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Friday, February 15, 2013

The WalMart Sales Disaster and the Payroll Tax Hike (Updated)

In the reporting today about Walmart's sales "disaster", I saw prominent attribution of the so-far-unquantified decline to the 2% payroll tax increase that kicked in last month.  None of the stories mentioned the impact of gas price increases over the same period. 

I suspect this might reflect a certain amount of political bias, but also probably some self-interest on the part of both the retail executives, who would be all too happy to have government subsidize their revenue, and also the reporters writing the stories, who are also likely feeling the impact of the payroll tax hike in their own paychecks and would be most happy if it were undone and the burden of their retirement were shifted to somebody else. 

To help compensate for that bias, here are some calculations and a little bit of information.   The Census estimates that median household income is around $50,000.  We know that Walmart sells more to lower income households, so the median income among its customers is probably no higher than $40,000.  That would imply a monthly loss of about $75 from the payroll tax hike.  Of course, not all that money was being spent at Walmart and not all of the adjustment in spending is going to occur there.  Let's say 2/3 does, though, just for argument.  That would mean $50 / month of lost sales per paycheck earning customer household.

But a significant part of Walmart's sales aren't paid for out of paychecks.  There are millions of retirees whose Social Security and other benefits aren't impacted by the payroll tax hike; roughly 20% of the nation is on Social Security, whether for old age or disability.  Of course, a good number of those people aren't able to get out to Walmart, but their check may be funding purchases made on their behalf just the same.  There is some amount of "off-the-books" income being earned in this country that is estimated to be 5-10% of GDP and some of that is being spent at Walmart.  There are estimates that Walmart gets roughly 1/4 to 2/5 of the $75-80 billion in food stamps in the US.  Walmart had about $320 billion in domestic sales last year, which means that food stamps account for about 8% of its sales, give or take a little.  Then, there are Rx sales that are mostly paid for through Medicaid, Medicare, private or other insurance; roughly 11% of Walmart's sales are categorized as health and wellness, although a lot of that is non-prescription.  There are probably other non-wage sources I have missed, perhaps alimony, child support, credit cards, and so on. 

Taking all the above into account, I would estimate with a fair degree of confidence that somewhere around 35% of Walmart's US sales are not paid for out of paychecks subject to the payroll tax. So I would discount the impact on Walmart from the payroll tax hike from $50 / month to $32.50.

The Consumer Expenditure Survey tells us that the median household spends about $2700 on gasoline.  I don't see any reason to attribute a lower amount to a Walmart customer because (1) the census population includes many urban dwellers who would use much less gasoline than a Walmart customer,  and (2) $2700 isn't enough to buy a full tank of gas each week for one average vehicle in the US and I find it hard to believe that the average Walmart household uses less than one tank of gas a week. 

Right now, gas prices are around $3.60 nationwide average, up about 10% in the past two months, according to USA Today.   Applied to the $2700 estimate for annual gasoline spending by a Walmart customer produces a $23/month hit to the average Walmart customer.  Retirees who go to Walmart have to drive as much as a wage earner does. People spending money earned off the books do too.   

Historically, Walmart sales have been inversely correlated with gas prices.  It has the most rural, low income customer mix among its peers. This Marketwatch article explains that in greater detail.  Conversely, if you go back to 2009, Walmart had an outstanding February with sales rising 5% - in a much worse overall economy and even though the payroll tax was at its current, hiked level.  Why?  Executives attributed it to falling gas prices.

Other factors besides the payroll tax and gas sales may be at work.  As the Bloomberg story mentions, tax refunds have been delayed because the uncertainty over the fiscal cliff resolution left the IRS unable to prepare tax forms and mail them out in January.  One comment I saw on Business Insider said that Walmart was losing customer loyalty in rural areas because of the perception it was supporting gun control; it's hard to assign much weight to that even if true as to some shoppers.  Another said that Walmart had cost itself February sales by overly aggressive clearance p ricing in January.  The quotes from the executives' emails certainly make it seem as if there are some company-specific factors at work: one executive refers to unidentified "stupid" behavior by the company, and another to "self-inflicted wounds". 

We don't know the amount of the disappointment at the moment.  But I think there are enough factors at work here that the payroll tax cannot be responsible for more than half of the disappointment.  As other stores report over the coming months, we will have a better sense.

UPDATE  Feb 21 a.m.:
WMT is out with its Q4 earnings and in the related material, they now attribute the February sales slowdown "in large part to the delay in income tax refunds", stating that they have begun to see a pickup in the latter half of the month.