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Macy’s, Inc. (M), Nordstrom, Inc. (JWN), Wal-Mart Stores, Inc. (WMT): Middle-Class Caution Is Bad for Business

This week brought along with it a slew of warnings and revisions from retailers who are starting to see the writing on the wall. Consumers are spending less than anticipated, and it looks as if the end of the year is going to bring more soft spending with it. Macy’s, Inc. (NYSE:M), Nordstrom, Inc. (NYSE:JWN), and Wal-Mart Stores, Inc. (NYSE:WMT) all dropped their forecasts for the back of the year. The question is — why?

Wal-Mart Stores, Inc. (NYSE:WMT) CEO Bill Simon blamed some of it on the expiration of the payroll tax. Macy’s, Inc. (NYSE:M) CFO thought consumers were reprioritizing and spending on cars and homes instead of on retail goods. Nordstrom, Inc. (NYSE:JWN) decided not to be nailed down and took the high road, saying that its “job is to stay focused and execute on what’s given [to it].”

Macy's, Inc. (NYSE:M)

Payroll taxes take their bite
The specter of lower spending from the expiration of the 2% payroll tax holiday has lingered in the air for months now. Wal-Mart Stores, Inc. (NYSE:WMT) has cited the payroll tax in the past three earnings statements it’s released, claiming that its customers have been suffering under the new weight. Target Corporation (NYSE:TGT) made a similar claim after its January sales came in low and claimed that the effects were felt throughout the first quarter.

At issue is the payroll tax holiday that expired at the beginning of 2013. The rate had been dropped to 4.2% from its normal 6.2% in a round of negotiations in 2010. During the political and social nightmare that was the end of 2012, the U.S. Congress let the holiday lapse. That meant an extra tax burden in the New Year, with estimates putting the annual impact at around $1,000 per average working household.

The reason some companies have cited the impact while others have looked for alternative explanations is largely due to demographics. The 2013 cost is around $20 a week, which means that households with strong earnings probably didn’t notice the change. The holiday also affected only the first $106,800  of income, meaning that high earners got a smaller proportional benefit.

As a result of all that, companies that focus on price and target lower- to middle-income consumers are the ones feeling the bulk of the squeeze. Nordstrom, Inc. (NYSE:JWN) is more concerned about cars and homes because its customers were much less likely to have felt the impact of the change. Wal-Mart Stores, Inc. (NYSE:WMT) and Target, on the other hand, may have been hit squarely in their wallets.

How the upper half spends
There’s not an end in sight to that issue, and so Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT) may continue to see pressure throughout the year. The higher-end retailers, like Nordstrom, Inc. (NYSE:JWN), are probably suffering from the issues that Macy’s, Inc. (NYSE:M) highlighted. Consumers have been buying in waves, and as house prices have started to recover, more consumers are spending their cash on homes. That means purchases of clothes and other goods are going back on the waiting list.

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