Wal-Mart E-Mails Seen Showing Tax Drag Mounting on Retailers

The payroll tax increases and delayed tax returns that Wal-Mart Stores Inc. executives blamed in internal e-mails for weak February sales may be poised to hurt other retailers as well.

Wal-Mart had the worst monthly sales start in seven years, according to internal e-mails obtained by Bloomberg News and reported Feb. 15. Jerry Murray, Wal-Mart’s vice president of finance and logistics, in a Feb. 12 e-mail called the retailer’s February month-to-date sales “a total disaster.”

“It’s not Wal-Mart specific,” David Strasser, an analyst for Janney Montgomery Scott LLC in New York, said in a telephone interview yesterday. Family Dollar Stores Inc., Target Corp. and supermarkets are encountering similar effects, he said. “Anyone with any low-end exposure is going to feel this. That customer runs out of money every day as it is. Now they’re really going to run out of money.”

When a payroll-tax break expired Dec. 31, Americans began paying 2 percentage points more in Social Security taxes on their first $113,700 in wages. That’s about $15 a week for a person making $40,000 a year. In addition, tax returns may be delayed in part because of the late release of forms, Wal-Mart, the world’s largest retailer, said in a report.

Photographer: Patrick Fallon/Bloomberg

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Photographer: Patrick Fallon/Bloomberg

Wal-Mart had the worst monthly sales start in seven years, according to internal e-mails obtained by Bloomberg News and reported Feb. 15.

Delayed tax rebates will be “a significant short-term issue” for retailers such as AutoZone Inc. and Advance Auto Parts Inc. as well as Wal-Mart, David Schick, a Stifel Financial Corp. analyst, wrote in a Feb. 15 report.

“I think it’s broad,” Schick, based in Baltimore, said in a telephone interview.

Spending Pressure

The payroll-tax increase may keep pressure on consumer spending, Daniel Binder, a Jefferies & Co. analyst in New York, wrote in a Feb. 15 report. It’s reasonable that Wal-Mart sales would be hurt and “we suspect the same holds true for other retailers serving middle to lower income consumers as well.”

“The wrong thing to do now is panic with knee-jerk selling on the broad group,” Binder said in the note.

Eric Wiseman, chief executive officer of VF Corp., said “it is still early days” to determine whether higher payroll taxes will crimp demand for his company’s products, which include North Face clothing and Vans shoes.

“As consumers have to pay more in tax and as consumers have to pay more for health care, it will affect the disposable income in a way similar to when gasoline prices go up and people have less,” Wiseman said in an interview Feb. 15. “It affects how much they can spend on apparel and footwear.”

Customers Struggling

Wal-Mart slipped 0.8 percent to $68.76 at the close in New York while Family Dollar declined 1.6 percent to $55.03. Target gained 0.3 percent to $61.87 and Advance Auto gained 2.2 percent to $80.72. VF added 3.5 percent to $163.38.

Following the report on the e-mails, Bentonville, Arkansas- based Wal-Mart fell 2.2 percent to $69.30 at the close in New York for the biggest decline since Dec. 12. The shares had risen 12 percent in the year through Feb. 15, compared with a 9.4 percent gain for the Dow Jones Industrial Average.

Lower-end retailers may benefit as customers struggling with the economy trade down, according to a Feb. 17 report by Deborah Weinswig, a Citigroup Inc. analyst in New York. “This should ultimately benefit retailers that cater to these customers,” such as Wal-Mart and dollar stores, she wrote.

Darren R. Jackson, CEO of Advance Auto, said on the company’s fourth-quarter earnings call Feb. 7 that financial stress on its core customers will become “more acute” with tax increases. Vehicle owners doing their own repairs and buying from the retailer may be a “silver lining,” he said.

Sales Slowdown

Shelly Whitaker, a spokeswoman for Roanoke, Virginia-based Advance Auto, declined to comment further today.

Sales growth at Target stores open at least a year slowed to 3.1 percent in January from 4.3 percent a year earlier.

“Our guests continue to shop with discipline in the face of a slow economic recovery and new pressures, including recent payroll tax increases,” CEO Gregg Steinhafel said in Target’s January sales release Feb. 7.

Bryn Winburn, a spokeswoman for Matthews, North Carolina- based Family Dollar, and Jessica Deede, a spokeswoman for Minneapolis-based Target, declined to comment. Ray Pohlman, an AutoZone spokesman in Memphis, Tennessee, didn’t return a call.

Wal-Mart E-Mails

Wal-Mart executive Murray’s comments about February sales followed disappointing results from January, a month that Cameron Geiger, senior vice president of Wal-Mart U.S. Replenishment, said he was relieved to see end, according to a separate internal e-mail obtained by Bloomberg News.

David Tovar, a Wal-Mart spokesman, said the e-mails lacked context and “are not entirely accurate.” The company will report earnings on Thursday for its fourth quarter, which ended in January.

Brian Yarbrough, an analyst for Edward Jones in St. Louis, said in an interview that Wal-Mart’s negative characterization of January sales could indicate a broader issue.

“It could be something going on at the lower end,” Yarbrough said. “Maybe the payroll tax is a bigger deal than any of us thought.”

To contact the reporter on this story: Renee Dudley in New York at rdudley6@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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