreign officials.

The company has launched its own investigation with officials in the United States 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 the company has "made significant improvement" to its compliance programs around the world.

In the fourth quarter, Walmart 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, Walmart 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. Walmart 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, Walmart expects first-quarter revenue at stores open at least a year, a measure of a retailer's health, to be unchanged from a year ago. The pace has slowed in recent quarters, and some analysts believe the forecast could be too optimistic.

For the year, Walmart 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 Walmart's outlook wasn't worse. Shares rose nearly 3 percent, or $1.85 per share, Thursday to $71.06 in trading.





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