Talking Numbers

What Wal-Mart is telling us about middle and lower income consumers

What Wal-Mart says about middle- and lower-income consumers

Wal-Mart, the world's largest retailer, has cut its outlook for the fourth-quarter of 2013. And that may have a lot to do with the American consumer, particularly those in the lower and middle income segments.

The company says it was hurt by store closings in Brazil and China as well as well as a charge on the company for getting out of franchise and supply agreements in India.

And, things are also tough in the United States. The company recently announced it was laying-off 2,300 employees at its Sam's Club stores. The company also has other worries in the US. In a statement, the company said:

"Despite a holiday season that delivered positive comps, two factors contributed to lower comp sales performance for the 14-week period for Walmart U.S… First, the sales impact from the reduction in SNAP (the U.S. government Supplemental Nutrition Assistance Program) benefits that went into effect Nov. 1 is greater than we expected. And, second, eight named winter storms resulted in store closures that impacted traffic throughout the quarter."

But a decrease in food stamps isn't the only thing biting into some consumers' ability to spend at Wal-Mart. Natural gas prices are up 38% over the last three months as unusually cold weather grips North America.

(Read: Wal-Mart sees lower Q4 earnings, blames weather, food stamp cuts)

So, while consumer incomes were flat for the month of December, spending was up 0.4%, according to the US Commerce Department. Were it not for energy costs, that spending would be up 0.1%.

According to Steve Cortes, founder of Veracruz TJM, Wal-Mart shares are suffering because consumers in the lower income are having a rough time with high costs. Wal-Mart's stock is down nearly 5% so far in 2014.

"Consumers right now face stagnant wages and persistently energy input costs," says Steve Cortes, founder of Veracruz TJM. "What you see right now is a tale of two cities: You see middle and lower income folks being squeezed [while] higher income folks doing very well. Why? Because the stock market has done so well. But, the typical Wal-Mart shopper isn't benefiting from the S&P [500 index] hitting all-time highs. And, he or she is having a real problem filling up their car, paying that heating bill, and we're seeing it in Wal-Mart's stock."

CNBC contributor Andrew Busch, editor and publisher of The Busch Update, agrees that higher energy prices are part of what's hurting Wal-Mart's customers.

"The energy aspect of the lower-end spending is really important," says Busch. "Those kinds of things really take away from discretionary spending. Wal-Mart is, obviously, a retailer at that end of the market and they get dramatically, negatively impacted when you have energy prices go up."

Yet Cortes says not all consumers – and, thus, not all retailers – have been hurt the same way by higher energy prices.

"While I think there are problems particularly for lower income folks, the consumer clearly is not dead," says Cortes.

Cortes notes that sports apparel maker Under Armour had a great fourth-quarter in 2013. And, even though Amazon disappointed Wall Street with its results in the last quarter, the online retailer's revenues were up 20% from the same time in 2012.

(See another take: Consumer spending split between haves, have nots)

"What both of those have in common is selling direct to the consumer," says Cortes. "They're not really dependent on brick-and-mortar…. The e-commerce situation remains robust [while] brick-and-mortar retail [is] very challenged."

While online sales showed double-digit growth during the holiday season, overall retail showed more modest gains. According to data from comScore, online retail spending was $46.5 billion for the last two months of 2013, a 10% increase from the previous year. Retail spending, excluding automobile-related purchased, was $697.8 billion in November and December, an increase of just under 3.3% compared to 2012.

Meanwhile, Wal-Mart may also be affected by a slower economic growth rate in this current quarter compared to the last two quarters of 2013, according to Busch. In the third and fourth quarters of 2013, the US Gross Domestic Product rose by 4.1% and 3.2%, respectively. While that may not hold in the first-quarter of 2014, Busch sees an opportunity ahead to buy Wal-Mart's stock – as well as other similar retailers – should it thus get weaker.

"First quarter, I'm seeing [growth] estimates of about 2.5%," says Busch. "I think that takes everybody down a bit. From there, then you can build into a medium-term picture where you're going to get a better chance to buy these stocks."

To see more of the discussion on Wal-Mart by Cortes and Busch, watch the video above.

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