Wal-Mart's forecast cut is slamming the stock and leading to much debate about the health of the consumer and the overall U.S. economy. There are some compelling arguments for why this news is indeed bad, and in time we'll find out if that's the correct version of this evolving story.
My first thought, however, was that the Wal-Mart news may be a good thing. Here are 4 reasons why:
1. First and foremost, the guidance cut was largely due to higher operating costs, not sales problems. Sales are projected torise 3-4% over the next three years. Not great, but a gain nonetheless.
2. Operating costs are rising because for the first time in a while, Wal-Mart is spending more to invest in its stores and people. As Stifel Nicolaus analyst David Shick wrote in a brief not etoday, Wal-Mart is "making up for years of over-earning and under-investing in a changing retail environment."
3. One big part of those higher operating costs: higher pay for its employees. If you raise wages but don't also raise prices, margins fall. That may be bad for the company stock, but hard to argue that more pay for America's biggest private workforce is a good thing for everyone else.
4. Wal-Mart said it is spending more than $1 billion in fiscal 2017 on e-commerce and digital initiatives. That's great news for hundreds of I.T. companies looking to score a big contract.
Perhaps this thesis will be proved wrong, but it's hard to argue there isn't at least some 'glass-half-full' angle to the story. And remember what I always say: the stock market is not the economy.
While I have you, here are two other random thoughts about retail.
First, don't forget about what I call the "house and car indicator." If home and car sales rise, there is less money left over for everything else. Even leasing a car requires a large down payment. Home and auto sales have both taken off this year, so it's no surprise retailers may have to adapt as consumers cut their discretionary spending. Google trends on searches for 'car loans' and 'mortgages' both show a gain over the past year.
Second, cell phones have forever changed the retail landscape. Most consumers spend about $100 a month on their phone bill, with some families spending hundreds per month. That's money that's going to Verizon, AT&T, or others instead of Wal-Mart and every other store. Salary is a zero sum game, so money going one place takes away from cash going someplace else … like Wal-Mart. Even a pop in sales from selling cellphones isn't going to recoup the loss of consumer spending power. Retailers will have to get used to it, because it won't change anytime soon.
And oh yeah, with college costs spiraling out of control, many families are, (like ours), saving instead of spending. I figure college will cost about $100,000 per year by the time my one year old son is of age. Perhaps "college kills retail" would be a good topic for a show segment.