Are Wal-Mart Stores, Inc. (WMT) Sales The Canary in the Coal Mine?

Unhappily I looked at my portfolio and saw a major drag- Wal-Mart Stores, Inc. (NYSE:WMT)’s stock, which fell over 2% on Friday. Upon investigation, I discovered, according to this article on the CNBC website, a leaked internal email from Jerry Murray, Wal-Mart’s vice president of finance and logistics attained by Bloomberg stated: “In case you haven’t seen a sales report these days, February (month-to-date) sales are a total disaster. The worst start to a month I have seen in my (about) 7 years with the company.”

Mr. Murray believes the main culprit was the payroll-tax increase that went into effect at the beginning of the year. Other retail stocks catering to the low end of the market, also followed suit with Target Corporation (NYSE:TGT) off 1.6%, and Family Dollar Stores, Inc. (NYSE:FDO) off 1.2% in sympathy.

Analysts believe that the working poor, who are make-up a good percentage of customers for each of these companies, would be most adversely affected by what is essentially a 2% tax hike on peoples’ paychecks, who were additionally squeezed by a recent increase in gas prices.

According to the following Motley Fool column, “Family Dollar has lost a quarter of its value as margins have shrunk and sales growth has slowed. With the payroll-tax holiday having ended on Jan. 1, deep-discounter customers have taken a big hit to their disposable income, and that may be hurting Family Dollar and its peers even more than they’re hurting Wal-Mart.” Wal-Mart hasn’t lost nearly as much value in the same time, and the earnings per share estimate was only cut a penny by analysts. One advantage that Target has over others is that they currently offer “online only products.”

While Wal-Mart was quick to downplay the leak, and some analysts stated that trouble in one locale does not necessarily mean trouble for all, I tend to disagree.

What we are seeing is the effect of public consumption on private. The working poor are especially vulnerable, as their discretionary spending, already low, is impacted to a greater degree than those of more affluence by any payroll tax-hike.

Say someone making $2,000 a month has $400 to spend after all fixed expenses (rent, health care, car insurance, etc.) are paid for. 2% of his paycheck is $40, or 10% of disposable income, while someone making $4,000 a month with $1,000 left over after substantially higher fixed expenses still has $920 to spend (8% of disposable income in this example which is fairly conservative considering how much higher I estimated his fixed expenses) … it’s easy to see if your clientele is predominately people of lower levels of income, you are going to be getting much less business.