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Wal-Mart Earnings: Look Toward This Key Number

Yahoo! Finance
The Exchange

By Marek Fuchs

When last Friday's “total disaster” email from a Wal-Mart (WMT) official was leaked, traders and the media searched for assumptions and gathered up the usual suspects as the stock sank.

Wal-Mart’s apparent weakness, they said, was a clear indication that the consumer and overall economy were drifting back toward oblivion. As Wal-Mart goes, so goes the economy. This is fair enough – to a point. But as we prepare for Wal-Mart’s fourth-quarter report, which is due to be released before the stock market’s open on Thursday, we need to realize there might very well be more (actually, less) to it than that.

Let’s back up for a moment.

[Related post: Friday's Wal-Mart Selloff Signals Lack of Confidence in the Consumer]

It’s all systems down at Wal-Mart, at least according to the leaked email from Jerry Murray, the retailer’s vice president of finance and logistics, who on February 12 termed Wal-Mart’s month-to-date sales “a total disaster.” We’ll have a better sense of the caliber of disaster after the earnings release. It is the cause we need to be more concerned with.

Cyclical troubles?

As stated above, when the email hit the public, Wal-Mart’s weakness was seen through the narrow frame of the larger economy, as a mere function of the lower- and middle-class consumer suffering from higher payroll taxes and rising gasoline prices. In other words, Wal-Mart’s troubles, at least according to this instantly formed conventional wisdom, were cyclical. “What Happens in Wal-Mart Doesn't Only Stay in Wal-Mart,” said SeekingAlpha in a representative headline.

And who can argue with that? Who indeed?

Well, the problem with this form of auto-think is several-fold. After all, consumer sentiment and overall retail sales numbers have not run into a complete ditch. And even when they have in the past, Wal-Mart has a long history of surmounting the macro-trouble. Additionally, the job market has improved slightly, which should counterbalance a portion of the recent bloat in taxes and gas.

So what gives?

This latest email received the better portion of public notice, but a less-remarked-upon email from January came from a Wal-Mart senior vice president, Cameron Geiger. In speaking about that month, he asked plaintively: "Where are all the customers? And where's their money?"

Secular, not simply cyclical

The fact is, Wal-Mart’s problems may be more acute than conventional wisdom holds. Rather than being simply cyclical, its troubles appear secular in nature. As they report, investors need to be on the lookout for signs that the discount store count across the nation has simply become too great.

Even as the stock prices of Dollar General (DG), Family Dollar (FDO) and Dollar Tree (DLTR) have also been slip-sliding away on reports that 2013 will be lighter than expected, their respective expansions beat on. With 10,000 stores and a base of strength in the Southeast, Dollar General is heading West even as they are growing out their grocery business, a Wal-Mart mainstay. Dollar Tree is a short-length from 6,000 stores and, on the whole, the Web reach and aptitude of discount stores has grown markedly.

Let’s not even talk about worthy adversaries such as Target (TGT) and Costco (COST), forever busy cleaving with force onto different corners of what was once, for all intents and purposes, Wal-Mart’s discount market.

Store count is key

In reporting their third quarter in November, Wal-Mart talked down fourth quarter and full-year forecasts, all but saying their lower-income customers had their wallets caught in a vice. But rather than viewing Thursday’s earnings through the lens of Wal-Mart’s probable laments that its customers have feet of clay, check out any and everything they say on store count.

As American growth has ground to a near halt over the past couple of years, Wal-Mart has limited its expansion. During 2010-2011, the retailer opened only 113 stores in the United States, a remarkable departure from the past, when you’d blink and risk missing a Wal-Mart opening.

A company that currently relies completely on international expansion is quite a risk. Such a company also says a good deal less about the American economy than many assume.

What we know

Here’s what we know for certain: Analyst consensus for Wal-Mart’s fourth-quarter stands at $1.57 in earnings per share on $128.8 billion of revenue, year-over-year growth rates of 9% and 4% respectively.

If earnings or forecasts disappoint, as the bazooka of an email seems to imply, Wal-Mart, traders and the media will continue to point to wary shoppers and a national economy teetering all over again.

Not that there’s anything wrong with that. The reasoning is sound – it’s just simplistic. Wal-Mart’s troubles go well beyond the current mood of the consumer. The discount store field has become so immeasurably crowded that Wal-Mart, once groundbreaking and aggressive, will – almost irrespective of the economy – show the strain.

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.