The Exchange

Walmart Earnings, Consumer Confidence: Take the Long View

The Exchange

By Marek Fuchs

Walmart (WMT) reports its second quarter on Thursday and consumer confidence is out on Friday, which means the media — often prone to simplification and overdrawn assumptions — stand poised to jump to conclusions based on a pair of reliably jumpy statistics.

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Before we start absorbing the media noise, though, let’s sidestep trouble by checking out how it typically goes down. Then we'll unfurl Marek’s Bucket Theory, which will help proactively skirt trouble.

Walmart Draws Worry After U.S. Sales Dip,” Forbes fretted in a headline in February of 2010. Problem is: That was just as the United States economy was climbing out of the worst of the financial crisis. Worry was unwarranted.

May 2012 offered an upside contrast. Walmart reported an excellent quarter, so the media promptly rejoiced, weaving a tale of a vaulting economy. But guess what? The U.S. economy remained fairly trackless. In fact, that flush quarter didn’t even give us a bead on how Walmart itself would be doing a few months out. The following May, the New York Times was describing Walmart’s sales as “cold” and its shares as facing a “chill.”

As Walmart goes, so doesn't go the economy

But here we go again. In looking to Thursday’s report (FactSet expects earnings of $1.25 per share on sales – without membership fees from Sam’s Club – of $118.24 billion), the media are seeing it through the lens of what it will say about the economy at large. But as we’ve seen, as Walmart goes, so (doesn’t) go the economy. The reasons are varied.

Walmart is, first and foremost, a merchandiser – and one that keeps lurching about in that regard, too. In recent years the company has alternately stocked too many goods, priced itself out of the market and leaned heavily on basics.

They’ve also been pitch perfect. In other words, like merchandisers since time immemorial, their fortunes float on the tide of inventory selection. To tell their tale through the narrow frame of economic growth ignores the greater influence of good (or bad) merchandising decisions.

Low-income consumers from suburban and rural outposts make up the better part of Walmart’s customer base. When the economy recovers, this population tends to feel it last, which negates their importance as the leading indicator the media mistake them for.

International sales also play a great importance. Before long, a third of Wal-Mart’s sales may come from overseas. Variables that hit overseas business – from bribery scandals to wholly different merchandising decisions – have little to nothing to do with the economy of the United States.

And, of course, there is Amazon (AMZN). Never mind traditional competition from the likes of Target (TGT), Khol’s (KSS) and Costco (COST). The rules of store shopping are all but changing underfoot, thanks to the pull, influence, reach and innovation of online shopping’s biggest force. That’s a secular change; it has nothing to do with economic cycles.

Walmart, to be certain, matters to a degree as an economic indicator. It is symbolically important and employs well over 1 million Americans, approximately 1% of the national workforce. In that sense, even if it is not an accurate indicator of national economic growth, it is undoubtably part of its an engine. But taking an isolated instance of a single Walmart quarter as a leading indicator is misleading, at best.

The consumer confidence effect

Consumer confidence, due to be reported Friday morning, is similar in this regard. Consumers account for nearly three-quarters of economic growth, so the media all but chains itself to the monthly reports.

The problem is, again, that the statistics ebb and flow by the month, causing the media to veer between desperation and exhilaration.

Consumer confidence plunged in January, enjoyed unexpected increases in the spring and saw record highs over the past two months. So can we draw a line right from Friday's number to the heavens? If it comes in well, the media will. If it stumbles, all hope will be lost.

Here’s the only takeaway we can likely rely on: In the case of both Walmart and consumer confidence, hyperbole will be ascendant.

As strategic salve, buy into Marek’s Bucket Theory. It’s a simple theory, but seldom used. Cut to the quick: Earnings reports and economic statistics should not exist in silos. You need to take them in batches.

In other words, don’t judge Walmart’s quarter without the benefit of the past four. Even then it has limitations as an economic barometer, but at least you won’t be thrown by the one-quarter fluke, a defining feature of the current economy. Take consumer confidence a year at a time too. Not enough there to pull out a thread of thought? Don’t indulge in a big thought, then.

More mistakes are made in the stock market – especially with the economy in its currently drifting state – by making too much of a single result, then too little.

Jumping to conclusions on Walmart and consumer confidence on this week’s results alone is probably akin to jumping off the lip of a cliff.

Marek Fuchs was a stockbroker for Shearson Lehman Brothers before becoming a journalist who wrote The New York Times' County Lines column for six years. Fuchs speaks regularly on business and journalism issues at venues ranging from annual meetings of the Society of American Business Editors and Writers to PBS to National Public Radio. His recent book, "Local Heroes: Portraits of American Volunteer Firefighters," earned widespread praise. He is on the writing faculty at Sarah Lawrence College. When Fuchs is not writing or teaching, he serves as a volunteer firefighter. You can contact him on Twitter: @MarekFuchs.

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