The world's largest retailer on Thursday reported that a lower tax rate helped boost net income by 8.6 percent during the fourth quarter, but the company offered a tempered forecast as its lower-income shoppers struggle with delayed income tax refunds and higher payroll taxes.
Wal-Mart is one of several companies from fast food restaurant Burger King to jewelry chain Zale to caution that shoppers are being hurt by smaller paychecks and delayed refunds. But since Wal-Mart is an industry behemoth that accounts for nearly 10 percent of nonautomotive retail spending in the U.S., the company's results are seen as a bellwether for how Americans are spending.
Low- and lower-middle-income customers that Wal-Mart caters to have continued to struggle even as the housing and stock markets have improved. And while Wal-Mart's results for the fourth quarter were promising, the retailer's forecast signals that those Americans still are being pinched.
"Wal-Mart moms are the barometer of the U.S. household," said Brian Sozzi, chief equities analyst at NBG Productions who follows Wal-Mart. "Right now, they're afraid of higher taxes and inflation."
Wal-Mart, based in Bentonville, Ark., said 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 Wal-Mart customers cashing about $1.7 billion in income tax refunds year to date, compared with $4 billion for the same time period a year ago, Bill Simon, president of the company's U.S. namesake division, 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 additional money.
Wal-Mart 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. Indeed, nearly all working Americans are taking home less pay, and JP Morgan estimates that payroll tax increase will equate to $70 a month less in take home pay for Wal-Mart shoppers, assuming an average annual income of $42,500.
Simons said that shoppers are "talking about" the payroll tax, so the company is doing things like offering smaller packaging and less expensive products.
In addition to its customers' economic concerns, Wal-Mart said it still is 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 American companies from bribing foreign officials.
The company has launched its own investigation and is working with government officials in the U.S. 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 that the company has "made significant improvement to our compliance programs around the world in 2013 and took a number of specific actions with respect to the processes, procedures and people."
In the fourth quarter, Wal-Mart said it 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, Wal-Mart says it expects earnings per share to range from $1.11 to $1.16 per share, below the $1.18 per share analysts polled by research firm FactSet are expecting. Wal-Mart says its guidance includes about $40 million to $45 million in first-quarter costs related to matters related to the Foreign Corrupt Practices Act and compliance issues.
For its namesake U.S. business, Wal-Mart expects first-quarter revenue at stores open at least a year, a key 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, Wal-Mart expects earnings per share of between $5.20 and $5.40 per share, while analysts expect $5.38 per share.
"We know there are challenges ahead," said Charles Holley, Wal-Mart's chief financial officer, said in statement. "But we believe our strong financial position ... will continue to produce strong sales and returns for our shareholders,
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 Wal-Mart's outlook wasn't worse. Shares rose nearly 3 percent, or $1.85 per share, on Thursday to $71.06 in trading.