The Trend

U.S. Economy 2017: Why Retailers Are Struggling

“As the fortunes of many Americans go, so goes Wal-Mart, so goes the economy.”

That’s what The Associated Press has 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 warned that earnings would be flat this year, according to an October 2016 statement, it sent shivers down the spines of the economy. 

Things haven’t improved much since then. In fact, Wal-Mart will lay off about 1,000 jobs at its corporate headquarters this month. According to the company, that’s happening because it’s looking for ways to operate much more efficiently and effectively.

In September 2016, it said it was cutting 7,000 back office jobs. In October 2015, it was cutting hundreds more jobs at its headquarters.

Unfortunately, the excuse stinks. You don’t just get rid of 1,000 employees at your corporate office if you’re just looking to become more efficient. It tells us WMT is struggling, as companies like and economic realities eat its lunch.

That’s worrisome because if WMT is struggling, so is the overall economy, seeing that consumers make up 70% of U.S. GDP.

Even Macy’s (M) and Kohl’s (KSS) just posted terrible holiday numbers.  The Limited just filed for bankruptcy, announcing the closing of all of its stores. That trend “was consistent with the lower end of our guidance, we had anticipated sales would be stronger,” said Macy’s CEO Terry Lundgren.

Sears Holdings is closing another 150 stores, too.  Sales are down 37% since 2013. In 2011, Sears had 3,555 stores.  It’s now down to 1,503 stores. 

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Target (TGT) is down $3.45 on Wednesday after noting November-December same store sales fell 1.3% year over year. Total sales fell by 4.9%. And the company now sees Q4 same store sales falling another 1% to 1.5%, as compared to prior guidance for down 1% to up 1%.  Adjusted EPS is expected to fall in a range of $1.45 to $1.55, as compared to earlier guidance of $1.55 to $1.75.

Then, they turned around and lowered full year guidance with an adjusted EPS of $5 to $5.10, down from previous guidance of $5.10 to $5.30. Analysts expect $5.20.

While we can make excuses that is crushing brick and mortar, we must also realize that a stagnating economy is hurting them, too. 

In fact, it’s a reflection that jobs and wage growth haven’t been as strong either.

As it turns out, employment isn’t as strong as hoped. The Federal Reserve’s labor market conditions index fell slightly in December, marking its first decline since March. And, the Labor Department reported that job growth slowed to 156,000 in December from 204,000 in November.

While wages have now grown 2.9% year over year, it’s still well below the 4% it was when the unemployment rate last hit 4.7%. If we were truly that close to full U.S. employment, slack in the labor market should have been absorbed, and wages would be higher. 

Part of the problem is the quality of the 155,000 jobs added in December 2016. Many were only minimum wage. For example, 30,000 food service and drinking establishment jobs were added. Another 10,600 administrative and waste services jobs were added, as well. That may begin to explain why retailers are struggling.