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Thursday, October 16, 2014 10:21 AM

WalMart Margins Set to Plunge? Will Rest of Retail Follow? What About Jobs?

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Retail sales reports on Wednesday have me thinking about the strength of the economy, commercial construction, jobs, and profit margins.

Let's start with a look at retail sales.

The Wall Street Journal reports U.S. Retail Sales Falter Amid Signs of Global Slowdown.

Similarly, Bloomberg reports Weaker Retail Sales Signal Smaller Spending Boost.

Retail sales dropped more than forecast in September on a broad pullback in spending that indicates American consumers provided less of a boost for the economy in the third quarter.

The 0.3 percent decrease followed a 0.6 percent August gain that was the biggest in four months, Commerce Department figures showed today in Washington. Sales fell at auto dealers, furniture stores, building-supply outlets and clothing merchants. The median forecast in a Bloomberg survey of economists called for a 0.1 percent drop.

“The fact that real wages and salaries haven’t picked up that dramatically, it puts a ceiling on how much spending can accelerate,” said Omair Sharif, a U.S. economist at RBS Securities Inc. in Stamford, Connecticut. “It seems like relatively widespread softness in spending. The pickup in consumption that we’re all waiting for hasn’t quite taken off yet.”
Slower Store Openings

Reuters reports Wal-Mart to Slow Store Openings, Invest More in Ecommerce
Wal-Mart Stores, the world's largest retailer, said on Wednesday it would open fewer stores in the U.S. in the next fiscal year and ramp up spending on e-commerce.

The retailer will open 180-200 of its small format stores, called Neighborhood Markets, in the next fiscal year through January 2016, Greg Foran, head of the U.S. business, told a meeting of investors and analysts. That compares with its plan to open 270-300 of the small format stores in the current fiscal year.

Foran said Wal-Mart would open 60-70 Supercenters, its large format store, in the next fiscal year, compared with a plan for 115 openings, including conversions, this year.
Fewer Stores, Less Hiring

Fewer stores means less construction and less hiring. The former is transitory, the latter more lasting. If this is the trend at Wal-Mart, can Target and other retailers be that far behind?

If so, what does that say about trucking growth to stock the stores, and truckers eating at restaurants along the way? Of course, one also needs to consider the long-term growth aspects of trucking in general.

With trucking in mind, please consider RoboTrucks from Mercedes-Benz to Hit US Highways Within 10 Years; Mish Supply Chain Proposal.

Bleak Outlook for Sales and Profit

Here's a story that really caught my eye: Wal-Mart offers bleaker outlook for sales and profit growth.
Wal-Mart Stores Inc., facing a retail slump and a decline in traffic to big-box chains, cut its annual sales forecast and predicted slower profit growth over the next three years.

Sales will rise 2% to 3% this fiscal year, the Bentonville, Ark., company said Wednesday at its annual meeting with analysts. Wal-Mart had previously projected growth of 3% to 5%, though it indicated in February that it expected to come in at the low end of that forecast.

Chief Executive Doug McMillon is trying to reignite growth at a company hampered by shaky retail spending and slow shopper foot traffic. Wal-Mart's same-store sales — an industry benchmark of health — haven't risen in six quarters. To bounce back, the company is opening fewer big-box locations, focusing instead on smaller neighborhood stores and its e-commerce site.

The 47-year-old executive, who took charge of the company in February, said he sees plenty of room for improvement when visiting Wal-Mart stores on surprise visits. McMillon said stores need to boost in-stock levels — a measure of the merchandise available on shelves for customers to buy. They also should address long checkout lines and improve staffing by increasing the number of worker hours.
Margins Set to Plunge

If CEO Doug McMillon is indeed concerned about stock levels and long checkout lines, then he has to commit to more inventory in spite of missed sales targets. More importantly, he will have to hire more employees if he wants to shrink checkout lines.

The latter is good news for hiring, but horrid news for profit margins. Moreover, extra hiring news is balanced by a cutback in store growth.

It is easy to spin the hiring news however one wants. However, stock market levels are more than a bit inflated vs. overall earnings and margin projections.

Mike "Mish" Shedlock

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