“As the fortunes of many Americans go, so goes Wal-Mart, so goes the economy.”
That’s what The Associated Press recently noted.
Arguably, Wal-Mart is one of the world’s most important economic indicators.
It’s a proxy for the health of the consumer and the global economy, if you will, an economic bellwether that accounts for nearly 10% of retail spending in the U.S.
So when the company predicted at 6% to 12% drop in fiscal 2017 profits, it sent shivers through the markets. Wiping out $20 billion of shareholder value in a day.
It was an outlook far worse than expected.
Analysts – predicting a mid-single digit increase of 4.2% -- were devastated.
Coupled with news of a 0.1% increase in September retail spending, this isn’t the news we needed to hear. Excluding auto and oil sales, retail sales actually fell 0.1%.
On top of that, August retail sales were revised from a 0.2% gain to flat – simply a reflection of a weaker consumer.
The numbers are simply indicative of the health of today’s consumer, which accounts for 70% of the $17.91 trillion U.S. GDP.
And if the fortune of many Americans dwindles, so goes Wal-Mart, so goes the economy.
70% of GDP On the Line
Wal-Mart suffered its worst decline in 27-years on the warning.
Now, since January 2015, Wal-Mart (WMT) is down 34% from the highs, as compared to a 1% decline in the S&P 500, and a 6% gain on the NASDAQ.
The company – which see more than 250 million shoppers a week – cut its sales forecast as a stronger dollar digs into foreign revenue. It now expects to see no real revenue growth this year, as compared to earlier projections for an increase of 1% to 2%.
It also expects EPS to fall between 6% and 12% for fiscal year 2017.
But this isn’t the first time the economic barometer has warned.
In August, the company cut its guidance for the 2016 fiscal year to a new range of $4.40 to $4.70, as compared to earlier forecasts of $4.70 to $5.05 thanks to the stronger dollar, global economic weakness, and higher employee pay, which added $1 billion in costs this year.
Its further confirmation that U.S. consumers are not shopping as they once did.
A year earlier [August 2014], after five consecutive quarters of comparable sales declines, Wal-Mart had warned again thanks to declines in store traffic and cautious consumer behaviors.
Such poor numbers are troubling at a time when consumers are visibly cutting back on spending, despite a fall in oil prices.
While job gains and cheaper oil were expected to boost spending, it hasn’t.
Instead, many consumers have cited stagnant income and job security as a reason not to spend these days. After peaking at 10.2% at the end of 2012, the U.S. savings rate now sits at 4.6%.
That may seem like a great deal of improvement, but it still tells us consumers are saving a great deal more than what they’re spending.
And it could be a sign of things to come.
In fact, some analysts have already cut their 2015 sales forecast for the holiday season after a year of weak consumer spending.
Bottom line – be safe with your investments right now.
But know this. The present situation will open up a long-term opportunity for investors to buy these stocks at historically low prices.
It’s only a matter of time before investors reap the rewards of down and out stocks.